CASE STUDY THE NIIT-MORRIS JV
IN PRACTICE LOOK BEFORE YOU LEAP
TRAVEL CHILLING IN TASMANIA
VOLUME 03 ISSUE 05 75 MAY 2012
New age investors will not accept short-term returns as a substitute for longerterm stability. What are their demands and how should CFOs tackle them?
A 9.9 MEDIA PUBLICATION
2 0 1 2
10 SUGATA SIRCAR The Finance-Director of Gujarat Gas talks about volatile currency rates, uncertainty in demand and the challenge of managing and planning execution in turbulent times
30 LEVERAGING INVESTMENTS IN GRC Expenditure will only increase on governance, risk and compliance (GRC) over time. How should a CFO manage this and focus it properly?
45 HOW TO PUT YOUR MONEY WHERE YOUR STRATEGY IS
A McKinsey report on best ways for resource allocation to reach strategic goals and thereby overcome inertia
RAJEEV KACHHAL As CFO of Fiserv India, Rajeev Kachhal will play a key role in his company’s plans to expand its base and delve deeper into the Indian market
MANAGING THE NEW INVESTOR Investors today are far more demanding when it comes to asking questions about their money. What is it that they seek and expect, and how should CFOs manage these demands?
42 THE NIIT-MORRIS JV Pratibha Advani, CFO of NIIT Technologies tells us how the tricky JV between NIIT and Morris Communications of US was executed, overcoming external and internal challenges
54 ON WHEELS | SKODA SUPERB AMBITION 57 M&E | WELCOMHOTEL SHERATON DELHI 51 MOUNTAINS AREN’T
58 TRAVEL | HOBART, TASMANIA
CLIMBED SITTING IN A TENT
Success doesn’t come if you only plan and don’t execute. It takes hard work, says David Lim
04 LETTERS TO THE EDITOR 60 NOT JUST THE LAST WORD
CASE STUDY THE NIIT-MORRIS
IN PRACTICE LOOK BEFORE YOU
TRAVEL CHILLING P. 58
CFO I NDIA
VOLUME 03 ISSUE 05 75
COVER DESIGN ATUL DESHMUKH
NIIT 42 LOUNGE: TASMANIA 58 I THINK: SUGATA
New age investors accept short-ter will not as a substitut m returns term stability. e for longerWhat demands and how are their CFOs tackle should them?
SIRCAR 10 VOLUME
Bharti Airtel IFC | Finacial Executive 02 | GE Capital 05 | Cleartrip 13 | Bharti Realty 53 | Nokia IBC | India Factoring BC
A 9. 9 MEDIA
THE VALUE OF FEI MEMBERSHIP Financial Executives International (FEI) is the professional association of choice for senior-level finance executives.
"Member relationships with financial thought leaders from large, highly-diversified global corporations and conglomerates to smaller private companies and non-profits.â€? Mary Jo Green Senior Vice President & Treasurer SONY CORPORATION OF AMERICA
"Leading-edge content and objective research for the competitive advantage I need to meet the demands of a multinational computer technology corporation.â€? Taylor Hawes CFO Intellectual Property & Licensing MICROSOFT CORPORATION
membership A newly-established category of FEI membership that empowers talented, motivated financial professionals with ongoing opportunities for personal and professional growth as their careers advance Choose FEI to support your advancing career as a financial professional.
Interested in learning more about the Financial Executives International India Chapter? Contact Tom Thompson at firstname.lastname@example.org
More than 15,000 Members | 85 Chapters Worldwide | 79 Year History FINANCIALEXECUTIVES.ORG | MEMBER SERVICES 877.359.1070
MANAGING DIRECTOR: Dr. Pramath Raj Sinha
Invest in the Investor
LIKE EVERY OTHER species, the large investor too has evolved over time and for very justifiable reasons, become far more demanding when it comes to knowing what is being done with his or her money. Come to think of it, if you gave half of your life savings to a friend, would you be happy just getting 2x return every year or would you ask questions about how that money is being spend and how it is being doubled? That is perhaps exactly what the new age investor seeks to find out. Of course lending money to a friend and running a business and dealing with VC or PE funding or numerous large shareholders, for that matter, are different ball games altogether. The fact, however, remains that the demands of modern investors have changed significantly over the last several years. While this is by means diluting the demands of investors from the years prior, today’s investors have a plethora of opportunities to access information on any variable that interests them, and they are able to use this information to effectively channel their investments. For instance, one of the fundamental questions most prudent investors ask today is in the area of integrity of the firm and the management team that they are investing in. While this has always been a key priority for investors, it has become paramount for those looking to drive long-term value. Also, today investors have access to information that they had no way of getting a decade back. Non-financial investors are able to decipher complex financial statements much more quickly and in depth due to the easy availability of resources (both, electronic and manual) to assist them. Moreover, as one CFO told us, the emergence of social media as a form of information gathering and sharing has transformed the knowledge landscape of investors in ways that were unimaginable just a few years ago. Our cover story this time focuses on some of the key demands or questions from investors and how CFOs are meeting these new challenges (Managing the new investor, pg14). As usual there is a lot more beyond the cover package—articles from CFOs and other domain experts, curated pieces from McKinsey and Financial Executives International and of course the Lounge section that allows you a bit of luxury. Enjoy!
EDITORIAL EDITOR: Anuradha Das Mathur MANAGING EDITOR: Dhiman Chattopadhyay MANAGING EDITOR (Copy Desk): Sangita Thakur Varma SUB EDITORS: Radhika Haswani, Mitia Nath DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Anil VK ASSOCIATE ART DIRECTOR: Atul Deshmukh SENIOR VISUALISER: Manav Sachdev VISUALISERS: Prasanth TR, Anil T & Shokeen Saifi SENIOR DESIGNERS: Sristi Maurya & NV Baiju DESIGNERS: Suneesh K, Shigil N, Charu Dwivedi Raj Verma, Prince Antony, Peterson, Midhun Mohan & Prameesh Purushothaman C CHIEF PHOTOGRAPHER: Subhojit Paul SENIOR PHOTOGRAPHER: Jiten Gandhi THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg ASSISTANT BRAND MANAGER: Nisha Anand ASSISTANT MANAGER: Dr Leena Narain ASSISTANT MANAGER - CORPORATE INITIATIVES: Deepika Sharma SALES & MARKETING VP SALES & MARKETING: Krishna Kumar KG (09810206034) ASSISTANT REGIONAL MANAGER (SALES): Rajesh Kandari (+91-9811140424) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) ASSISTANT BRAND MANAGER: Arpita Ganguli SOUTH: Vinodh Kaliappan (+91-9740714817) WEST: Sachin N Mhashilkar (+91-9920348755) For any customer queries and assistance please contact email@example.com PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar Hiremath MANAGER OPERATIONS: Rakesh Upadhyay ASST. MANAGER - LOGISTICS: Vijay Menon EXECUTIVE LOGISTICS: Nilesh Shiravadekar ASSISTANT PRODUCTION MANAGER: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd Kakson House, A & B Wing, 2nd Floor 80 Sion Trombay Road, Chembur, Mumbai- 400071 INDIA. Published, Printed and Owned by Nine Dot Nine Interactive Pvt Ltd. Published and printed on their behalf by Kanak Ghosh. Published at Bungalow No. 725, Sector - 1, Shirvane, Nerul, Navi Mumbai - 400706 Printed at Tara Art Printers Pvt ltd., A-46-47, Sector-5 NOIDA (U.P.) 201301 All rights reserved: Reproduction in whole or in part without written permission from Nine Dot Nine Interactive Pvt Ltd is prohibited. SUBSCRIBER SERVICES: Call +91-120-4010999 VISIT CFO INDIA’S WEBSITE www.cfo-india.in M AY 2 0 1 2
05.12 A GALA EVENT It was a great evening and truly “gala” ! I enjoyed it thoroughly and found some of the conference sessions quite interesting. Thanks for everything and I do look forward to future engagements. — Sugata Sircar, Director Finance, Gujarat Gas, Ahmedabad
HAPPY TO STRENGTHEN RELATION Congratulations to you and the team at CFO India on organising such a wonderful event. It was my pleasure to be part of the same. I also look forward to our association being strengthened going forward. I wish the team and the magazine the very best. May you achieve greater heights. — Jatin Kapoor, CFO, Philips Carbon Black, Kolkata
WORDS OF WISDOM: Mr O.P.Bhatt, Former Chairman SBI and chief guest for the evening, addresses the assembled CFOs during his key note speech
An evening to remember
The second annual CFO100 Roll of Honour was a thumping success with almost all the 100 winners and an equal number of guests and invitees in attendance at the gala evening 46
HOUSEFULL: CFOs listen in rapt attention to a speaker during the CFO100 event at the Vivanta by Taj on March 20, 2012
THE OSCAR NIGHT has some serious competition. If you had walked in to the Presidential Ballroom at Vivanta by Taj President, Mumbai on the evening of March 20th, you could well have thought there was a summit conference in progress or a black-tie celebrity awards going on. The latter in fact, wouldn’t be far off the mark, for indeed there were a 100 celebrities in the room albeit not the ones who sing and dance in films. These were 100 men and women who
The CFO100 was an extremely well organised function and very well attended. Zila Khan was the icing on the cake. A few suggestions though: the quality of guest speakers could be upgraded. Some were just speaking to sell their company and not relevant to the forum. Also you can have fewer sessions but with more audience involvement. — Pratibha K Advani, CFO, NIIT Technologies, Noida
have, with their superb financial and business acumen, taken India Inc to a position of pride and honour today. The event? CFO India’s 2nd Annual CFO100 Roll of Honour, 2012, where
the country’s premier magazine for the powerful finance community honoured a 100 CFOs for their exemplary contribution to corporate finance in the previous financial year. Despite being a weekday, over 175 people including some of the biggest names from India Inc. made it a point to attend the ceremony—a 9.9 Media initiative. Last year, at the inaugural awards, 9.9 Media (the parent company that publishes CFO India along with eight other magazines) had initiated India’s first CFO India Hall of Fame to honour 15 financial leaders for their lifetime contribution to finance. This year, all 15 members voted unanimously to welcome two new leaders to this club—Mr Keki Mistry, Vice Chairman & MD of HDFC and Mr Ravi Sud, CFO Hero MotoCorp. Mr O.P Bhatt, former Chairman SBI and the chief guest for
the evening, presented the scrolls of honour to the new inductees. Mr Sud and Mr Mistry join Mr Mohandas Pai (formerly of Infosys), Mr Suresh Senapaty of Wipro, Mr Y.M Deosthalee of L&T, Mr Bharat Doshi of M&M, Mr S Mahalingam of TCS, Mr Partho Datta (formerly of Murugappa Group), Mr Hari Mundra, (formerly of Essar Oil) Mr D Sundaram of TVS Capital, Mr Anil Singhvi of ICAN, Mr Ishat Hussain of Tata Sons, Mr Praveen Kadle of Tata Capital, Mr Akhil Gupta of Bharti Enterprises, Mr S.V Narasimhan of IOC, Mr B Hariharan of Avantha Group and Mr K Vaidyanath, (formely for ITC) in the Hall of Fame. This was followed by the CFO100 Roll of Honour in 12 categories, namely, excellence in cost management, M&A, strategy, growth, risk management, raising capital, financial control, use of tech-
COFFEE & CONVERSATIONS: Mr Anup Vikal, CFO, Interglobe, Urmil Khurana, CFO, Starwood Hotels and Pratibha Advani, CFO, NIIT catch up over coffee
LET THE SHOW BEGIN: Mr Gulshan Dua (in red tie), Country Controller, Freescale Semi Conductors India, checks in to the CFO100 conference at Vivanta
MAKING A POINT: Mr Sunil Kakar, Group CFO, IDFC (Right) discusses a point with Ms Anuradha Das Mathur, Director 9.9 Media
NETWORKING TIME: Mr Charanjit Attra, CFO, ICICI Securities discusses finance over tea with a fellow delegate at the CFO100
Your voice can make a change: Share your viewpoint on what’s happening in the community and your feedback on the magazine at firstname.lastname@example.org
100 Roll of honor celebration. It is a privilege to receive the award and be recognised amongst the top 100 CFOs of the country. It was a very well organised event and I want to acknowledge and appreciate team 9.9 media for their efforts. I look forward to being associated with CFO India on many more occasions. — Gulshan Dua, Country Controller, Freescale Semiconductor India, Noida
THANKS! Thanks for making me a part of the celebrations. I really acknowledge and appreciate the efforts put in by you and your team for making this event a memorable one — Rajesh Pasari, CFO, NetAmbit, NCR
A SUGGESTION GREAT NETWORKING OPPORTUNITY Thanks to the entire team of 9.9 Media. All of you worked really hard to make this event a grand success. My compliments to you all for making it happen. This was a great networking opportunity for me with old friends. — Girish Bhat, CFO, Gammon India, Mumbai
PLEASURE TO BE PART OF CFO100 It was indeed a pleasure to be a part of the CFO 4
M AY 2 0 1 2
Thank you very much for the hospitality and for sending the photographs of the CFO100 event. It was very well organised. I had one suggestion though. It would be good if next time onwards you chose a venue closer to the airport, since many CFOs come from across India and travelling two hours to reach the venue from the aiport is sometimes tough — Mahesh Majithia, CFO, KHS Machinery, Ahmedabad
05.12 India most optimistic market
INDIA HAS EMERGED as the most optimistic market in terms of consumer confidence, but there is still some amount of cautiousness when it comes to spending spare cash, says a Nielsen survey. This is the ninth consecutive quarter wherein India has retained the tag of the world’s most optimistic market with an increase of one point in consumer confidence to 123. “India once again topped the global index indicating a high level of confidence amongst consumers, who are optimistic yet cautious,” Nielsen India managing director Justin Sargent told PTI. “This optimism is reflected in Indian consumers’ increased confidence in job prospects, which is a good sign for the economy. However, job 6
M AY 2 0 1 2
security is still a cause for concern and consumers are still cautious when it comes to spending spare cash,” he added. India is followed by Saudi Arabia at 119. Indonesia and the Philippines shared the third most optimistic nation tag with an index point of 118. Meanwhile, Hungary was the most pessimistic market with 32 index points, followed by Greece (37) and Portugal (39). “Households around the globe experienced brighter personal situations in terms of jobs and personal finances last quarter, especially in the US and Asia, which was reflected with improved consumer confidence and higher discretionary spending,” Venkatesh Bala, chief economist at the Cambridge Group, a part of Nielsen, said. The survey suggests that while consumers are neither as confident nor comfortable with the economy as they would like to be, they are expressing a pent-up demand to spend as they did prior to the recession, Bala added. The survey tracks consumer confidence, major concerns and spending intentions among more than 28,000 Internet consumers in 56 countries.
