February 2011, IBM’s Watson computing system competed on Jeopardy!against two formidable opponents: Ken Jennings, who holds the record for the longest winning streak in Jeopardy! with 74 appearances, and Brad Rudder, who has earned the largest amount of money on the show at $3.25 million. Watson bested its human competitors, coming out roundly on top at the end of the two-game contest, broadcast over three days. Despite uncertainty about whether the human/computer contest was on a level playing field (much of the success in Jeopardy! depends on buzzer timing, and Watson may have had an advantage in knowing when to buzz in), it was an impressive showing.
And it caused many to wonder what this technology might be able to do beyond the realm of a TV game show. Starting in 2012, IBM began to pilot uses of Watson in health care and other fields. The company has since launched a series of products based on the technology, which it calls “cognitive computing.”
Knowledge@Wharton spoke with Brad Becker, chief design officer for IBM Watson, about current and future applications of cognitive computing and how he hopes to make computers “more humane.” An edited version of the conversation follows.
Knowledge@Wharton: Your background is in user experience design. How does that play a role in IBM’s Watson Project?
Becker: [It’s based on] the idea that technology should work for people, not the other way around. Twitter For a long time, people have worked to better understand technology. Watson is technology that works to understand us. It’s more humane, it’s helpful to humans, it speaks our language, it can deal with ambiguity, it can create hypotheses, it can learn from us. And, of course, since it’s a computer, it can scale as much as needed and has recall far beyond what humans have.
You take the traditional strength of computers, but in a way that’s more comfortable and efficient for people — more humane, I like to say. And it allows experts, or even non-experts, to do much more than they could otherwise.
Knowledge@Wharton: When you speak of a “more humane” computer, what does that mean?
Becker: Technology, traditionally, is created by technologists. That sounds like it’s a tautology, but the people who are usually creating technology love the technology and accept it as it is. Alan Cooper wrote a book called The Inmates Are Running the Asylum talking about this problem. What’s the solution?
Part of the solution is to take time to focus on who is going to be using the technology, what their needs are, how humans work, what’s the ethnography and the cognitive psychology of the people who are actually using the technology. How do we better fit the technology for humans? It’s sort of like ergonomics with furniture.
Here we use IBM Design Thinking, and we look at the business problem — both for IBM and their clients — as well as using hands-on research to understand the end users and what their specific needs are in context. We also look at things that are more horizontal: How can this technology, in general, work better for people and be at the service of people? Have you ever struggled with technology and thought, “Who came up with this?” Or felt like maybe you were dumb, because you couldn’t understand how to use this tool that was supposedly meant for you?
That is what we’re really after. We’re trying to come up with this idea of cognitive computing future today. The whole focus of this is that technology should work for people, and not the other way around. It starts with what we need and what we think is helpful for humans. How do we help augment humans? The bicycle didn’t replace legs, it augmented what they could do. That’s our goal: to take what humans are good at and then supplement the things humans aren’t good at, such as reading 50 million passages and remembering every word; making it possible for a human, with the help of Watson, to be able to do much more than they could without Watson.
The whole focus of this is that technology should work for people, and not the other way around.
Knowledge@Wharton: Can you explain in basic terms how Watson does what it does?
Becker: [Watson] is not a copy of the human brain, but it takes a similar approach [to solving problems] in that there are multiple, completely separate approaches running in parallel. We handle different kinds of queries differently, depending on the nature of that question.
We’ve also moved beyond just question and answer to discovery, where you’re looking not just for “the answer.” The answer today, if one exists, is not necessarily the same as what the answer will be tomorrow. Things change quickly; there’s ambiguity. Watson is good at dealing with that.
Discovery is an interesting application because you’re looking for weak signals in the noise. It’s a big data problem, but [one] where you’re not just looking for the most obvious things. You’re not just running a linear regression or doing typical shallow machine learning. It’s a great example of the combination of a human expert and Watson working together to sift kind of through this to find the needle in the haystack.
There are some examples in the press recently [describing how] Baylor [University] found quite a few discoveries by plugging Watson [into] all the material that’s available, just to test it. They applied it against older material to see if Watson would come up with the same discoveries that the scientific community had come up with in the last decade, and Watson found several of them within a matter of weeks.
Knowledge@Wharton: So you’re regression testing against things that have already been discovered by humans, and then seeing whether Watson can come to the same conclusion?
Becker: Right. We take 18 years to train a human to get to a level that we call “adult.” Whereas, in Watson, it can be in weeks or months to get Watson trained to provide value in a particular area or domain. In this particular case, Baylor did this to check out the Watson technology for themselves by applying it to their own data. And, sure enough, Watson was able to find those hidden connections that were out there already.
Knowledge@Wharton: You said that the kind of cognitive computing that Watson does is not quite the same as the way humans think. How are they similar and how are they different?
Becker: Well, for one thing, the human mind is interesting in that it’s a very low-power, small, portable computer attached to a stomach that can run on berries and nuts. There are all these physiological aspects of the human brain that are both limitations and strengths. There are specializations of the brain.
We’re not looking to reproduce the human brain, because quite frankly, nature’s done that just fine. We’re looking at the way the human brain works, the way people like to work, and then looking at what traditional computers do and saying: It’s not a great fit. By learning from some of the things the human brain does, we can make computers more useful to people. We don’t want to lose the perfect recall, the ability to scale and the speed at which computers can do rote tasks — but, mixed with some of the learnings from the human brain and the way that all the different pieces of the brain work together in unison to come up with a path to understanding.
We’re also adding a lot of work on natural language processing, so that computers can speak the same language we do. Since the story of the Tower of Babel, we’ve known that being able to speak a common language is important in understanding or working with someone. Until now, computers have only spoken code and you program them. Now, we’re moving to a world where you can actually use human language to work with a computer. Instead of programming a computer, you can train a computer.
Knowledge@Wharton: You mentioned the project IBM did with Baylor University. Tell us more about that.
Becker: The Baylor College of Medicine and IBM joint project used a particular toolkit with Watson to identify proteins that modified p53, which is a protein related to a lot of different cancers. They looked at 70,000 scientific articles on p53, and they were predicting proteins that turn on or off the activity of that protein. They found six potential proteins to target for new research. In general, the industry discovers one protein a year that might be interesting. By looking at 70,000 articles, Watson was able to handle at scale all of that information and came up with six promising directions. Humans will go and explore those.
Knowledge@Wharton: There are a number of different Watson-based products: the medical applications you’ve mentioned, a product called Chef Watson, etc. Can you give an overview of the products that are being spun off of the core technology?
Becker: Yes. We have Watson Engagement Advisor, [which is] a solution that allows you to have a better relationship with your customers. It takes your unstructured data and makes it available to your customers; it assists them to go in for themselves and find the information they’re looking for. You also have the ability as a business, then, to see the questions that are being asked, etc.
The second thing, that we talked about already, is Watson Discovery Advisor, which is about finding those connections and relationships – [for example,] using Watson to look through law enforcement databases and unstructured data to find potential connections between suspects, between events, etc.
We’ve talked about drug discovery where you can look for: What are the connections between different elements that have not been adequately explored? It’s one thing to find an obvious connection, but it’s another to go find a weaker, less obvious or more indirect connection that warrants exploration.
Chef Watson is another Discovery domain, where you’re discovering how there might be interesting connections between different ingredients [in cooking recipes]. The fact that people like ice cream on top of apple pie is not very interesting, but the fact that strawberries and mushrooms have a similar chemical makeup and they might pair well together is interesting — in a sense of discovery — when people are looking for something interesting and new.
Another project is Watson Explorer, which started from Enterprise Search. It’s one thing to explore the bodies of knowledge that already exist, but every institution has their own internal bodies of knowledge, as well. Watson Explorer is a way to collect all the information that’s already in your organization and make it available for people to explore and to find information and answers.
We just announced the Watson Developer Cloud. Now developers can come in, use Watson’s services and IBM Bluemix [IBM’s cloud platform] to create their own cognitive applications based on the services that we expose there. Students, universities, companies and even independent developers can come in and kick the tires and play with cognitive computing.
There are still a lot of things we don’t understand about our own brains and our own behaviors, let alone how technology can help us take them further.
Knowledge@Wharton: Are all of these hosted, cloud-based services?
Becker: No. The Watson Developer Cloud is a hosted SaaS [software as a service] based, scalable solution. There are also solutions that are based on cloud technologies but are hosted locally at the company.
Watson Explorer, for instance, works locally and finds all your information. I think the idea of cloud technologies, APIs and scalable servers are definitely a part of it always, but there are on-premises versions, based on the customer preference.
Knowledge@Wharton: When you talk about Watson working in areas like health care and crime detection, should we be concerned that people will have too much faith in its analysis? For example, we’ve seen cases in which the knowledge that when a spouse is killed the husband or wife is the most likely suspect can circumvent the exploration of other scenarios. Is there a similar concern with Watson that we’ll have too much confidence in its analysis, so that other avenues — which even though they are less likely could still be correct — may not be pursued?
Becker: That’s actually the main purpose of Discovery Advisor — to look for potential, subtle connections, not necessarily the obvious ones. The obvious connections are self-evident, so you don’t need Watson to find [them]. The fact that a spouse is an obvious suspect in a domestic murder case — you don’t need Watson for that.
The Discovery Advisor is focused on the opposite [problem]: looking for all those subtle, indirect, weak signal connections; finding the nonobvious connections and the fertile ground for investigation and for human expertise to pay attention; helping humans find where the needle in the haystack might be.