WHAT’S AROUND ZONE CFO Book: Jatin Kapoor ...................................... Pg 08 Jargon Decoded: Move the Needle ...................... Pg 08 CFO Movements ..................................................Pg 09 Unhappy Engineers .............................................Pg 09
THE CFO POLL RESULT
Have real estate prices been fully corrected in Indian metros?
15% Maybe 50% Yes 35% No
CURRENT POLL QUESTION
Will Indo-US trade relations improve again, following Hillary Clinton’s visit?
The Teen Whiz
Radiation tag for mobiles ALL INDIAN AND international mobile manufacturers will have to provide a radiation tag with SAR (Specific Absorption Rate) value of less than 1.6 to their mobile phones from this September. The Indian government has now made the radiation tag mandatory for manufacturers; these tags will show the SAR level on their devices. According to the Ministry of Communication and Information Technology all mobile phones which will be sold in India after September 2012 should have SRA information on them. The Indian government is trying to make the rule obligatory to make customers aware and more knowledgeable about the mobiles they buy. This rule also aims to improve the quality of phones in the Indian market.
SAHIL LAVINGIA, A 19-year-old boy of Indian origin has convinced some of the world’s large venture capital firms to invest about $1.1 Million in his startup, Gumroad. Much like some of the biggest names in Information Technology, Lavingia too dropped out of college (Computer Science class of the University of Southern California), and joined a few classmates to launch Pinterest a few years ago, which he later left to lead his own internet company. Gumroad, is a website where you can upload, share and sell your articles and web products. The company, started in 2011, has attracted investors such as Accel Partners, Max Levchin of PayPal and social music service Turntable’s founder Seth Goldstein to raise the million dollar fund.
According to his LinkedIn CV, Lavingia bought his first company at 14, a video streaming website for $400. This generated torrents of traffic and finally he sold it for $10,000. “What’s more fun - writing an English essay or an iPhone app? For me, it’s the latter” he told The Times of India about his decision to drop out of college to get into entrepreneurship. The founder of Gumroad is also an avid writer and frequently posts blogs on his web-site. A note on the blog site of this Indian techie reads “I’m just a 19-year old kid who likes building things.” M AY 2 0 1 2
What’s on your mind? Attach
Share Jatin Kapoor is enjoying watching IPL and backing KKR to win May 18 at 19.35 · 4 people commented · 2 persons like this
Zodiac: Sagittarius Views: Liberal
CFO, Philips Carbon Black, Sept 2010 to present CFO, Himadri Chemicals & Industries, April 2009 to Sept 2010 Finance Controller, Pepsi, Nigeria CFO, Ispat, Nigeria CFO, Must, Hong Kong
Jatin Kapoor hopes to make Philips Carbon Black an even larger player in the global carbon black market May 15 at 19.22 · Comment · 3 people like this
Jatin Kapoor Loves ‘Oldies’ music - music from the 1960s and 70s, be they jazz, pop or rock or even old Hindi numbers May 09, at 22.45 · Comment · 14 people like this
Books on business and cricket 3 people commented · Like
I Listen... Oldies Comment · 2 person likes this
BCom, St Xavier’s College, Kolkata Chaterted Accountant Schooling in South Point High School, Kolkata
RECENT ACTIVITY Jatin Kapoor likes CFO India and two others
CFO India, Cricket, Oldies March 18 at 11.55 · Comments · 2 people Like this
Gen-Y not energy savvy GEN-Y—AGED BETWEEN 13 to 30 and heavily dependent on power intensive technology like iPods and laptops, shrugs off messages to conserve energy despite rising environmental concerns, according to a study. “Yet, paradoxically, this is also the age of advances in energy hungry technology—plasma TVs, iPods, iPads, smart phones and lap top computers are all common place in Gen Y households,” Samantha Smith, a doctoral candidate in marketing from Monash University, researching Gen Y students, said. Smith found few youngsters feel the need to conserve energy even in the face of environmental messages. “Feedback indicated that Gen Y’s are dismissive of the impact they can and do have on the environment,” she said. 8
M AY 2 0 1 2
THE MEANING The jargon is a favourite of venture capitalists. If something doesn’t move the needle, meaning that it doesn’t generate a reaction (like, positive cash flow), they don’t like it much. THE USAGE So when pitching to VCs, make it clear that you “intend to move the needle” with your plan. Or simply say how your plan & product are superior to competitors’
TWEET WINS MBA SEAT RAHUL RATHI, A 25-year-old technical associate with Tech Mahindra has made history after winning the ‘International Tweet Competition’ conducted by University of Iowa’s Tippie School of Management (TSM). The competition earned him an MBA seat worth $36,400 in the U.S. based college, reports PTI “What makes you an exceptional Tippie full-time MBA candidate and future MBA hire?” was the question asked in the competition. Rathi found an answer for this question in a unique tweet, “In an age where packaging is as imp as content, I present me in a
manner that makes me stand out from the crowd.” The tweet showed a link to his personal blog where he shared his views on leadership, decision-making, problem solving and team-playing skills. This made him the only international winner in the contest which was announced in the last year. One of the panel judges said “He chose to keep it simple while communicating his points effectively. We appreciated that.” TSM staff and current students were included in the judging panel. Last year Rathi had applied to many colleges in the US and he is now set to join from September 2012
Suzlon CFO joins Bilcare Research Robin Banerjee, CFO of the world’s third largest wind turbine-maker by sales, Suzlon Energy, has quit after spending almost three years with the company. Banerjee has joined as CFO of the Pune based ‘Bilcare Research,’ an R&D driven organisation which offers customer-centric innovation for pharmaceutical packaging, card solutions, specialty film solutions and clinical trial supplies management. A CFO100 Roll of Honour winner for the past two years, Banerjee has held senior leadership positions across various industries such as FMCG, steel, auto components and travel.
New CFO @Komli
Unhappy Engineers? A RECENT SURVEY conducted by IIT-B has shown that very little attention is given to the mental health of future engineers. The survey conducted at IIT-Bangalore saw over 200 respondents fill up the ‘Oxford Happiness Questionnaire’ developed by psychologists Michael Argyle and Peter Hills at Oxford University. Happiness Questionnaire has been considered as an accurate means of measuring psychological well-being in a compact scale. The survey reveals that IIT-B students are not too happy with life (an average individual’s happiness score is 4.3). The average happiness score found on the IIT-B analysis stands at 3.43. Female students scored 3.44, better than the male students who could get only 3.34. In the student’s survey Aerospace (3.76), Civil (3.67), Energy (3.64) and EP (3.55) departments scored better than the Chemistry (3.40), Chemical (3.34),Electronics (3.29) and Computer Science (3.27) departments. The survey also shows that students are much happier in their third year than in the fourth and fifth years and least happy in their second year of engineering, reports Silicon India.
Rajesh Ghonasgi has put in his papers as CFO of the Punebased IT firm Persistent Systems after a successful four-year stint which saw the IT major do an IPO and record significant growth. His new assignment is with the start-up Komli Media where he joins as Chief Financial Officer for India. Ghonasgi, a CFO100 winner in 2011 and 2012, has worked for IT giants such as Wipro and been CFO of Hexaware Technologies.
Granules India CFO Granules India Limited has appointed VVS Murthy as its new CFO. Murthy previously served as the group CFO at Ahmedabad-based Dishman Pharmaceutical and Chemicals Limited and has over 32 years of experience in finance.
M AY 2 0 1 2
Facts & Trivia EDUCATION: CA - Institute of Chartered Accountants of India LAST JOB: Finance Controller, Cabot India CAREER: In a career spanning over two decades, Sugata Sircar, Finance Director at Gujarat Gas, has worked for organisations such as Madura Coats, Britannia and Dunlop in various capacities
WHEN ONE VENTURES to write such a piece, the brief is to focus on what keeps one awake at night. While I will cover that, let me also talk about the positive indicators which I see in the business environment which are relevant in the planning and execution of a CFOâ€™s job. The Indian economy is growing at about 7 per cent. The growth estimate of real GDP for the current fiscal year is 7.6 per cent and this is expected on the back of industrial growth at 6.7 per cent, services at 9.3 and agriculture at 2.4 per cent (Source: CMIE). This indicates a reasonable growth in demand. So I would agree with the view that there is no cause for panic.
THE CHALLENGES Investment decisions are dependent 10
M AY 2 0 1 2
SUGATA SIRCAR The Finance Director at Gujarat Gas talks about volatile currency rates, uncertain demand and the challenge of managing planning and execution in a rapidly changing environment as major issues that concern him today
I think it is time for CFOs to approach planning and execution with more flexibility. Various possible scenarios have to be created changing the variables which have a critical impact on the outcome
on a number of factors. The primary factor is expected demand. Other important factors, depending on the industry and the business, would be cost of capital, requirement of permissions, land acquisition, etc. The challenge is the uncertainty around each of those factors. Demand, which is the primary driver, would be dependent on the prospects of the customer industries or consumers. It would also depend on the price of the product, which in turn would depend on cost of production and sales, and the desired margins. The Indian business environment is experiencing such a churn, that it is becoming increasingly difficult to project each of these variables. Past trends in demand are often not good enough indicators. Basing decisions on growth projections of target regions
or industries and using the same to plan demand has equal uncertainties. Cost of capital is not only uncertain, but has proved to be volatile, as have exchange rates. Permissions if required from the Government could
be impacted by Central policy and politics. And projects may be stalled at different stages for want of permission, leading to idle capital. I think it is time for CFOs to approach planning and execution with
much more flexibility. Various possible scenarios have to be created changing the variables which have a critical impact on the outcome. Therefore, there could be a number of demand situations, cost of capital scenarios M AY 2 0 1 2
While systems and processes must have adequate fraud control mechanisms... it is necessary to have intervening assurance checks at random to minimise fraud risk and a few different time scales for the execution of a project. The actual outcome would possibly lie within the range of scenarios. It is important to understand the likelihood of each of the scenarios and also to take specific measures to ensure that the outcome is as close as possible to the desired goal. This is a way of using Risk Management in planning. Course correction may be necessary while a project is under execution. The goal is to create value, so the business should be able to change tactics quickly if circumstances change. If there is a general increase in cost of capital, it should be understood that it would not only impact business but would 12
M AY 2 0 1 2
also impact customers. This may delay the offtake of a product earlier envisaged and hence may call for splitting the project into phases. So progress review of a project and of circumstantial parameters against the projections used is very essential. There are several challenges in the operating scenario too. The depreciating Indian Rupee is pushing up input costs in several ways. While this exerts pressure on margins, product pricing is seeing an upward trend. Customers have to adjust to a scenario of steadily increasing prices for the products and services that they buy. Price elasticity is factored in demand projections, based on the assumption that demand will
react to price beyond a certain level. These levels are now being breached as customers adjust to a higher cost environment. So price elasticity has to be reviewed and reset regularly. Pressure on costs brings in pressure on efficiencies. Businesses which can improve efficiencies and transfer the same through their offerings to customers would have a strategic advantage. Process efficiencies can be copied by customers in time, so it is also important to have a culture of continuous improvement and of innovation. Investment is required in resources and in their development to raise the capability of a firm for innovation. The last piece that I would like to talk about is fraud risk management. We live in an environment of exponential increase in aspirations, temptations and peer pressure to continuously demonstrate success. These are all red flags in the context of fraud risk. Unreasonable pressure on people to “make their numbers” increases the risk of fraudulent financial statements being generated based on inflated revenues or margins. While systems and processes must have adequate fraud control mechanisms like segregation of duties, system based validation of transactions, independent checks etc, it is necessary to have intervening assurance checks at random to minimise fraud risk. The whistleblower mechanism must be strongly propagated. It must be made clear that it is an employee’s duty to blow the whistle if she sees something amiss. A mechanism for investigation must exist. A lot needs to be done optically to demonstrate the management’s commitment to values in order to minimise fraud risk. I would conclude by saying that we live in vibrant, volatile and interesting times. It will be our ability to understand the changes in the environment and to adapt which will determine our success. *The views expressed by the author are personal
New age investors will no longer accept short-term returns as a substitute for longer-term stability, operational transparency and fundamental good management. What is it that investors want to know and how should CFOs prepare to meet these challenges and demands? DHIMAN CHATTOPADHYAY
ife in the second decade of the 21st century is not going to get any easier for India Inc in general and CFOs in particular. Exciting yes, easy...definitely not! The job portfolio will continue to evolve, competition will get stiffer and making money, tougher. To top it all, raising capital is increasingly becoming a tougher ball game. Not just because the economic outlook is not as as rosy as it was four years ago, but also because the large investor today is very demanding, asks a lot more questions and is completely clued in to markets around the world. One thing remains a constant though: as companies look for fresh inflow of funds from Venture Capitalists or Private Equity players, plan an IPO or seek to simply re-balance investments across markets to secure their future, it will remain crucial for CFOs to ensure that investors are with them for the journey. This, as a recent Ernst & Young report titled: “Building investor confidence in long-term health” observes, “requires them to clearly and coherently narrate two distinctly different chapters of a single story.” One is about today’s established business, its competitive performance and ability to generate profit: it is often a tale of difficult conditions and hard won margin. The other is about tomorrow’s opportunity: it is about capital investment in new and unfamiliar territories in pursuit of growth. This, however, is easier said than done, given the very nature of the supremely knowledgeable and demanding ‘new investor’. As Sathya Kalyanasundaram, DirectorFinance & Operations of Bangalore-based Texas Instruments (India) says, “the demands of modern investors have changed significantly over the last several years. While this is in no means diluting the
demands of investors from the years prior, today’s investors have a plethora of opportunities to access information on any variable that interests them and are able to use this information to effectively channel their investments.” What is it that this so-called new kind of investor demands? And how best can CFOs manage these smarter, more aware and demanding set of investors?