Knowledge@Wharton: This notion — that computers should work like people, rather than people working like computers — has been around for quite a while, going back to at least Apple’s Macintosh in 1984. In fact, Steve Jobs also used the bicycle analogy you mentioned. He saw the Macintosh as an “engine for the mind.” What’s taken us so long to make progress in this area?
Becker: This is a really hard, worthy challenge. There are a lot of different aspects of it. Understanding people is one challenge. There are still a lot of things we don’t understand about our own brains and our own behaviors, let alone how technology can help us take them further.
But some of this is just common sense, practical things. At IBM, we’ve hired a lot of people who are focused on building more humane computing. We have not just visual designers who make things look appropriate and refine the visual details, but also people who work through the workflows that customers are trying to do.
What is it like to be a life scientist or drug researcher? What’s it like to be a customer support representative? We work with [financial services and insurance company] USAA; what’s it like to be separated from the military? What are the questions you have? What are the concerns? What’s your state of mind? What’s that like?
We actually do ethnography. We sit with these sorts of people to understand what they care about. There are a lot of common patterns, and we’re identifying some of those, but the fact of the matter is that humans are kind of messy and complicated. We’re trying to create technology that interfaces with something that is dynamic and complicated.
Knowledge@Wharton: It seems like for many companies this issue of user experience design is often an afterthought. Is that a fair assessment?
Becker: Traditionally, I think that it was completely an afterthought. Think about a physical space, like a house, where if every time you walked in the house, there was a wall two feet in front of you and you’d run into it, or you’d hit your head on a really low thing. We set up standards for these things. For some reason, the more virtual technology has been a little bit immune to that. I think it’s catching up now. You see this across the web, across the applications — there’s an increased focus in the industry now on user experiences.
Knowledge@Wharton: If an executive came to you and said, “I want to differentiate my product by its user experience,” what advice would you give?
Humans are interesting and complex and they are hard to directly replace.
Becker: The best thing is to get out of the building and watch people use your product. That will tell you what the problems are. For the solutions, there are great ways — like IBM Design Thinking — that help you brainstorm, try out, fail fast, go in and focus and come up with what are the most important solutions for these problems. But it starts with understanding your users and, of course, understanding the capability of your technology. Most tech companies are good at doing that side of it, but understanding your users is the number one thing.
The second thing that I would say is: hire professionals; I would hire people who have experience in this, that have a passion for it. And will know how to shepherd a culture that promotes it.
Ultimately, your culture has to promote it. You mentioned Apple — it’s not that they necessarily have the most designers, but from Steve Jobs on down there was an appreciation of design and the importance that things work well for people and that you keep in mind why you’re doing it. That same culture has been growing at IBM. You have to inculcate a culture that says, “At the end of the day, we’re trying to solve a problem for somebody or provide some sort of value for someone. We’d better understand and be able to articulate what that is.”
Knowledge@Wharton: How will technologies like Watson reshape the employment landscape in the future? Won’t these technologies eliminate a lot of jobs?
Becker: It’s funny, because I was looking at some material in the history of IBM, talking about computers back in the ’60s. There were all these discussions in the ’50s and ’60s about how these new computers were going to replace humans in the office, and there would be no more office jobs. I don’t know about you, but I work in offices and there are a lot of people there — and lots of computers, too.
Knowledge@Wharton: Any thoughts on when the singularity will occur? When will computer thought outpace that of human beings?
Becker: I can’t see those lines completely converging. I’m not sure we ever get there 100%. The progress in that direction will be surprisingly helpful to us — especially, as we understand ourselves better, we can make our technology work better for us. But it’s not clear to me that there’s going to be a world [in which computers surpass humans]. Because ultimately, a human has to come up with how a computer or a machine could get to the point of creating itself and creating others. It still has to be devised by humans to do this.
Knowledge@Wharton: Looking out ten or more years, then, what is the future for cognitive computing?
Becker: It’s hard to see all the fruit that this will bear. It’s really exciting already, but I think we’re going to see more of the promises fulfilled. It’s going to get easier, it’s going to be faster, it’s going to be more ubiquitous. You’re going see the fulfillment of the promise that technology will be more focused on people, more adaptable to people, more useful, more humane.
I think a lot about how the technology can serve us. Sometimes, as we have more and more technology in our lives, it feels like we’re serving the technology. We look at the carbon footprint of things, which is great, but I think there’s a responsibility in the tech industry to make sure that you also look at the cognitive footprints of the technology that you’re creating. Is it more of a burden than a blessing? We want to make sure that we understand the users and what they need, so that we can create a technology that is adapted to that, and is a net positive benefit.
That combination of making sure that technology serves us and looking, in particular, at Watson and how cognitive computing is going to be able to fit with humans a lot better than the traditional super calculators we’ve had, I think that’s exciting.
Image credit: “IBM Watson” by Clockready – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons.
The search committee forms, and vets dozens of candidates. Deliberations stretch for months. After an exhaustive process mulling all possible options, a decision is made. The new CEO is — the old CEO.
It’s a familiar scenario of late. Statistically, an uptick in CEOs returning to their former posts is hard to prove, but some high-profile cases – either meant to bring back the magic, or to clean up the mess they helped create – are drawing increased scrutiny. Michael Dell of Dell Inc. and Steve Jobs of Apple are prime examples, as are A.G. Lafley of Procter & Gamble, Myron “Mike” Ullman of J.C. Penney, Howard Schultz of Starbucks and Charles R. Schwab, who returned to his eponymous firm. Most recently, in September, former New York City mayor Michael Bloomberg announced that he will return as head of media firm Bloomberg LP, which he founded.
With all of the talent streaming through the corporate sector and the increased use and sophistication of executive search firms, why are companies going back to the future? Wharton management professor Matthew Bidwell says that companies turn to former CEOs because when they tick off the wish list of qualifications, the person they know often ends up being the best choice.
“Ideally, you want someone who knows the industry, someone with a clear idea of the company, and someone who has senior level experience,” Bidwell notes. “There is a sense that being the CEO is a job like no other. You are dealing with a wide array of issues and are also the public face of the company, and it’s hard to know whether someone can do it until someone has done it. Twitter Your prior CEO is one of those few people.”
Instances of returning CEOs appear to be more frequent, says Mark A. Cohen, a former chairman and CEO of Sears Canada who is now director of retail studies at Columbia University’s Graduate School of Business. Often it signals weak vision on the part of the board, he says. “When a board is composed of cronies, and the retired CEO has a big block of stock, and the stock appears to be collapsing — and the board, by the way, has a big block of stock — they incorrectly reach for same old, same old.”
“It’s hard to know whether someone can do [the CEO’s job] until someone has done it.”–Matthew Bidwell
“I haven’t done an analysis, but I would guess that in tough times, it happens a little more frequently,” adds Richard Vague, managing partner at Gabriel Investments and former CEO of Energy Plus and First USA. “When there are strong tail winds behind the corporate sector, it’s easier for average people to look good, and when the headwinds are strong, you default more toward proven leaders.”
And while bringing back the former CEO may seem like a safe decision, it can also bring unseen folly. “It isn’t always clear that the CEO wants to do the job, at least at the level they did it before,” says Wharton management professor Peter Cappelli, director of the school’s Center for Human Resources. “There is a risk of settling old scores and backing up in terms of direction. The big risk is that the CEO won’t be there long, so it’s yet another transition for the organization.”
Cheap Coffee and the Goldfish Bowl
Whether it’s just as good the second time around hinges on a variety of factors, says Wharton emeritus management professorLawrence G. Hrebiniak. Among them: whether the CEO still has the support from the board and staff he or she had on the first tour of duty; whether conditions in the industry have changed in intervening years, and a certain dash of luck.
Hrebiniak cites J.C. Penney, where retired CEO Ullman was brought back 17 months after former Apple retail chief Ron Johnson failed to reinvent the store with a new hip edge. “Conditions in the industry changed in those 17 months, and Ullman came back, but frankly he was facing a wall of competition and opposition, and he hasn’t been able to pull the company back,” notes Hrebiniak. “Schultz leaves Starbucks, the stock plunges by 50%. Why? Competition from Dunkin’ Donuts. Schultz comes back and introduces new varieties of coffee and starts giving away free samples, and it’s having some effect, but Starbucks has not come back to its dominant position. Competitive conditions can trump even a returning strong leader’s actions.”
A beneficiary of sheer luck was Schwab, says Hrebiniak. “Schwab left his company [when] he felt the company had lost its heritage, had lost touch with customers, that the culture had changed. He was coming back to [bring] back the old Schwab, yet he was lucky. He came back right after the tech bubble burst — and when you’re coming in when things are at the bottom [and] things can’t get worse, there’s a higher probability they will get better.”
That said, it also matters how the public discussion gets framed around a returning CEO, says Bidwell. “It’s a tricky argument to make, isn’t it?” he notes. “I mean, I think it’s easier in the kind of Starbucks, Dell, bringing-back-the-magic case than it is in the J.C. Penney we-really-screwed-up case. I think in that case it’s transparent: ‘We made a mistake; we recognize that we made a mistake. We’re doing our best to fix it.’ That is strongly how it appears outside, and it’s not clear to me that it’s a terrible storyline. It’s embarrassing. But on the other hand, it’s nice to see people confronting the issues rather than stubbornly staying the course when it’s not working.”