CHALLENGE 1 REASSURANCES FROM THE CFO Both, investors and CFOs agree that it is primarily the job of the CFO to communicate with investors about a change in investment allocation across developed or rapid-growth markets. They also agree that greater investment in rapidgrowth markets means that the CFO needs to communicate more frequently with investors. Says Alok Misra, CFO of the Mumbai- headquartered WNS Global, “The key questions investors want answered are about what is the industry you are operating in and what are the prospects for the industry as a whole; Are there independent sources of data that corroborate your story on industry growth rates and what are the key emerging trends in your industry that will shape it in the next five years.” “The CFO therefore has to be on his or her toes at all times,” says Vibha Padalkar, CFO HDFC Life, adding: “Don’t keep changing metrics to put forth numbers that suit you in a particular quarter such as total sales growth in one vs growth of certain divisions in another. Also try and satisfy investors that the company would not be happy using dubious accounting practices and M AY 2 0 1 2
feasible extent, engagement of the CXO suite, especially the CEO and CFO with investors are crucial in managing investors, continuing and new.”
that there is rigour from the audit committee.” Misra adds that another area the CFO needs to manage is accounting policies and convincing investors that they are different or superior to competitors. “What are the key levers for margin and cash generation in your company? How are you managing these levers to optimise return to the shareholders? What are the levels of disclosures you provide and finally what are some of the negative surprises you may have given the market? These are issues CFOs have to manage when dealing with investors. The investor needs to be reassured on these fronts.”
CHALLENGE 3 THE CFO AS A REPORTER, NOT AN ADVOCATE “When investors meet CFOs, what they’re really trying to test is their character,” Glen Suarez, Deputy Chief Executive of Knight Vinke, an asset management firm mentions in the E&Y study. Also, they often want greater exposure to the board and local management. “It’s very important in the eyes of investors that the independent nonexecutives appear to be fully persuaded of the course of action that management is recommending,” says an industry analyst. Agrees S. Varadarajan, ED &CFO of Chennai-based VA Tech Wabag, whose company went the IPO route less than two years ago. “The investors clearly wanted 50 per cent of the board of directors to be from varied fields and to be independent directors and also wanted to meet them at regular intervals,” he recalls. This is an area where the CFO might need to work in consultation with the CEO and the board.
Not all emerging markets’ exposure is created equal. Five years ago, when demand in these markets far outstripped supply, one didn’t have to be very good to earn a decent return. Now, as investment in rapid-growth markets such as India catches up with the underlying growth in demand, we will start to see a separation between operators who are good at what they do versus those companies that don’t have those capabilities. “Investors would want a clear presentation from the CFO about how the company is placed within the specific industry. Are they among the top three players? If not, how do they plan to get there? These are questions one must be prepared for,” says Misra. Strategies for organic and inorganic growth, investment plans over the next three to five years and how these tie in with the cash generation record of the business are issues where the investors can indeed be very demanding. “Todays investors are a lot better informed and they want to use this to drive a dialogue of a magnitude more intense than in the past. Institutional investors or global investors also want 16
M AY 2 0 1 2
— VIBHA PADALKAR, CFO, HDFC Standard Life
to have a keen understanding of the company’s strategy, visibility of the key steps being taken and a complete transparency, especially on governance matters,” says Pramod Gupta, CFO, Novartis India. He argues that to instill confidence in investors CFOs need a “clear communication strategy, transparency on governance issues and, to a
CHALLENGE 4 INSISTENCE ON INTEGRITY, ETHICS, GOVERNANCE & COMPLIANCE Perhaps the most fundamental requirement of prudent investors today is the integrity of the firm and the management team that they are investing in. While this has always been a key priority for investors throughout all time, it has taken centre stage for those investors looking to drive long-term value. “Tactically, this means that the CFO will have to ensure complete compliance with regulatory, statutory, accounting, taxa-
CHALLENGE 2 CONFIDENCE THAT THE COMPANY CAN CAPTURE COMPETITIVE ADVANTAGE
What Matters Most Forms of communication that CFOs, and investors find most useful in providing information about investments in rapid-growth markets (percentage) FOR CFOs • Investor road shows (25%) • Interim report (22%) • Annual report (15%) • One-on-one meetings (12%) • Regular trading updates (10%) • Analyst presentation (9%) • Media coverage and interviews (7%)
FOR INVESTORS • Regular trading updates (20%) • Annual report (17%) • Analyst presentation (16%) • Investor road shows (16%) • One-on-one meetings (16%) • Interim report (11%) • Media coverage and interviews (4%)
tion and any other requirements at all times. More importantly, the CFO will need to build a team that fully believes and imbibes the values of the firm comprehensively. Non-financial performance continues to score high on the agenda of new age investors. I believe that this will drive decision making in greater form in the years to come. Considerations such as carbon footprint and energy efficiency have already begun to weigh heavily on investor minds in channeling their investments,” says Kalyanasundaram of TI.
could be in terms of the pedigree and stature of the chair of the audit committee, or the transparency in conduct of the board or even the way in which succession planning is handled. Good governance that helps build a solid business is something that will impress an investor. For instance, the quality of the book is very important in the insurance sector,” says Padalkar of HDFC Life. Varadarajan adds, “We had our IPO in October 2010. Both during and after the IPO the investors placed a number of expectations
CHALLENGE 5 ALIGNMENT OF VISION OF TOP MANAGEMENT It is imperative that the CEO and the CFO are aligned in their vision and thoughts, says Varadarajan. “Often the investors speak to both at short intervals just to check out if things are as they are presented to be. It is good for the company’s image to have a message in same direction coming out of the company,” he adds. Kalyanasundaram agrees when he talks about the convergence of information. “Today’s investors have access to information in forms that continues to grow. Non-financial investors and partners are able to decipher complex financial statements much more quickly and in depth due to the easy availability of resources (both, electronic and manual) to assist them. Moreover, the emergence of social media as a form of information gathering and sharing has transformed the knowledge landscape of investors in ways that were unimaginable just a few years ago,” he says.
— RAVI S GUPTA, CFO, Jubilant FoodWorks
A decade ago, investors were not quite that bothered with governance standards just as they only asked perfunctory questions about ethics. All that has changed post Satyam. “Evidence of good corporate governance is a big plus for investors. This
on the company and most of them stressed the need for good corporate governance. Since FIIs and FCBs were predominantly the target investor for us, we found a majority of them willing to pay a premium for well-governed companies.”
His advice: “CFOs have to perform the fine balancing act of enabling knowledge growth and spurring interest in the proposed combination, investment or transaction without creating any perception of disguised realities. The role that a CFO plays in such M AY 2 0 1 2
CHALLENGE 6 TRANSPARENCY It is best to be honest and transparent in your dealings with investors and not make tall promises. “Disclosures beyond basic regulatory requirements enable shareholders to understand the company better. In fact they stressed that higher standard of disclosures encourage higher accountability on the part of employees across all levels,” says Varadarajan. Agrees Padalkar of HDFC Life: “There is a strong correlation between market cap and strong disclosures. An opaque prospectus would not get top dollar valuation.” Others who have been
of financial and operating metrics and disclosures, going beyond the basic requirements, are always appreciated—especially if they help analyse and predict performance.
CHALLENGE 7 PREDICTABILITY, NOT SURPRISES Contrary to popular belief, investors do not like surprises, even the happy ones, since anything that is ‘surprising’ suggests the CFO and the CEO were not expecting it. “During and after our IPO, most of our investors voted for the basic expectation of predictability, sustainability, scalability and profitability”, recalls Varadarajan. Padalkar, who has been through an IPO in her previous job and deals with investors on a regular basis reveals that predictable (and sometimes boring) earning estimates get brownie points. “Predictability and consistency pays. Investors do not want surprises of the negative (or positive) kind, because even a positive surprise implies that the company wasn’t aware,” she argues.
— ALOK MISRA, CFO
through an IPO in recent years such as Ravi S Gupta, President & CFO of Jubilant Foodworks, mention that investors “need complete transparency and expect a high level of corporate governance.” Indeed as Misra mentions, sound financial systems and controls that allows for quick reporting and facilitates proper disclosures 18
M AY 2 0 1 2
money on a quarterly and sometimes on an even more frequent basis. What should a CFO do then? Misra who has vast experience both, with Indian as well as a large number of US investors says, “Spend time in the market communicating with investors and analysts—there are a lot of great stories out there so no one is going to come and seek you out—you need to go out and tell the story.”
CHALLENGE 8 REGULAR INVESTOR MEETINGS No, the annual investor meet that some Indian business tycoons magnanimously convene, just won’t work anymore. Investors today demand to know exactly what is being done with their
Varadarajan speaks from experience too when he says, “periodic meetings with investors and conference calls to share the expectations and provide reassurance on the road map given by the management are essential. In fact in our case, most often the investors want to have a discussion with two levels below in the hierarchy to check out whether
situations varies from that of a provider of information and a creator of a vision to that of a supporter of thought processes. By navigating these roles effectively, the CFO is able to strike the right chord in enabling the business combination or investment.”
the vision we speak about, is shared and believed by all in the organisation. Specific project meetings they request are to help them get an insight on the quality of the execution in the company. While technology and innovation is an expectation, they do not encourage innovation in finance. All this is more oriented towards transparency and better disclosure for good governance.” Ravi Gupta of Jubilant Foodworks says “investors want to interact with the top management of a company on a regular basis, so that they are updated not only on the business performance but also about current business challenges. Updates to smaller investors can be through analyst reports or company press releases but large investors need to be met.” He also advices that CFOs should be “ready with a whole lot of additional business information which an investor may need. However, we must know where to draw the line as we may end up sharing information which is of confidential nature.” His mantra: Keep at least 10 per cent of your time in a day for investors and analysts.
CHALLENGE 9 COMMUNICATE The power and value of this word can never be over-estimated. Communication at the right time and in the proper way can save companies from disaster, rake in the money and work wonders in many other ways. But when it comes to managing investors’ demands and expectations, what should a CFO do? “Do not attempt to hide bad news or squirrel away good news. If there is bad news to be communicated, take it on the chin and give coherent reasons and focus on how the company would improve the situation. If there is good news that wasn’t anticipated, give adequate reasons. As a rule if you goofed up, admit it,” is the way Padalkar looks at the challenge. Agrees Varadarajan when he says, “Be quick to convey the bad news. Be proud when conveying
good news but check if you have ticked off all the code of conduct and ethics rules.” Misra too says: “be quick to provide the bad news since hiding it won’t make it go away. Investors always appreciate candour and transparency especially when it comes to bad news,” he says.
— SATHYA KALYANASUNDARAM, DIRECTOR FINANCE & OPERATIONS Texas Instruments India
CHALLENGE 10 REGULAR, CONCISE TRADING UPDATES “Keep your promises,” says Misra, adding that making tall claims and not living up to them is a very short-lived strategy and is fraught with danger. “CFOs are naturally conservative but in communicating they need to balance between being optimistic about the future (based on reality, of course) and being conservative—neither extreme helps,” he says. The E&Y global survey too points in the same direction when it observes that investors want forward-looking, real-time and concise insight. “Investors don’t care about what’s already taken place. They’re much more interested in what might happen in the future and the executive team’s assessment of the key opportunities and risks,” says Jeremy Jennings, Ernst & Young’s Regulatory & Public Policy Leader.