“Boards … want to hire someone who is a known quantity because they are working in a goldfish bowl.”–Lawrence Hrebiniak
In fact, Hrebiniak points out, public perception might be an inhibiting factor in boards’ willingness to take chances on outside choices for CEO spots. “Everything is transparent now, and because of this transparency, people are quick to criticize,” he says. “Boards have become very conservative. They want to hire someone who is a known quantity because they are working in a goldfish bowl.”
Several observers say boards may be choosing to bring back former CEOs out of fear of market reaction. But one 2007 study found that despite an immediate downward market reaction to such announcements, longer-term financial performance was unaffected. “While the market reacts negatively to the rehiring announcement, the accounting and stock market performances of rehired CEO firms do not differ from those of a control sample over the two years following the turnover,” wrote Rüdiger Fahlenbrach, Bernadette A. Minton and Carrie H. Pan in “The Market Comeback for CEOs.” “Our evidence suggests that firms rehiring their former CEOs hire the best available candidate given the circumstances.”
Go-Getters Get Going
When a company is considering the return of a former CEO – or any employee – it’s important to consider a number of questions, says Hrebiniak: “What has this person been doing since he left — has he been successful? Has he been doing something in some other industry we didn’t see the first time around? Was he held back by a culture that didn’t make him shine? What were the conditions that led to his ouster, and have those things changed? And if we bring this more experienced person back to the company, can we say that conditions are more conducive to success?”
Bidwell says professional growth is an important consideration, but so is the question of why the CEO left the first time. “It may be that the decision to fire the CEO initially was something that the entire board was not comfortable with, or driven by a particular group within the board, so part of what’s happened is a slight shift within the board as well [i.e.] ‘We tried our idea, and that was disastrous, so we’ll go back to plan A.’”
In that case, it’s important for the returning CEO to have some skin in the game, such as founder status or stock ownership, says Martin Conyon, a senior fellow at Wharton’s Center for Human Resources and professor at the University of Lancaster (U.K.) management school. “There are two sides to this market transaction, not only the demand for the CEO on the part of the board, but secondly the willingness of the former CEO to do the job,” he notes.
But why aren’t boards better prepared for CEO turnover with a succession plan? After all, CEO turnover has been on the rise since 2008, according to several studies, and companies have become more proactive about developing succession plans, according to Strategy&, formerly Booz & Company. “Companies are now planning carefully to ensure they have the leaders they need,” stated a 2013 report published by the firm. “Planned successions made up 72% of all 2012 successions (up from 69% in 2011), and forced turnovers were at 19%, their second-lowest share ever. This shift indicates that companies are now able to take a more thoughtful approach to transitions.”
“There is a lot more time and effort involved in getting to know all the nuances of a company than is generally appreciated.”–Richard Vague
But that’s not necessarily the impression out in the field. “Most companies have no effective succession planning, or if they do it’s flawed, as evidenced by CEOs who are anointed who fail,” says Cohen. Effective succession planning is easy on paper, hard in practice, says Vague — no matter the route you choose. “If you have a visionary executive, it’s hard to have someone underneath them willing to stay under them for 10 or 20 years,” he notes. “It’s hard to find someone who has demonstrated that vision in another context. I don’t think there is a formula as such. I have been a party to numerous succession plans where the organization carefully maps out what they need, a person steps in and the moment of truth comes and that person may not be able to deliver. It’s extraordinarily hard. It’s human nature – if you are an independent go-getter, the question is really how much are you willing to support the CEO and for how long? And for true leaders, the answer is not that long.”
One potential CEO pipeline, Vague says, could be sitting under the board’s nose. “Organizations that are truly decentralized with several operating entities with no overlapping, and where folks can operate with autonomy, that’s where you are most likely to find the most successful context for seeing a successful succession. They’ve got plenty of room to operate, they haven’t been sitting right under the CEO taking orders. They’ve been initiating action.”
Vague adds that “there is a lot more time and effort involved in getting to know all the nuances of a company than is generally appreciated. There is a lot of complexity, a lot of personalities, a lot to know about the competition, a lot of knowing where the bodies are buried. That really takes even the most extraordinary executive a while to come to grips with, and in particular in periods of concern, bringing back a CEO who has done well in the past eliminates that period of learning, which frankly may be a year or two or three.”
As examples of returning CEOs who have made a success of it, Cohen cites Starbucks and P&G. “Lafley has a much bigger view than just quarterly results. He keeps the company on a successful strategic path and doesn’t preside over a stricture of allowing the company to just play to the crowd,” he says. “The same thing [is true] with Starbucks. [Schultz’s] successor started opening stores as if there were no consequences for forever-proliferating Starbucks, and when Schultz came back, they closed stores. Also, his successor seemed to lose sight of the mojo that made Starbucks special, where the CEO lives and breathes the products they preside over.”