CONCLUSION This is by no means an exhaustive list of demands that the new age investor makes when he or she backs an organisation and puts in large sums of money into it. After all, if you were to hand over your life savings to anyone, wouldn’t you be well within your rights to ask all the questions that you want? Simply getting a high return on your investments are not enough anymore. Investors want to see their money put into the right areas, used ethically, invested into green initiatives and into sustainable projects instead of ones which offer quick returns. Clearly, CFOs have their plates full in trying to understand and manage the new investors. And the ones who hone that much talked about but rare quality—the art of listening with their ears to the ground—will more often than not emerge victorious in the race to woo investors in the years to come. M AY 2 0 1 2
BECOMING A STRATEGIC CFO Thinking forward looking backward: Developing into a strategic CFO necessitates almost a complete about-face—instead of focusing on the non-financial rather than the financial elements of critical decisions and with an external rather than internal orientation ROBERT A. HOWELL
he notion that Chief Financial Officers should add to their traditional roles of compliance, reporting and control and become business partners and strategists has been around for some time. Certainly some CFOs have moved in that direction and have been rewarded for it, including succeeding to the CEO seat. Many, however, have not. Part of the reason could be that many CFOs feel more comfortable working in the areas of compliance, reporting and control—the areas with which they are most familiar. Others just can’t find the time to take on additional activities with which they are less familiar. And some just don’t know what it means to be a strategic CFO or how to get there. It’s an issue that is clearly on the minds of CFOs in all industries. When more than 60 large-company finance chiefs gathered in Washington, D.C., last June to network and discuss the state
M AY 2 0 1 2
of their profession, participants were asked to propose, and then rank, priorities for business and government. The CFOs attending The Wall Street Journal’s programme divided into five breakout groups to consider the priorities related to managing in uncertainty, managing cash, dealing with conflicts between reporting lines, preparing for growth and next steps in their career path for CFOs. Of the 19 recommendations for action presented by the group, four of the top five dealt with making the CFOs “more strategic.” The top priority was to “become a strategic CFO.” The rest of the top five were: • Develop a financial leadership pipeline; • Drive value through capital allocation; • View cash as a strategic tool; and • Provide short- and long-term balance.
WHAT IS A ‘STRATEGIC’ CFO? Becoming a strategic CFO necessitates almost a complete about-face—thinking forward instead of looking backward, focusing on the non-financial rather than financial elements of critical decisions and with an external rather than internal orientation. Focusing Forward Rather than Backward: The penultimate responsibility of every CFO is to drive the underlying “intrinsic value” of the firm. The intrinsic value of a firm very simply is—as Warren E. Buffett so clearly states each year in Berkshire Hathaway Inc.’s annual report—the net present value of the future cash flows, which may be taken out of the firm. The networking session last spring clearly recognised the importance of this responsibility when the participants stated their second highest priority: “The CFO must drive firm value by focusing more explicitly on free cash flow generation and reallocation rather than on income and earnings per share.” That means finding ways to increase future cash flows, realising them earlier and appropriately reducing the discount rate applied to the future cash
flows. The CFO must be committed to focusing on improving future cash flows rather than looking backward and tallying historical results. Non-financial Rather than Financial Elements of Decisions: Every business decision has non-financial as well as financial elements and implications. Is it better for the company to grow organically or by acquisition? Which product lines have the best short and long-run competitive advantage? Similarly, with markets and customers? Should the firm outsource or own its productive capacity? What is the best way to develop the workforce? What about financial leverage? Should the firm return capital to the shareholders, and how? CFOs must also understand the non-financial aspects of the myriad decisions confronting the firm, as they do the financial aspects. If he or she only brings financial skills primarily to a decision, that CFO is only bringing half the required understanding and will continue to be relegated to secondclass participant. External Rather Than Internal Orientation: Finally, CFOs have to become comfortable with, and understand very well, a number of external relationships and other factors than is typically the case today. It is virtually impossible to make sound decisions without really knowing about markets and customers, suppliers and, especially, competitors. Customers drive firms’ “top lines,” margins, profits and cash flows. Com-
petitors’ actions can get in the way and even destroy a firm’s ability to create value. Understanding how suppliers and the whole supply chain can help, and hurt, the firm by their actions is also essential. Although a business operates within an industry and understanding one’s position in that industry relative to customers, competitors and suppliers is essential, it is also critical that CFOs have a very good understanding of even broader macro trends, including societal, political, economic and technological trends—the implications of social networking; dramatic political shifts; the financial crisis and its impact on unemployment and consumer buying patterns; and the impact on human behaviour of iPods, iPhones and iPads, for example. The traditional CFO typically has focused on historical financial results pertaining to the internal firm. Strategic CFOs must add to that orientation an almost reversal of focus, on the future growth of the intrinsic value of the firm. They must do so by focusing as much, if not more, on the nonfinancial aspects of decisions leading to growth in intrinsic value, and drawing upon a deep understanding of external relationships and influential factors that includes customers, competitors and suppliers, as well as social, political, economic and technological factors. To become a truly strategic CFO requires a specific personal developM AY 2 0 1 2
ment plan and an appropriate amount of time to carry it out.
STRATEGIC DECISIONS TO DRIVE VALUE One way to assess the kinds of decisions a firm can make, and that a strategic CFO should fully understand to drive firm value, is to think in terms of operating, investing and financing decisions. Operating Decisions: Two critical operating decisions are to grow the firms’ existing business—perhaps by market expansion—or to diversify the business into new product and market areas. The first area, expanding the existing business, should be relatively straightforward financially. As revenues increase, margins and profits should typically increase faster 26
M AY 2 0 1 2
as a result of operating leverage and, depending upon the reinvestment requirements in terms of working capital and fixed and other assets, cash flows should also increase. If cash flows do not increase, then additional value is not created. The strategic aspects of growth must consider which products have the best opportunity for growth, in which markets, especially considering the degree of competition, and what kinds of additional costs, including price concessions, commissions, promotional and advertising expenditures and the like will be required. These latter issues are much more strategic in nature and have few simple answers. Diversifying one’s business is more complex. In most cases, growth is intended, but there is no assurance
that relative margins and profits will increase. A company may choose to diversify to increase absolute margins and profits at the expense of relative margin erosion. Diversifying usually requires additional investments in working capital and other assets. Again, the long-term financial objective is to increase cash flows and firm value. Strategically, the decision to grow by diversification is much more challenging than just organic growth. What product lines and products should be added, what are their economics compared to existing products, into which markets should they be introduced and how quickly, and exactly how should they be introduced? Will the new products affect existing products? What is the competitive landscape in terms of competing offerings or likely response? A strategic understanding of the existing and proposed product lines, markets and customers and competition is essential. There are a number of more specific operating decisions than just growing or diversifying the firm, including price/cost/volume tradeoff analyses, product and customer profitability analyses and make or buy decisions, for example. But these two are significant and clearly demonstrate the need for CFOs to acquire and bring strategic, as well as financial, insights to operational decision-making. Investment Decisions: There are three major investment categories— acquisitions, tangible assets and intangible assets. Many firms grow and diversify by making acquisitions. Quite frankly, the success record for major acquisitions has been very poor. It has been estimated that more than 60 percent of all major acquisitions have not been successful. The framework for analysing an acquisition candidate is relatively straightforward. First, determine the intrinsic value of the acquisition candidate. Second, estimate any synergies to be realised. Third, estimate any integration costs. Fourth, do
not pay more than the net of the first three calculations. The strategic aspects of an acquisition are, in fact, paramount. Determining the intrinsic value of the candidate requires understanding that firm’s strengths, weaknesses, opportunities and threats in the context of its industry position, as well as whether they are sustainable in a new organisational arrangement. Achieving synergies necessitates understanding both the acquirer and acquisition candidate’s businesses well enough to appreciate where opportunities to fit the two together will be achieved. Integration costs depend on the underlying similarities and differences of systems and other coordinating vehicles. An acquisition is ultimately a huge strategic challenge. Making an investment in tangible assets, including property, plant and equipment, has a similar structure to an acquisition. Ultimately, the question becomes what is the present value of the future stream of cash flows to be realised relative to the investment required. At one extreme, building a “greenfield” plant to go into a new business has all of the challenges of an acquisition. At the other extreme, a simple capital expenditure should require much less strategic consideration. CFOs should understand that investments in working capital accounts such as accounts receivables and inventories are just as much an investment as property, plant and equipment, and should be subject to similar investment analysis. Issues of strategy arise when one considers the impact of such initiatives as changing collection terms and reducing inventories on customers. Intangible assets include such categories as R&D, patents, brands and even human capital, although expensed for accounting purposes. In a number of cases, expenditures/ investments in R&D exceed capital expenditures. Many firms invest heavily in creating and sustaining their brands. And today, the personnel component of
many firms far exceeds any other outlay. The strategic implications of such expenditures should be clear. Unfortunately, many executives and CFOs fail to view them and manage them as those they were among the most critical investments the firm is making. Financial Decisions. There are a number of financial decisions that, for the most part, CFOs are central to making, which also have strong strategic ramifications. Today, a number of firms have built large caches of cash on their balance sheets. Obviously, having a sufficient cash cushion available in times of emergency or to take advantage of an unseen opportunity is important. However, the return the firm can realize from short-term investments of cash fall short its cost of capital and thus is a value destroying decision. Second, the degree to which a firm should leverage its capital structure is a critical financial and strategic decision. Given that the cost of debt is typically lower than the cost of equity,additional leverage (more debt) results in a lower weighted average cost of capital and, as a result, higher intrinsic value. Some-
firm is clearly a strategic decision. There are two ways by which capital may be returned to shareholders—the repurchase of stock or via dividends. Many companies have utilised stock repurchases. The strategic issue is whether repurchasing stock actually increases, or decreases, firm value. The answer lies in the relationship of the price paid relative to the intrinsic value of the stock. Unfortunately, if a firm and its CFO do not have a good assessment of its current intrinsic value, it becomes difficult to know, in many cases, whether one is actually paying more than the intrinsic value of the stock and destroying value. Similar to paying too much for an acquisition, many companies have paid more than the intrinsic value they are getting when repurchasing their firm’s stock. Although many have paid cash dividends and have a policy of regularly increasing the cash dividend for years, the distribution of a cash dividend is actually a destruction of firm value, in as much as it is a direct transfer of value from the firm to the shareholders. If the firm could achieve a return on that
what surprisingly, a number of large firms have de-levered their balance sheets considerably in the past few years, thereby destroying intrinsic value. What might appear to be a risk-reducing financial decision actually becomes a value- destroying strategic decision. Finally, returning capital to shareholders rather than holding it in the
capital in excess of what the shareholders could achieve, this becomes a poor financial and strategic decision. In summary, there are a number of major operating (grow the business, diversify the business), investing (acquisitions, tangible and intangible assets) and financing (cash, leverage, return of capital) decisions, which are M AY 2 0 1 2
corporate controller working on budget preparation and performance monitoring, in many cases, produces financial executives focused on historical, financial and internal results—the antithesis of the strategic CFO. Accounting competence is necessary but, quite frankly, it does not take years of accounting training and experience to be a strategic CFO. The General Electric Co.’s vaunted Financial Management Program (FMP) recruits very bright liberal arts graduates into its program, then the participants rotate through a series of assignments in various business units before settling into a first permanent assignment. Many of these FMP participants are as likely to emerge, in time, as business leaders as financial leaders. They are not accountants, per se, but learn GE’s
as much strategic as they are simply financial decisions. CFOs must intimately understand the strategic and value-creating/destroying implications, as well as the short-term financial implications, if they are going to truly be strategic CFOs.
GETTING FROM HERE TO THERE Initial Training: Noted executive coach and author Marshall Goldsmith titled one of his books What Got You Here Won’t Get You There. In many cases, that is especially true for aspiring strategic CFOs and CFO wannabes. Extensive accounting training, even a CPA and time spent as an auditor or 28
M AY 2 0 1 2
accounting and finance practices while completing FMP and are given the opportunity to learn about various parts of GE early in their careers. There are a number of top CFOs who were trained in engineering or other technical fields who then achieved MBA degrees. Business Partnering: There are several ways CFOs may develop their strategic mindsets. The first is to break away from more traditional activities and spend more time actually working closely with business colleagues as they struggle with the challenges they face. Some finance organizations have created business partnering groups whose members, frequently younger staff, are assigned to work closely with the business units.
It is essential that the CFO be actively involved in working with the assigned staff and with the challenging decisions being addressed. In some cases, the CFO may want to physically relocate the finance organisation closer to the business units to be more aware and involved in decision-making. Line and International Experience. Some CFOs have left the finance function and assumed line management responsibilities. This is especially the case for those finance executives who see themselves more broadly as business executives rather than exclusively finance executives. This would be especially true for GE FMP types, finance staff with technical or liberal arts backgrounds before acquiring an MBA and for CFOs who clearly aspire to become a CEO. In today’s global environment, it is almost essential that senior executives, including finance executives, have a broadening international experience for the purpose of truly understanding different cultures, work habits and perspectives. Without such experience, it is very difficult to fully understand the broad macro issues—social, political, economic, and technological—and market, customer, competitive and supply chain challenges. Leadership Development. Being a truly effective strategic CFO requires drawing upon the efforts of one’s own staff, as well as working closely with other senior executives including the CEO. This requires a strong understanding of leadership styles, how different styles work under different situations and how to lead a team, as well as how to work effectively with colleagues on challenging strategic/financial decisions. Such behavioral skills are not automatic. For those CFOs who tend to prefer to work alone or with a small group with similar skill sets and approaches, this will demand extra effort, including perhaps utilising an executive coach to help improve leadership skills and participating in professional development programmes.
Networking and Professional Development: There are a number of professional organizations that should be utilized to become a more strategic CFO, including the parent of this publication, Financial Executives International. Participating in local chapter and national meetings, sitting on regular and special committees and mixing with peers with similar responsibilities and challenges provide opportunities to compare notes and grow professionally. The CFO should also stay abreast of developments by continued reading of the financial press, technical journals and even more far-ranging publications. The strategic CFO has to shift from the historical, financial and internal to a future, non-financial and external orientation. That is not necessarily easy for some CFOs, and takes an explicit commitment and effort to
achieve it. Without that, it is easy to get sucked back into more traditional activities and to become virtually totally consumed by them. CFOs must get deeply enmeshed in the strategic as well as the financial aspects of the major operating, investing and financial decisions facing the firm, including growing and diversifying the firm, investing in both tangible and intangible assets, acquisitions, cash deployment, capital structure and the return of capital to shareholders. To become a truly strategic CFO requires a lot of hands-on experience, as well as learning about it. That experience can be realised by refocusing the finance organisation in a more strategic direction, working closely with line managers on their strategic challenges and even getting line experience, including internationally. Finally,
personal growth and development via networking with other CFOs, working within professional organisations, developing individual leadership skills and continuing education will put an aspiring strategic CFO on the road to becoming one.
ROBERT A. HOWELL IS THE DAVID T. MCLAUGHLIN DISTINGUISHED VISITING PROFESSOR AT THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH COLLEGE. HE SERVES ON THE EDITORIAL ADVISORY BOARD FOR FINANCIAL EXECUTIVE. TO RECEIVE CPE FOR THIS ARTICLE VISIT WWW. FINANCIAL EXECUTIVES.ORG/MAGAZINECPE TO COMPLETE YOUR REVIEW, TEST AND EVALUATION. ÂŠ FINANCIAL EXECUTIVES INTERNAL 2012
LEVERAGING INVESTMENTS IN GOVERNANCE, RISK & COMPLIANCE Expenditure will only increase on governance and compliance over time. How to manage this risk and focus it properly is something CFOs will have to grasp fast
ABOUT THE AUTHOR: SAMIRON GHOSHAL, PARTNER AND LEADER, IT ADVISORY SERVICES, ERNST & YOUNG. THE VIEWS EXPRESSED HEREIN ARE THE PERSONAL VIEWS OF THE AUTHOR AND DO NOT NECESSARILY REPRESENT THE VIEWS OF ERNST & YOUNG GLOBAL OR ANY OF ITS MEMBER FIRMS. 30
M AY 2 0 1 2
or years, companies have invested heavily in governance, risk management and compliance (GRC), increasing the size, magnitude and reach of their GRC functions and activities. Now, in the aftermath of the most severe economic crisis in a generation, they are acutely conscious of the need to demonstrate sound risk management. They believe that their reputations, customer loyalty and even their credit rating and access to capital depend on it. As the trend towards massive expenditure in GRC continues, many companies fail to grasp, that their GRC investment, unless properly focused, is potentially being poured into a black hole and will not deliver the value investors and other key stakeholders demand.
Not only are companies afraid of risk management lapses, they are increasingly dependent on GRC to deliver â€œeffectiveâ€? risk management across their businesses. Their spending is indicative of this growing dependency. In a survey among companies across Europe, the Middle East, India and Africa in 2010, we found that nearly 70% of organizations are highly reliant on their GRC activities as a safeguard against failure. Interestingly, however, this spending and dependency is not matched by the value that business leaders think they currently get from GRC. Over two-thirds of all respondents indicated that more work was needed to enhance their GRC functions.
WHY GRC SPENDING IS RISING
HOW DOES RISK MANAGEMENT DRIVE FINANCIAL RESULTS?
For companies, public perception can have a dramatic affect on the business. It is not just highrisk industries such as oil and gas that have seen their reputation and market capitalization damaged by controversy in recent years. Being seen to invest in risk management is, they deem, one way of communicating to stakeholders that their businesses are safe and reliable investments.
Companies with more mature risk management practices outperform their peers financially. In our recent study, we found that companies with the most mature (i.e., the most sophisticated) risk management practices generated the highest growth in revenue, EBITDA and EBITDA/EV. Using a global, quantitative survey (based on 576 interviews with companies around the world
and a review of over 2,750 analyst and company reports), we assessed the maturity level of risk management practices and then determined a positive relationship between risk management maturity and financial performance. We identified the leading risk management practices that were differentiators between the different maturity levels and organized them into specific risk components. It is evident that sophisticated risk management creates value, mitigates risk and optimizes cost.
FIGURE 1: THE EXTENT TO WHICH ORGANIZATIONS BELIEVE THEIR GRC FUNCTIONS NEED TO BE ENHANCED
TREAT RISK MANAGEMENT AS AN INVESTMENT Companies would not ordinarily part with billions of dollars without the expectation of a healthy return. That is why risk expenditure needs to be treated as a strategic investment or business enabler—much like spending on plant or equipment. Although companies recognize the need to get more value from their GRC capabilities, and despite matching that impetus with spending, there is overwhelming uncertainty about how to design and implement the most appropriate GRC functions for their specific circumstances. As figure 3 illustrates, companies find GRC a difficult concept to grasp. The 2010 survey finds implementation difficult for almost half (44%) of the companies surveyed, with an overwhelming sense that GRC does not work on a holistic level across the business.
Expectations on governance, risk and compliance from the management, operational leader and external stakeholder perspective, Ernst & Young’s survey of 567 companies in Europe, the Middle East, India and Asia, conducted in the second quarter of 2010.
FIGURE 2: DEGREE OF RELIANCE INVESTORS/SHAREHOLDERS PLACE ON GRC
DERIVING VALUE OUT OF YOUR GRC INVESTMENT An effective GRC capability provides value by giving organizations the confidence to take on risk, rather than avoid it. It helps with the identification of risk boundaries and tolerances and above all, enables ongoing assessment of a company’s strategic initiatives, such as capital programs, M&A and integration. It cuts costs by eliminating overlaps and redundancy in risk coverage and focuses management attention on the high- rather than low-priority risk areas. While the theory sounds good, what does it take for companies to build and deliver an effective GRC capability? Delving deeper, our studies indicate that a key problem is the wide divergence in how GRC leadership responsibility and reporting lines are structured. This is most likely a symp-
FIGURE 3: IS GRC INTEGRATED INTO YOUR BUSINESS? COMPANIES SEEM UNCERTAIN ABOUT THE TYPE OF RISK FUNCTION THEY HAVE CREATED
Shown: percentage of respondents, base: companies only (501), multiple answers possible
M AY 2 0 1 2
tom of the significant lack of integration and alignment between GRC functions. To address this challenge, companies must determine their business priorities and the most appropriate focus for their GRC investment. They can achieve this by: • Focusing resources on priority areas • Managing the performance of overall GRC capability • Focusing resources on priority areas By effectively managing the right risks, management has more timely, comprehensive and a deeper understanding of risk which, in turn, facilitates better decision-making and confidence to take on new ventures or even to accept higher levels of risk. The upshot of this investment includes
Key research findings • The top performing companies (from a risk maturity perspective) implemented on average twice as many of the key risk capabilities as those in the lowest performing group. • Companies in the top 20% of risk maturity generated three times the level of EBITDA as those in the bottom 20%. • Financial performance is highly correlated with the level of integration and coordination across risk, control and compliance functions. • Effectively harnessing technology to support risk management is the greatest weakness/opportunity for most organizations. SOURCE: EY ANALYSIS
M AY 2 0 1 2
a greater competitive advantage, reduced cost of capital and a steady share price. • Managing performance of overall GRC capability As well as focusing resources on priority areas, companies need to focus on enhancing the overall performance of their newly integrated GRC capabilities. Currently companies take a “check-the-box” approach to compliance with an overemphasis on internal risk structures, committees and isolated risk assessments. By adopting a holistic and cohesive risk transformation approach, they can better align risk and strategic business processes. Moving forward, an organization can expect its GRC capability to deliver value at four levels of performance. • Governance—risk governance strategy is driven by and better aligned to key strategic risks and business objectives. • Effective risk management—deeper and more robust risk insight applied to enhance the design and effectiveness of the overall control environment. This optimizes risk and control mechanisms to enhance decision-making and, potentially, facilitates greater risk-taking. • Integration—rather than stand-alone functions, risk is managed on a business-wide level to protect value and improve performance across the enterprise, delivering an appropriate ROI for the investment. • Business performance—an effective and agile GRC capability contributes to the protection and enhancement of overall business performance. In conclusion, as the trend towards massive expenditure in GRC continues, many companies fail to grasp, that their GRC investment, unless properly focused, is potentially being poured into a black hole and will not deliver the value investors and other key stakeholders demand.
BEST PRACTICES FOR INNOVATION Firms take these steps to ensure that their innovation processes yield optimum value BECKY PARTIDA
rganisations are facing mounting pressure to innovate in order to spur growth and increase the bottomline. Despite belief to the contrary, the invention of new products and services does not occur spontaneously. There is a process involved, and organisations can take practical steps to ensure that their innovation processes yield maximum value. APQC has identified 10 key elements in the innovation processes at IBM Corporation, Kennametal Inc, and Mayo Clinic that make these organisations best-in-class for innovation. This article focuses on five of these elements and shows how three best-practice organisations have incorporated the elements into their innovation processes. â€˘ Drive innovation from the top and bottom. â€˘ Cross traditional organisational boundaries to help innovation thrive. M AY 2 0 1 2
• Strategically select opportunity areas through the eyes of customers. • Distinguish among different types of innovation. • Cast the net wide for ideas.
DRIVE INNOVATION FROM THE TOP AND BOTTOM It is a given that leadership support for innovation is important. Without it, few resources would be allocated to these efforts. However, support from employees who work closely with customers is also important. Without buy-in from these employees, it is difficult to source ideas and embed a culture of innovation throughout the enterprise. Thus, support from both the top and the bottom is of the utmost importance to innovation. Securing buy-in from front-line employees while aligning innovation efforts with top-down strategy enables relevant ideas to surface and be taken through to production or implementation. For several years, IBM has stressed that innovation is the responsibility of every employee. However, it recently shifted innovation accountability to focus more on employees who engage regularly with customers. This shift has given front-line employees greater decision making power regarding innovation. However, even with the spreading of accountability, IBM holds that senior level sponsorship is vital to ensure that the organisation maintains support, guidance, and direction for innovation.
CROSS TRADITIONAL ORGANISATIONAL BOUNDARIES Innovation is not isolated to specific areas within an organisation. The best-practice organisations identified by APQC encourage innovation within areas of the business that may not normally be associated with innovative thought. They also facilitate innovation by creating collaborative teams 34
M AY 2 0 1 2
comprised of members from multiple business units. Collaboration is vital to Mayo Clinic’s innovation strategy. The organisation has established cross functional innovation teams that meet regularly to analyse ideas generated by staff members and to identify strategic targets for innovative projects. Separate leadership teams, made up of physicians and nonphysicians, also meet to brainstorm and execute new projects. These collaborative teams have generated ideas for new products and services, suggested quality improvements, and designed new business models for the organisation. In addition to the responsibility for innovation placed on each employee, IBM includes innovation as part of each business unit’s strategic focus.
materials consumed in the manufacturing process. It considers innovation to be a constant process focused on the demands of the market. The organisation has developed the term “exciters” to describe innovations that are radical in that they satisfy unarticulated needs. The organisation connects with customers at regular intervals to determine where the potential for exciters exists. IBM has implemented a programme called First of a Kind that relies on customer input for solution development. Here IBM conducts research in a customer’s own environment and applies technologies that it feels are appropriate solutions for the customer.
SELECT OPPORTUNITY AREAS USING CUSTOMER INPUT
Adopting the right enabling technologies for innovation can support the creative process, facilitate collaboration, and provide a way to capture new ideas. However, technology is pointless unless it matches an organisation’s innovation objectives. Best-practice organisations focus technology adoption on the needs of the enterprise as well as individual innovation teams. The best-practice organisations studied by APQC favour tools that allow a large number of employees to capture and build on ideas. For example, Mayo
The best practice organisations identified by APQC make a point of gathering customer feedback, determining customer requirements, and aligning their processes with the customer in mind. In the end, the creation of new products and services means nothing if the organisation isn’t giving customers what they want. Kennametal is a maker of tooling, engineered components, and advanced
EMBRACE TECHNOLOGIES AND TOOLS FOR INNOVATION
Clinic implemented a software application to capture, categorise, and archive ideas for innovation around a defined topic. Virtual events are held to drive brainstorming, and users can rate others’ ideas as well as submit comments, suggestions, and observations. Mayo also adopted social media tools to facilitate collaboration among employees. Wikis enable staff to capture and modify notes and other project-related communications. The organisation has created an innovation toolkit that serves as a central location for materials and resources needed during the innovation process.