Snapdeal co-founder Kunal Bahl discusses the company's unique business model.
Indian e-commerce firm Snapdeal recently got a major boost: a $627 million investment from SoftBank, the Japanese telecom and media giant. This is the largest investment so far in the Indian e-commerce space. Snapdeal began as an online group discounting site in 2010. In 2012, it transformed itself into a marketplace almost overnight, and today has more than 50,000 merchants, five million products and 30 million users. The company is also entering new categories like real estate and automobiles.
But co-founder Kunal Bahl doesn’t consider Snapdeal to be an e-commerce player. In a conversation with Knowledge@Wharton, he says the firm is “really a technology company. We enable others to do e-commerce.”
An edited transcript of the conversation follows.
Knowledge@Wharton: When we last spoke — at Wharton three years ago — Snapdeal had 10 million users, and you had called it a “discovery platform” for Indian consumers. Now, SoftBank’s $627 million investment in Snapdeal is the largest single investment in the history of Indian e-commerce. So, can you take us through your journey over the past three years, and how it led to this investment?
Bahl: We have had an interesting journey, even getting to the point when we last spoke. We had taken many pivots along the way. We started as a coupon book business, then mobile coupons, discount cards…. Then Snapdeal became a deals platform, which we started viewing increasingly as a discovery platform. That was the phase of evolution we were in when we met three years ago.
It was an interesting juncture in our business. We started feeling that the core deals platform was not going to be as large a business as we originally thought it would be. We were trying to figure out how to expand the scope of our platform to enable consumers to get access to not only services, or deals, but also products. A few months after we met, I went to China. It was December of 2011. There, we met with many e-commerce companies, including Alibaba. We realized that if we attached a large products-merchant marketplace to the demand pipe we had, theoretically-speaking, intent would meet availability and transactions would grow.
So we came back from China and, in January 2012, we almost overnight changed our business model from being very services or deals focused, to a-product-focused marketplace. It was a very drastic shift, and one that surprised many people, including our board and our management team. But it was the right thing for the company. We felt that using the demand pipe, the platform and the brand trust we had created, we could significantly move the needle for these product merchants. At some level, it’s a much larger space to go after and a much bigger need to solve. Suddenly, you are making a percentage of India’s consumption — which is about $1.2 trillion to $1.3 trillion — more efficient as compared to just catering to a small subset of it.
“We realized that structurally, the same problem that Alibaba was solving in China was the problem that needed to be solved in India — bridging the gap between the very long tail of supply and the very long tail of demand.”
That’s where we were at in January 2012. But at that point, our business was back to zero merchants, zero products and a bunch of users. It has taken a lot of work since then. Our goal at that point in time was to get to 20,000 merchants on our platform in five years. We were quite blessed to have the team we have; in two-and-a-half years, we had more than 50,000 merchants doing the key billing part of their sales through our platform. It was increasing at 600% year-on-year, to reach more than 30 million users now. So, things have evolved pretty significantly since we last spoke. And the business has also changed quite significantly.
Knowledge@Wharton: During your trip to China, what happened to change your mind so drastically? Did it have anything to do with Alibaba?
Knowledge@Wharton: SoftBank also happens to be one of the early investors in Alibaba, and one of its biggest shareholders. Are there any lessons from the Alibaba experience that you think would be relevant to Snapdeal? And what do you think Indian e-commerce firms can learn from China?
Bahl: Many things, actually. I feel the Chinese market is about seven to eight years ahead of India. So, it’s almost like looking into a crystal ball. I’ve spent a tremendous amount of time educating myself and my team on how the Chinese e-commerce ecosystem evolved. And what are our learnings, and what are the differences between that ecosystem and ours? Hence, how do we need to adapt our strategy for the Indian market? We are not looking to be a copycat here. There are many unique aspects of this industry, many unique aspects of consumers, many unique aspects of businesses in India vis-à-vis China. But at a meta-level, the problem that we are trying to solve is the same — bridging the gap between very fragmented supply and very fragmented demand.
The SoftBank partnership works because they have deep belief that this is the right business model for markets like India and China, perhaps Indonesia. They have made an investment there in a similar business. We wanted a partner who has deep belief in what we are doing. When we started building our marketplace, all the e-commerce companies in India were — and still are — retailers with a website. They are buying and selling inventory. And we said: “Look, that’s not really solving a problem. You are just aggregating products and reselling them. You are not necessarily bridging the gap between demand and supply. And you are not making commerce that otherwise wouldn’t have happened — happen, where a lady sitting in Chennai can now order saris made anywhere in the country, at a great price, delivered with free shipping to her house in two days. That commerce did not happen earlier. That’s what we wanted to change. And the only way to do that is by having the largest selection online, from the largest number of sellers. And if your goal is to offer infinite selection, theoretically, the only way you can do that is by not owning any of it.