FOCUS ON EXPERIMENTATION For every successful idea, there are many ideas that do not make it through the process. Best-practice organisations accept this fact and do not allow failure to hinder innovation. The organisations studied by APQC emphasise the effort behind the innovations, even if the ideas do not yield profitable results. This fosters a culture in which employees feel free to explore all creative solutions and ideas. IBM balances its research agenda among three groups: • Exploratory research (understanding how nature works); • Applied research (connecting the understanding to issues); and • Development (making the research usable to IBM customers). The organisation measures success not only by the innovation but also by how its research increases scientific understanding. Unsuccessful projects are considered learning experiences and are documented so that the lessons-learned can be applied to future work.
RECOGNISE THE HUMAN SIDE OF INNOVATION The best-practice organisations studied by APQC use more than just finan-
cial rewards to encourage innovation. These organisations create spaces conducive to innovation, and they tailor their rewards programmes to suit employee interests. To reward innovation, IBM uses internal programmes such as peerto-peer awards, recognition of technical accomplishments in a particular research area, and an innovation client value award given to teams that exemplify dedication to client success. The organisation also seeks publication in external journals and recognition through professional societies to gain external exposure for its employees’ efforts.
KEEP MEASUREMENTS SIMPLE IBM, Kennametal, and Mayo all recognise that no one metric can convey
innovation success. However, when measuring innovation and its results, these organisations use only a select group of measures which are meaningful to users. Although innovation can involve multiple activities and processes, the metrics selected for use should be customised. Kennametal uses only a few high-level, cross-functional measures to evaluate the success of innovation. These measures include the percentage of revenue resulting from new products and the cycle time of new product development. By keeping measures high-level and simple, the organisation can easily communicate performance across the enterprise in a way that employees at all levels can understand. Kennametal also tracks three other groups of performance measures to obtain a more
detailed view of the innovation process and its outcomes: • Project metrics; • RD&E functional metrics; and • Special focus metrics (such as the percentage of employees trained in Six Sigma).
LOOK TO THE FUTURE AND THE PAST When developing measures and improvement plans, it can be easy to focus solely on results. However, the organisations studied by APQC emphasise predictive factors as well as outcomes when developing measures. The organisations look both at leading indicators that provide a foundation for performance (such as employee training and environmental conditions) and the results of innovation processes (such as cycle time and cus-
tomer satisfaction). Most importantly, the best-practice organisations allow their measures to change over time to meet enterprise needs. Frequently updated measures are balanced with consistent measures to enable longerterm trending.
BECKY PARTIDA IS KNOWLEDGE SPECIALIST WITH APQC, A MEMBER-BASED NONPROFIT AND A LEADING PROPONENTS OF BENCHMARKING AND BEST PRACTICE BUSINESS RESEARCH. THIS ARTICLE HAS BEEN REPRINTED WITH PERMISSION FROM CIO UPDATE. TAKEN FROM THE CTOF MAGAZINE, A 9.9 MEDIA PUBLICATION. VISIT WWW.THECTOFORUM.COM M AY 2 0 1 2
YOU LEAP Putting in place a global compliance management programme should be looked upon as a valuable investment rather than just a time consuming effort JIGNESH THAKKAR
et me start this article with a hypothetical, though very common example. Mr Amit S. was very excited about the fact that he had won an application maintenance contract worth â‚Ź10 million in mainland Europe from a large private bank. However, as the contract reached the Finance and Human Resource department for execution, it was discovered that the cost of compliance with local regulations, especially with employment laws, was much higher than the initial cost estimates that were prepared based on the companyâ€™s experience of working in other geographies. Suddenly a profit-making contract turned out to be a huge loss-making proposition for the company. It had ignored vital compliance requirements. This was primarily because various complicated compliance requirements from immigration, employment laws, 36
M AY 2 0 1 2
payroll tax and social security compliances were not studied before taking a decision to enter a particular country in Europe.
COMPLIANCE MANAGEMENT IN INDIAN IT INDUSTRY According to Ernst & Young’s study titled Strategic Business Risk—the top 10 Risks for Business, compliance is one of the top priorities for most of companies today. The major concerns are legal, regulatory and reputational issues that can lead to prosecution of a company or an individual employee, loss of business (e.g., debarment), or headlines that undermine customer and investor confidence. As Indian companies have become more active in overseas acquisitions and are setting up businesses in foreign countries, a robust global compliance management programme has become imperative for India. Given its large mobile and global work force, the Indian Information Technology (IT) service industry, in particular, is highly vulnerable to compliance risk especially in the area of employment and data privacy laws. Further, it has become important for Indian IT companies to have a strong compliance management programme due to the recent anti-offshoring and local employment protection measures adopted by most of the developed countries. A majority of the Indian IT companies are facing constraints on immigration from developed countries in various forms such as increased rejection of L1 visa application in the US, cap on immigrant workers introduced by the UK, etc. Further, employees hired outside India by the Indian IT companies have gradually become more aggressive with respect to their employment rights on discrimination and equal employment opportunities. A clear indication of this is the fact that some of the venerable IT companies in India face lawsuits
from local and expatriate employees deputed to overseas locations on various grounds. A decentralised approach to compliance risk management is a big challenge for Indian MNCs. Every business has compliance risks that cut across a number of significant areas, and often the controls laid down to manage those risks are implemented functionally, without the benefit of an overarching compliance programme.
by the Chief Compliance Officer and supported by the Functional Heads and internal auditors/external consultants.
While there are advantages of decentralisation, as the controls are designed and implemented by those employees who are closest to the risks, taking a highly decentralised approach can result in inconsistencies or gap in overall compliance risk management. Amit’s company is an appropriate example of ineffective compliance management programme, which assessed compliance risk too late in the process of winning a new contract. The companies that manage compliance risk most effectively are those that achieve a strong balance between centralisation and decentralisation. Some of the large Indian IT companies have realised the importance of an effective compliance management programme and have put in place a comprehensive compliance management infrastructure, which is driven
infrastructure. Typical compliance risk priority areas for most of the Indian MNCs are: • Financial laws • Employment laws • Information security/data privacy, fraud and corruption control • Industry specific laws Once the priority areas are identified, detailed compliance requirement from applicable laws and regulations prevailing in the countries of operations needs to be identified with help of an expert or in-house legal counsel. Experience of external experts certainly helps in this area for a quick turnaround and identifying most relevant and updated compliance requirements. The cost and efforts of tracking irrelevant compliance requirement need to be kept in mind while preparing the compliance checklist.
THE PROCESS A roadmap to achieve a sustainable compliance risk management starts with assessing a compliance risk to prioritise the key risk areas and evaluate the current compliance management
M AY 2 0 1 2
Experience shows that 80 per cent of compliance management programmes fail not due to inadequate identification of compliance requirement but because of ineffective implementation of monitoring mechanism. The Compliance Officers/Functional Heads have to be thoroughly involved in the entire process, taking onus of every step from planning to ensuring effective implementation and finally evaluation. A fragmented approach results in waste of investments and disbelief in the compliance management programme. A sustainable compliance management programme needs to be aligned and coordinated with the business processes. Awareness of compliance requirements among the process owners and compliance monitoring 38
M AY 2 0 1 2
mechanism embedded in the business processes are essential components of a successful compliance management programme.
Points to Ponder • Compliance is one of the top priorities for most companies today • Employees hired outside India by Indian IT companies have become more aggressive with respect to their employment rights • A sustainable compliance management programme needs to be aligned and coordinated with the business processes
Most MNCs have invested in an automated web-based tool to capture compliance requirements, compliance responsibilities and compliance status assessment for their complex businesses operating in different countries. Such compliance management tools, embedded within the business process system, provide a real time compliance health status to the top management of a company. To complement the compliance monitoring mechanism, most of the organisations are also mandating independent audit of the compliance status assessed by the process owners. This role is being filled increasingly by an internal audit or compliance audit function. Furthermore, the audit committee members are also mandating internal audit function to staff their department/team with experts with knowledge of the regulatory compliances and mindset to perform such compliance reviews and provide them with an independent assessment of the compliance management programme at Indian companies. A successful compliance management programme is one, which is well integrated into the business processes and becomes an integral part of the way business is done. It is difficult to measure the internal rate of return on compliance investments and to find measurements and metrics that demonstrate the effectiveness of the compliance programme. It is impossible to measure its effectiveness to prevent non-compliance; however, an effective compliance management programme can help organisations get more efficient in the way they allocate their compliance resources.
JIGNESH THAKKAR IS ASSOCIATE DIRECTOR—TECHNOLOGY PRACTICE, ERNST & YOUNG INDIA. THE OPINIONS EXPRESSED IN THIS ARTICLE ARE THE AUTHOR’S OWN AND DO NOT REFLECT FIRM’S VIEW
UNFUNDED EMPLOYEE BENEFIT LIABILITIES— IS IT WORTH THE RISK? Leading Indian companies need to be aware of changing employee benefits costs KULIN PATEL AND ANURADHA SRIRAM
he ghost of the global economic slowdown of 2008-09 seems to have returned to haunt businesses the world over, including India. Indian companies, especially in sectors such as aviation, textile, infrastructure and to an extent even financial services are going through financial uncertainty. Considering the scenario back in 2008, Towers Watson initiated a pioneering study of the BSE 100 companies. The first version of the study “Employee Benefits—Accounting and Risk study” analysed annual reports of 93 companies (89 companies from the BSE 100 list along with 4 additional banks). The study revealed almost 33 per cent of the total employee benefits liabilities of 76,350 crore, were unfunded. In comparison to 2008, in percentage terms at least, the unfunded portion of the employee benefits liabilities has come down drastically—to 20 M AY 2 0 1 2
tions towards employee benefits continue to grow, the combined funding of these benefits across all sectors in the BSE 100 companies list has dropped from 86 to 80 per cent. The findings are based on statistics found in the annual reports, in particular the notes to accounts related to employee benefits and costs and liabilities reported as per AS 15 (Revised). The data this year has been taken from accounts for FY March 31, 2011 with a cut-off date for October 2011. The study includes 95 companies, of these 83 companies are common to the 2010 study. The employee benefits liabilities have increased across all sectors in the BSE 100 list, the banking sector benefits liabilities in particular have almost doubled for FY March 31, 2011 as compared to the FY March 31, 2010. The overwhelming reason for this is the defined benefit pension of public sector banks. The liabilities will no doubt now be reflecting the impact of the 2nd pension option where bank employees have elected to re-join the pension plan and have their Provident Fund balances transferred in to the pension plan. In the Indian context, the gratuity and provident fund benefits are two mandatory provisions. While gratuity is maintained by employers, provi-
per cent this year (study analysing Annual Report of 95 companies for FY2011). However, it is significant to note that the year-on-year unfunded employee benefits liabilities have actually increased from 14 per cent the previous year (the 2010 study analysed annual reports of 91 companies). The unfunded liabilities as on March 31, 2011 have doubled to 58,000 crore, compared to 29,000 crore as on March 31, 2010. The TW study for 2011 thus reveals that a significant portion of corporate liability on account of long term employee benefits remains unfunded. The study also reveals that liabilities, in all probability, would continue to increase as companies grow. Therefore, companies will need to keep a close watch on how liabilities develop relative to its financials.
RISE IN UNFUNDED LIABILITIES According to the study, the combined estimated liabilities (obligations) for employee benefits across the BSE 100 companies indicate an alarming jump of 45 per cent to 290,000 crore for financial year (FY) ended March 31, 2011. While the employerâ€™s obliga-
dent fund is maintained either by the employer in the form of a trust or by the Employees Provident Fund Organisation (EPFO). The gratuity benefit for non-banks forms the largest part of the liability with 44 per cent of the total liabilities. It should be noted that the gratuity benefits tend to be funded through a trust. In addition to the mandatory provision, Indian companies also provide for other long term defined benefit schemes such as pension provision and leave benefits, post-retirement medical needs and defined contribution (DC) schemes in the form of superannuation funds. The employee benefits liabilities of 83 companies (common during financial year 2011 and 2010) have increased significantly in financial year 2011, while the proportionate rise in assets has not been commensurate. The statistical evidence for the same 83 companies point out the total defined benefit liabilities of these companies stood at 1,32,000 crore for FY March 31, 2011, 50 per cent higher compared to FY March 31, 2010. And the proportionate rise in assets stood at 77,200 crore for FY March 31, 2011 up by 27 per cent compared to FY March 31, 2010. Due to this, overall funding level of gratu-
CHANGE IN RISK LEVELS 1.43% 1.25% 1.39%
Service Cost / Personnel Cost Total Plan Deficit / Operating Cash flow Employer Contributions / Operating Cash flow
M AY 2 0 1 2
1.54% Median - 2009
0.58% 0.53% 0.57%
Total Plan Deficit / Retained Earnings
Total Benefit Obligations / Market Cap
Benefits Cost / Operating Profit
Total Plan Deficit / Market Cap
Median - 2010 Median - 2011
0.16% 0.12% 0.29% 0.58% 0.45%
ity plans has decreased by 6 per cent in 2011 compared to 2010.
AVERAGE BENEFITS LIABILITIES BY SECTOR
PSU BANKS—LARGEST RISK Consistent with the findings over the previous years, PSU banks by far have the largest risk to the extent of liabilities against their finances. While the employee benefit liabilities of the banking sector have risen, the banks have large funding gaps for them and this is expected to impact their profits going forward. Within the banking sector, PSU banks have funded only 60 per cent of the total estimated liabilities, while private banks have funded 89 per cent of these estimated liabilities. The PSU Banks risk ratios continue to be significantly high. The median employee benefit expense as a percentage to operating profit is almost 30 per cent compared to private banks where it is just 1 per cent and for the rest of BSE 100 companies it stands at 1.5 per cent. With many PSU bank employees having opted for the 2nd option for defined benefit pension plan, the total employee benefit liability has soared and the median deficit as compared to the operating cash flow was 57 per cent and the total benefit costs were almost 30 per cent of operating profit. Though new bank recruits will not be in the pension plan there is a large and significant legacy liability that will start to unravel in the coming years. As PSU banks continue to have very large liabilities relative to their business, a disciplined approach towards investments, cash flows, projection of liabilities and administration should be followed as part of a better governance and management philosophy. Following the banking sector, the Oil and Gas segment within the BSE 100 companies showed the highest benefits liabilities increase at 12 per cent up from 1,680 crore as on March 31, 2010. The average employee benefit liabilities for FY March 31, 2011 for sectors like IT stood at 514 crore, Telecom at 411 crore, Power at 262 crore
61,541 55,217 18,847 16,805 14,433
Oil & Gas Computers
5,139 4,019 3,463
4,115 3,828 2,986
2,319 2,013 1,791
2,610 2,086 1,727
2009 2010 2011
and Mining at 232 crore which have remained largely unchanged over the last three years.
INCREASING DISCLOSURES Increasing sophistication in disclosures by companies and scrutiny by auditors has led to companies disclosing liabilities for more benefits plans that may not have been explicitly mentioned before 2008, like long term medical plans, long service awards etc. The short term salary increases as compared to the long term assumed rate for the liability calculation further justify the surge in benefits liabilities, especially for the banking sector. Any significant increase on account of employee benefit liabilities will have a direct impact on the company’s net profit, as accounting standards require immediate recognition of change in liability measurements. Going forward, considerable increase in employee benefit liabilities in uncertain market conditions and therefore unmatched employer contribution could be a cause for concern for India Inc. So, what are the remedial measures companies could take? To begin with they should create funds over a period of time for meeting the benefits obligations on account of long term employee benefits. This is most urgent
for defined pension plans and gratuity payments. It is advisable for corporates to be more observant of about how their liabilities develop; relative to company financials as volatility of liabilities can have a direct impact on profit/bottomline of the companies.
SETTING APPROPRIATE ASSUMPTIONS With the changes to IFRS being made for employee benefits accounting, there may be increased scrutiny on assumptions being made by companies. As actuarial gains/losses will go to the reserves in the future there may be more scrutiny on the assumptions to prevent employee benefit expense disclosures being managed by companies. It may be worth considering whether the assumptions used truly paint the right picture. This exercise will help to assess what may develop by the end of the current fiscal and will definitely help avoid nasty surprises a year down the line. We all know how much CFOs don’t like unexpected volatility!
KULIN PATEL IS DIRECTOR, CLIENT ACCOUNT MANAGEMENT, TOWERS WATSON, INDIA. ANURADHA SRIRAM IS DIRECTOR, BENEFITS PRACTICE, TOWERS WATSON, INDIA M AY 2 0 1 2
THE CHALLENGE: To execute the joint venture with Morris Communications in the US in a time-bound manner and in the least disruptive manner TIMELINE: December 2010- July 2011 PEOPLE INVOLVED: Top management as well as various unit heads KEY CFO TAKEWAYS: Go by the courage of your conviction. People need to realise you do not have a hidden agenda and that you are transparent. At all times you cannot lose sight of either the details or the big picture
M AY 2 0 1 2
Pratibha K. Advani, CFO of NIIT Technologies TALKS ABOUT A TRICKY AND time-consuming Joint Venture deal that she executed soon after joining NIIT SHALINI
hen Pratibha Khandelwal Advani joined NIIT Technologies in November 2010 she was no greenhorn. She had over 25 years of extremely diverse professional experience ranging from financial strategy to the legal aspects across organisations such as ITC Ltd, GE-SBI Cards and Barclays Shared Services. She was not likely to be surprised. However, the steady inorganic growth at the midtier IT company has afforded many valuable lessons. In her tenure, Advani has already closed an acquisition and a joint venture and the purchase of an intellectual property asset as well.
THE CHALLENGE Typically, the challenges of a merger and an acquisition process revolve around understanding local legislation, risks, cultural differences and then providing financial support to the strategy. However, sometimes, the challenges related to these changes emerge from within the organisation itself. â€œOne can work around external challenges. Often, the biggest challenge is internal where the teams think that you are at cross purposes with them because you are highlighting the risks,â€? says Advani. Her challenge came in December 2010, soon after her arrival at NIIT, when the business head of the US operations came up with a joint ven-
ture opportunity and wanted to close the deal in 15-20 days. The company in question was Morris Communications. Advani knew this was going to be difficult given the complexity of such a transaction. She had to satisfy the stakeholders (including the CEO and the board) towards whom she had a fiduciary responsibility as well as engage fruitfully with her team to make the transaction a success. It was a sizable piece of business and one of the largest deals that NIIT had pursued. The brief from the CEO was clear that though it was a good opportunity it had only to be pursued after a thorough due diligence and with maximum de-risking efforts. Also, Morris M AY 2 0 1 2
Another issue that needed clarity was the solvency-related aspects of Morris, its ability to honor its commitments and NIIT’s ability to manage it. “It was difficult to convince the other side that actually as a CFO one is being extremely collaborative,” recounts Advani. Subsequently, when the financial targets for the topline and bottomline for the JV were completely in line, it was clear that the efforts that went in to structuring the deal and ensuring matching financials had paid off. Advani points out that she considers herself a Chief Facilitative Officer rather than a CFO. “I believe there is no such thing as over-communication.” As a CFO it is critical to highlight the risks associated with any business plan or action and do it in a manner that is transparent. She believes that the moment people realise that you are genuinely facilitative and collaborative, the working relationships ease off. “I am as much a vested party as anybody else in showing growth. If I ask questions, it is because I want all the ribbons tied properly before the packet is placed before the board,” she says.
had been through a Chapter 11 filing shortly before. Therefore, the ramifications of its restructuring needed to be understood. Finally since some assets and people were to be moved to the JV, it became essential that a time-consuming due diligence and valuation process be carried out. Yet she had to ride this situation in least disruptive a fashion, without discouraging the business teams from their legitimate goals.
HOW IT WAS TACKLED Advani’s list of issues were tackled one by one. In this case, what started out as an equal JV morphed into a 60:40 JV to ensure that the board would find merit in considering the proposal. 44
M AY 2 0 1 2
NIIT was bringing in the funds while Morris was bringing in assets. Advani believed a valuation needed to be done whereas the business head was unconvinced. Contracts getting transferred to the JV also needed to be assessed. The lock-in periods and the terms all needed to be scrutinised so that the flexibility of renegotiation can be fully explored. It took some effort to convince the business head of the necessity of doing so. He thought Advani was trying to put speed breakers in the process. Advani explained that these were risks that needed to be understood and then mitigated in order to ensure future operational success. “It took a lot of time. So a deal he thought will take us 15-20 days took us almost six months.”
She remembers several valuable lessons from this experience. The most significant one is to figure out, “how open collaborative and facilitative are you? The moment you are able to demonstrate that to the opposite party you are able to win their confidence,” she says. The other key lesson is to remember that courage in your convictions helps. “CFOs have a lot of tightrope walking to do, but what pays off eventually is your ability to take the correct decision.” Another essential trait for any CFO is the ability to engage in hard talk. “There is no scope for pussyfooting. You may not win friends or you may not be the flavour of the month, but as long as you are able to articulate that it is your job to point out the pitfalls it will be fine.” We believe Advani when she says so. The JV is doing well with both revenue and profit projections on target.
HOW TO PUT YOUR MONEY WHERE YOUR STRATEGY IS Most companies allocate the same resources to the same business units year after year. That makes it difficult to realise strategic goals and undermines performance. Here’s how to overcome inertia STEPHEN HALL, DAN LOVALLO, AND REINIER MUSTERS
icture two global companies, each operating a range of different businesses. Company A allocates capital, talent, and research dollars consistently every year, making small changes but always following the same broad investment pattern. Company B continually evaluates the performance of business units, acquires and divests assets, and adjusts resource allocations based on each division’s relative market opportunities. Over time, which company will be worth more? If you guessed company B, you’re right. In fact, our research suggests that after 15 years, it will be worth an average of 40 percent more than company A. We also found, though, that the vast majority of companies resemble company A. Therein lies a major disconnect between the aspirations of many corporate strategists to boldly jettison M AY 2 0 1 2
unattractive businesses or double down on exciting new opportunities, and the reality of how they invest capital, talent, and other scarce resources. For the past two years, we’ve been systematically looking at corporate resource allocation patterns, their relationship to performance, and the implications for strategy. We found that while inertia reigns at most companies, in those where capital and other resources flow more readily from one business opportunity to another, returns to shareholders are higher and the risk of falling into bankruptcy or the hands of an acquirer lower. We’ve also reviewed the causes of inertia (such as cognitive biases and politics) and identified a number of steps companies can take to overcome them. These include introducing new decision rules and processes to ensure that the allocation of resources is a top-of-mind issue for executives, and remaking the corporate center so it can provide more independent counsel to the CEO and other key decision makers. We are not suggesting that executives act as investment portfolio managers. That implies a search for stand-alone returns at any cost rather than purposeful decisions that enhance a corporation’s long-term value and strategic coherence. But given the prevalence of stasis today, most organisations are a long way from the head-long pursuit of disconnected opportunities. Rather, many leaders face a stark choice: shift resources among their businesses to realize strategic goals or run the risk that the market will do it for them. Which would you prefer?
WEIGHING THE EVIDENCE Every year for the past quarter century, US capital markets have issued about $85 billion of equity and $536 billion in associated corporate debt. During the same period, the amount of capital allocated or reallocated within multibusiness companies was approximately $640 billion annually—more than equi46
M AY 2 0 1 2
Exhibit 1 Capital allocations were essentially fixed for roughly one-third of the business units in our sample. Correlation index of business units’ capital expenditures, year-over-year change,1990–2005
Companies’ degree of capital reallocation
The closer the correlation index is to 1.0, the less the year-over-year change in a company’s capital allocation across business units.
0.6 0.5 0 1991
ty and corporate debt combined. While most perceive markets as the primary means of directing capital and recycling assets across industries, companies with multiple businesses actually play a bigger role in allocating capital and other resources across a spectrum of economic opportunities. To understand how effectively corporations are moving their resources, we reviewed the performance of more than 1,600 US companies between 1990 and 2005. The results were striking. For one-third of the businesses in our sample, the amount of capital received in a given year was almost exactly that received the year before—the mean correlation was 0.99. For the economy as a whole, the mean correlation across all industries was 0.92 (Exhibit 1). In other words, the enormous amount of strategic planning in corporations seems to result, on the whole, in only modest resource shifts. Whether the relevant resource is capital expenditures, operating expenditures, or human capital, this finding is consistent across industries as diverse as mining and consumer packaged goods. Given the performance edge associated with higher levels of reallocation, such static behaviour is almost certainly not sensible. Our research showed the following: • Companies that reallocated more resources—the top third of our sample,
shifting an average of 56 percent of capital across business units over the entire 15-year period—earned, on average, 30 percent higher total returns to shareholders (TRS) annually than companies in the bottom third of the sample. This result was surprisingly consistent across all sectors of the economy. It seems that when companies disproportionately invest in value-creating businesses, they generate a mutually reinforcing cycle of growth and further investment options (Exhibit 2). • Consistent and incremental reallocation levels diminished the variance of returns over the long term. • A company in the top third of reallocators was, on average, 13 percent more likely to avoid acquisition or bankruptcy than low reallocators. • Over an average six-year tenure, chief executives who reallocated less than their peers did in the first three years on the job were significantly more likely than their more active peers to be removed in years four through six. To paraphrase the philosopher Thomas Hobbes, tenure for static CEOs is likely to be nasty, brutish, and, above all, short. We should note the importance of a long-term view: over time spans of less than three years, companies that reallocated higher levels of resources delivered lower shareholder returns than their more stable peers did. One expla-
nation for this pattern could be risk aversion on the part of investors, who are initially cautious about major corporate capital shifts and then recognise value only once the results become visible. Another factor could be the deep interconnection of resource allocation choices with corporate strategy. The goal isn’t to make dramatic changes every year but to reallocate resources consistently over the medium to long term in service of a clear corporate strategy. That provides the time necessary for new investments to flourish, for established businesses to maximize their potential, and for capital from declining investments to be redeployed effectively. Given the richness and complexity of the issues at play here, differences in the relationship between short- and long-term resource shifts and financial performance is likely to be a fruitful area for further research.