Knowledge@Wharton: You mentioned that there are similarities and differences between the Chinese market and India. What are some of the unique features of India’s e-commerce environment, and what are some of the unique challenges?
Bahl: One of the differences in India is that commerce [via] mobile is far ahead of the Chinese market. So, we are leapfrogging the whole PC-commerce phase. Fifteen months ago, 5% of our orders were over mobile phones. Now, more than 65% of our orders are over mobile phones. China is a little behind on that because they have a pre-existing installed base of PCs. So, a lot of orders there are still placed over laptops, etc. We invested pretty significantly behind mobile, early.
Knowledge@Wharton: What do you think of the Indian government’s policies on e-commerce? Do they seem very clear to you, and how does that impact the industry?
Bahl: I think the policies are very clear — foreign investment is not allowed in multi-brand retail, online or offline. We are really a technology company. We don’t even see ourselves as an e-commerce company; we enable others to do e-commerce. We don’t hold any inventory of our own. We don’t have any private labels. So, we are not a merchant. We’re just a connector between the dots of demand and supply. There’s no restriction on foreign investment in a technology businesses like ours. There is a restriction of investment in businesses that actually take the title of the product — e-commerce. And whatever the policy is at any point in time, there will be people who will want to get it changed.
“Fifteen months ago, 5% of our orders were over mobile phones. Now, more than 65% of our orders are over mobile phones.”
Knowledge@Wharton: You said you see Snapdeal more as a technology company than as an e-commerce venture. Do you plan to offer any new products and services as you go along that direction?
Bahl: We are making massive investments in technology. Much of the money we have raised, we’re investing in growing our technology base, both organically and inorganically. Within the next three months, we’re going to acquire at least five companies, mostly for enhancing our core technology — in recommendation, personalization, supply chain, payments and so on. Right now, we have 500 engineers in the company. We’re going to hire 1,000 more in the next 12 months. We are setting up new development centers in NCR (the National Capital Region, where Snapdeal already has a base), Hyderabad and Bangalore.
We have also been launching many new categories that are very unique to the Indian market, and even at a global level. We launched real estate online with the Tatas; people started buying apartments online on Snapdeal. We launched cars from Mahindra. We’ve started selling cancer testing as a service. We started selling gourmet food, online education… All these categories are actually very unique. Our philosophy is: if you can buy it offline, we should sell it online. For every consumer who can buy something offline in India, there are at least 100 who don’t have access to that product or service. That’s the problem we want to solve.
Knowledge@Wharton: When you venture into categories like real estate or autos, do you see this as an experiment, or do you see this aspect of your business as something that is going to expand, and you will add more similar categories in the future?
Bahl: It’s going to expand. Of course, we start everything in pilot form. So, after the Tatas, we have launched with Godrej to sell apartments online. And there are many more in the pipeline. It’s the same in the car space. There are many more car companies in the pipeline also. We have been selling two-wheelers from Hero and Mahindra in the past — and very successfully. It is very important for us to keep innovating, to keep a vibrant ecosystem going and to have this perception of innovation in the consumers’ mind, so that they keep feeling that, “Hey, I should keep checking out the site. There is something or the other that’s going on here all the time.” That is very critical in our kind of business.
Knowledge@Wharton: You say your goal is to add more vendors, tens of thousands of vendors. As the number of vendors on your site increases, do you face issues of getting visibility for all your vendors?
“For every consumer who can buy something offline in India, there are at least 100 who don’t have access to that product or service. That’s the problem we want to solve.”
Bahl: It’s a great question [with] a two-pronged answer. One, it’s a meritorious marketplace — a completely merit-driven marketplace. If you have a great product at a great price, and you ship fast and resolve customer queries fast, you will end up being more successful than the next guy. This is how the world of commerce anyways works, even offline. If you do a good job, you will become Walmart. We offer the same opportunity to every small and big merchant. So, we have merchants who are operating from home. You know, 30% of our sellers are first-time women entrepreneurs. Many of them have started companies out of their homes. And they are becoming very successful.
At the other end of the spectrum, we have people like Tata Croma, which is the largest electronics offline store in the country. If someone does a great job, the hole-in-the-wall guy can actually now successfully compete with the largest offline retailers in the country. In a way, our platform is enabling a great democratization of retail in the virtual world. It doesn’t matter how big your store is anymore, or if you have a store offline.
That’s one. Secondly, we are now in the process of ramping up our advertising platform. Similar to advertising on Google, merchants can advertise on Snapdeal. As you know, 60% of Alibaba’s revenues are through their ad platform.
Knowledge@Wharton: If you look at Alibaba as one possible model that connects buyers and sellers and eBay as another, what do you think is closer to what the Indian market needs?
Bahl: Alibaba has multiple businesses. There’s Star World, there’s Tmall and Taobao. Taobao is more similar to eBay than Tmall. eBay and Taobao are open marketplaces. Anyone can sell anything to anyone. Tmall, or Taobao Mall, is actually a more managed marketplace, only for screened businesses to sell to consumers. Our business model is like Tmall. That’s really the crown jewel of Alibaba. We feel that open marketplaces sometimes have a challenge of lack of trust, given that it’s hard to control who is selling. And the world is probably moving more toward managed marketplaces. Hence, our decision to pursue that business model. It has worked really well for us, because the consumer has a very predictable experience, a predictable catalog on the site to choose from. It doesn’t seem like a random constellation of products and an unpredictable assortment.
Knowledge@Wharton: One of the very interesting developments in the Chinese e-commerce market has been the entry of some of these players into financial services and banking. Is banking something that Snapdeal might consider in the future?
“We have no plants or machinery. Speed and sluggishness — success and failure — are all a function of our people.”
Bahl: I have developed a deep interest in financial services. At the end of the day, we are a marketing distribution company, leveraging technology. The problem that we are trying to solve for product merchants, small and large, is the same problem that we can solve for services merchants. Whether it’s getting a loan or getting a credit card, we can probably make it more efficient online. So the quick answer is, yes.
Knowledge@Wharton: E-commerce in India still seems to be seen as a loss-leader business, with price determining where the buyer buys from. Now, given the discounts that competitors provide, how do you see the growth vs. bottomline question evolving? How have your vendors been able to compete with all the price cuts?
Bahl: That’s the exact reason we don’t hold any inventory of our own; we don’t want to compete with our own merchants. That’s why we don’t do any private labels; we don’t want to compete against our brands, either. We want to be purely a platform. So, when we say we have done $3 billion of sales, that’s actually the sales of our merchants. They’re not Snapdeal’s sales. We’re just the conduit.
What happens in a marketplace like ours is that the same product may be sold by 100 different sellers. These 100 different sellers have different economics at which they buy their products from their suppliers. They have different overheads. Some guy may say, “Hey, I want to make at least 5% on everything I sell.” And some other seller may say, “I’m OK with making Rs. 50, because I don’t have any overhead and I’m a one-man show.” So they compete amongst themselves to drive down prices. Of course, we do run promotions from time to time. But it’s largely a pricing that’s set by the sellers on our platform.
Knowledge@Wharton: Snapdeal has grown really fast. What are the main risks you see in continuing high growth?
Bahl: You know, all those risks are actually more organizational. You want to make sure that you are able to attract the right talent, that you are able to upgrade the talent, organically or inorganically, and constantly assessing whether your team has the right level of skills, readiness and experiences to support what needs to be done in the business as we move into higher orbits. We have no plants or machinery. Speed and sluggishness — success and failure — are all a function of our people. Twitter I think that will always be the biggest risk for our business.
Knowledge@Wharton: Do you see the Indian market for talent improving in this regard? Or are you sourcing talent globally?
Bahl: We’re doing it globally. But the good thing is, given the stage of the business, the scale, the excitement, and the stature of the brand and the company, we don’t have a hard time in at least having a conversation with anyone we want to bring on board. CEOs of fairly large, established companies are very open to taking senior roles in our company because they know that what today is $2 billion or $3 billion can tomorrow be $50 billion. And they want to be part of that journey, because they realize that these waves don’t come every day.
Knowledge@Wharton: Long-term success and sustainability depends on profitability. Where does Snapdeal stand on that, and what’s your strategy there?
Bahl: We are a technology company and a large part of our investments is going into technology, both organic and inorganic. Right now, given that the market is still young, and we need to invest in building scale and increasing the size of the buy, we need to invest in our brand. So the two areas of investment for us are really technology and our brand. We want to continue doing that over the next couple of years. Given that our business model has significant operating leverage, we feel less concerned about the path to profitability for our company. It’s a conscious decision to frontload our investments in technology.
Knowledge@Wharton: Do you have a sense of when you might expect to be profitable?
Bahl: We have to play it a little bit by ear. We have seven times the money we have spent to date — since we started the company — in the bank. So the fear is not that we will run out of money. The fear is always: Are we investing enough for future growth, in terms of building our infrastructure? Right now, I’m very focused on solving that, as compared to figuring out how we can start generating cash flows. I think if we build the right business, with the right infrastructure, the right technology, the right brand and the right people, that will eventually happen. Alibaba took many years to get to profitability. Once they got there, they started generating more profits than most companies in the world.
Knowledge@Wharton: And one last question. Where do you want Snapdeal to be in another three years?
Bahl: That’s a hard one. The bigger the business has become, the more dynamic it has also become, as has the space itself. In three years, I would love that the company is well on its way to change lives of one million businesses in India.