WHY COMPANIES GET STUCK Why do so many companies undermine their strategic direction by allocating the same levels of resources to business units year after year? The reasons vary widely, from the very bad—companies operating on autopilot—to the more sensible. After all, sometimes it’s wise to persist with previously chosen resource allocations, especially if there are no viable reallocation opportunities or if switching costs are too high. And companies in capital-intensive sectors, for example, often have to commit resources more than five years ahead of time to long-term programmes, leaving less discretionary capital to play with. For the most part, however, the failure to pursue a more active allocation agenda is a result of organisational inertia that has multiple causes. We’ll focus here on cognitive biases and corporate politics, but regardless of source, inertia’s gravitational pull is strong—and overcoming it is critical to creating an effective corporate strategy. As author and Kleiner Per-
kins Caufield & Byers partner Randy Komisar told us, “If corporations don’t approach rebalancing as fiduciaries for long-term corporate value, their life span will decline as creative destruction gets the better of them.”
COGNITIVE BIASES Biases such as anchoring and loss aversion, which are deeply rooted in the workings of the human brain and have been much studied by behavioral economists, are major contributors to the inertia that prevents more active reallocation. Anchoring refers to the tendency to use any number, even an irrelevant one, as an anchor for future choices. Judges asked to roll a pair of dice before making a simulated sentencing decision, for example, are influenced by the result of that roll, even though they deny they are. Within a company, last year’s budget allocation often serves as a ready, salient, and justifiable anchor during the planning process. We know this to be true in practice, and it’s been reinforced for us recently as we’ve played a business game with several groups of senior executives. The game asked participants to allocate a capital budget across a fictitious company’s businesses and provided players with identical growth and return projections for the relevant markets. Half of the group also received details of the previous year’s
capital allocation. Those without last year’s capital budget all allocated resources in a range that optimised for the expected outlook in market growth and returns. The other half aligned capital far more closely with last year’s pattern, which had little to do with the potential for future returns. And this was a game where the company was fictitious and no one’s career was at risk! In reality, anchoring is reinforced by loss aversion: losses typically hurt us at least twice as much as equivalent gains give us pleasure. That reduces the appetite for taking risks and makes it painful for managers to give up resources.
CORPORATE POLITICS A second major source of inertia is political. There’s often a tight alignment between the interests of senior executives and those of their divisions or business units, whose ability to attract capital can significantly influence the personal credibility of a leader. Indeed, because executives are competing for resources, anyone who wins less than he or she did last year is invariably seen as weak. At the extreme, leaders of business units and divisions see themselves as playing for their own “teams” rather than for the corporation as a whole, making it challenging to reallocate resources significantly. Even if a reduction in resources to their division benefits the company as a whole,
Exhibit 2 Companies with higher levels of capital reallocation experienced higher average shareholder returns. Companies’ degree of capital reallocation (n = 1,616 companies)
Total returns to shareholders, compound annual growth rate, 1990–2005, % 10.2
M AY 2 0 1 2
ambitious leaders are unlikely to agree without a fight. As one CEO told us: “If you’re asking me to play Robin Hood, that’s not going to work.”
Exhibit 3 Inertia may affect the distribution of other scarce resources, such as advertising spending. Correlation between each brand’s 2010 advertising budget and its average advertising budget for previous 5 years at one consumer goods company (n = 40 brands)
OVERCOMING INERTIA Tempting as it is to believe that one’s own company avoids these traps, our research suggests that’s unlikely. Our experience also suggests, though, that taking steps such as those described below can materially improve a company’s resource allocation and its connection to strategic priorities. These imperatives apply not just to capital but also to other scarce resources, such as talent, R&D dollars, and marketing expenditures (as shown in Exhibit 3, for advertising spending by one consumer goods company). All of these also are subject to the forces of inertia, which can undermine an organisation’s ability to achieve its strategic goals. Consider one company we know that prioritized expanding in China. It set an ambitious sales growth target for the country and planned to meet it by supplementing organic growth with a series of acquisitions. Yet it identified just three people to spearhead this strategic imperative—a small fraction of the number required, which is typical of the problems that arise when the link between corporate strategy and resource allocation is weak. Here are four ideas for doing better.
Have a target corporate portfolio There’s a quote attributed to author Lewis Carroll: “If you don’t know where you are going, any road will take you there.” When it comes to developing an allocation agenda, it’s helpful to have a target portfolio in mind. Most companies resist this, for understandable reasons: it requires a lot of conviction to describe planned portfolio changes in anything but the vaguest terms, and the right answers may change if the broader business environment turns out to be different from the expected one.
M AY 2 0 1 2
Average advertising spending by brand over 5 years, 2004–09, % of corporate total 5.0
r 2 = 0.87
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0
Average advertising spending by brand in 2010, % of corporate total
In our experience, though, a target portfolio need not be slavish or mechanistic and can be a powerful forcing device to move beyond generic strategy statements, such as “strengthen in Asian markets” or “continue to migrate from products to services.” Identifying business opportunities where your company wants to increase its exposure can create a foundation for scrutinizing how it allocates capital, talent, and other resources. Setting targets is just a starting point; companies also need mechanisms for revisiting and adjusting them over time. For example, Google holds a quarterly review process that examines the performance of all core product and engineering areas against three measures: what each area did in the previous 90 days and forecasts for the next 90 days, its medium-term financial trajectory, and its strategic positioning. And the company has ensured that it can allocate resources in an agile way by not having business units, which diminishes the impact of corporate politics.
Evaluating reallocation performance relative to peers also can help companies set targets. From 1990 to 2009, for example, Honeywell reallocated about 25 percent of its capital as it shifted away from some existing business areas toward aerospace, air conditioning, and controls (for more on Honeywell’s approach to resource allocation, see our interview with Andreas C. Kramvis, president and CEO of Honeywell Performance Materials and Technologies, in “Breaking strategic inertia: Tips from two leaders”). Honeywell’s competitor Danaher, which was in similar businesses in 1990, moved 66 percent of its capital into new ones during the same period. Both companies achieved returns above the industry average in these years—TRS for Honeywell was 14 percent and for Danaher 25 percent. We’re not suggesting that companies adopt a mind-set of “more is better, and if my competitor is making big moves, I should too.” But differences in allocation levels among peer companies can serve as valuable clues about contrasting busi-
ness approaches—clues that prompt questions yielding strategic insights.
Use all available resource reallocation tools Talking about resource allocation in broad terms oversimplifies the choices facing senior executives. In reality, allocation comprises four fundamental activities: seeding, nurturing, pruning, and harvesting. Seeding is entering new business areas, whether through an acquisition or an organic start-up investment. Nurturing involves building up an existing business through follow-on investments, including bolt-on acquisitions. Pruning takes resources away from an existing business, either by giving some of its annual capital allocation to others or by putting a portion of the business up for sale. Finally, harvesting is selling whole businesses that no longer fit a company’s portfolio or undertaking equity spin-offs. Our research found that there’s little overall difference between the seeding and harvesting behaviour of low and high reallocators. This should come as little surprise: seeding involves giving money to new business opportunities—something that’s rarely resisted. And while harvesting is difficult, it most often occurs as a result of a business unit’s sustained under-performance, which is difficult to ignore. However, we found a 170 percent difference in activity levels between high and low reallocators when it came to the combination of nurturing and pruning existing businesses. Together, these two represent half of all corporate reallocation activity. Both are difficult because they often involve taking resources from one business unit and giving them to another. What’s more, the better a company is at encouraging seeding, the more important nurturing and pruning become—nurturing to ensure the success of new initiatives and pruning to eliminate flowers that won’t ever bloom. Consider, for example, the efforts of Google CEO Larry Page, over the past
12 months, to cope with the flowering of ideas brought forth by the company’s well-known “20 percent rule,” which allows engineers to spend at least onefifth of their time on personal projects and has resulted in products such as AdSense, Gmail, and Google News. These successes notwithstanding, the 20 percent rule also has yielded many peripheral projects, which Page has recently been pruning.
Adopt simple rules to break the status quo Simple decision rules can help minimise political infighting because they change the burden of proof from the typical default allocation (“what we did last year”) to one that makes it impossible to maintain the status quo. For example, a simple harvesting rule might involve putting a certain percentage of an organisation’s portfolio up for sale each year to maintain vibrancy and to cull dead wood. When Lee Raymond was CEO of Exxon Mobil, he required the corporateplanning team to identify 3 to 5 percent of the company’s assets for potential disposal every year. Exxon Mobil’s divisions were allowed to retain assets placed in this group only if they could demonstrate a tangible and compelling turnaround program. In essence, the burden on the business units was to prove that an asset should be retained,
rather than the other way around. The net effect was accelerated portfolio upgrading and healthy turnover in the face of executives’ natural desire to hang on to under-performing assets. Another approach we’ve observed involves placing existing businesses into different categories—such as “grow,” “maintain,” and “dispose”— and then following clearly differentiated resource-investment rules for each. The purpose of having clear investment rules for each category of business is to remove as much politics as possible from the resource allocation process. Sometimes, the CEO may want a way to shift resources directly, in parallel with regular corporate processes. One natural-resources company, for example, gave its CEO sole discretion to allocate 5 percent of the company’s capital outside of the traditional bottom-up annual capital allocation process. This provided an opportunity to move the organisation more quickly toward what the CEO believed were exciting growth opportunities, without first having to go through a “pruning” fight with the company’s executive-leadership committee. Of course, the CEO and other senior leaders will need to reinforce discipline around such simple allocation rules; it’s not easy to hold the line in the face of special pleading from less-favored businesses. Developing that level of clarity—not to mention the courage
M AY 2 0 1 2
to fight tough battles that arise as a result—often requires support in the form of a strong corporate center or a strategic-planning group that’s independent of competing business interests and can provide objective information (for more on the importance of the corporate center to resource reallocation, see “The power of an independent corporate centre”).
Implement processes to mitigate inertia Systematic processes can strengthen allocation activities. One approach, explored in detail by our colleagues Sven Smit and Patrick Viguerie, is to create planning and management processes that generate a granular view of product and market opportunities. The overwhelming tendency is for corporate leaders to allocate resources at a level that is too high—namely, by division or business unit. When senior management doesn’t have a granular view, division leaders can use their information advantage to average out allocations within their domains. Another approach is to revisit a company’s businesses periodically and engage in a process similar to the due diligence conducted for investments. Executives at one energy conglomerate annually ask whether they would choose to invest in a business if they didn’t already own it. If the answer is no, a discussion about whether and how to exit the business begins. Executives can further strengthen allocation decisions by creating objectivity through re-anchoring—that is, giving the allocation an objective basis that is independent of both the numbers the business units provide and the previous year’s allocation. There are numerous ways to create such independent, fact-based anchors, including deriving targets from market growth and market share data or leveraging benchmarking analysis of competitors. The goal is to create an objective way to ask business leaders this tough question: “If we were to triangulate between
M AY 2 0 1 2
these different approaches, we would expect your investments and returns to lie within the following range. Why are your estimates so much higher (or lower)?” (For more on re-anchoring, see “Re-anchor your next budget meeting” on the Harvard Business Review Web site.) Finally, it’s worth noting that technology is enabling strategy process innovations that stir the pot through internal discussions and “crowdsourcing.” For example, Rite-Solutions, a Rhode Island–based company that builds advanced software for the US Navy, defense contractors, and first responders, derives 20 percent of its revenue from businesses identified through a “stock exchange” where employees can propose and invest in new ideas (for more on this, see “The social side of strategy,” forthcoming on mckinseyquarterly.com). Much of our advice for overcoming inertia within multibusiness companies assumes that a corporation’s interests are not the same as the cumulative resource demands of the underlying divisions and businesses. As they say, turkeys do not vote for Christmas. Putting in place some combination of the targets, rules, and processes proposed here may require rethinking the role and inner workings of a company’s
strategic- and financial-planning teams. Although we recognise that this is not a trivial endeavor, the rewards make the effort worthwhile. A primary performance imperative for corporate-level executives should be to escape the tyranny of inertia and create more dynamic portfolios. STEPHEN HALL IS A DIRECTOR IN MCKINSEY’S LONDON OFFICE, AND REINIER MUSTERS IS AN ASSOCIATE PRINCIPAL IN THE AMSTERDAM OFFICE. DAN LOVALLO IS A PROFESSOR AT THE UNIVERSITY OF SYDNEY BUSINESS SCHOOL, A SENIOR RESEARCH FELLOW AT THE INSTITUTE FOR BUSINESS INNOVATION AT THE UNIVERSITY OF CALIFORNIA, BERKELEY, AND AN ADVISER TO MCKINSEY. THE AUTHORS WOULD LIKE TO ACKNOWLEDGE THE CONTRIBUTIONS OF MICHAEL BIRSHAN, MARJA ENGEL, MLADEN FRUK, JOHN HORN, CONOR KEHOE, DEVESH MITTAL, OLIVIER SIBONY, AND SVEN SMIT TO THIS ARTICLE. THIS ARTICLE WAS ORIGINALLY PUBLISHED IN MCKINSEY QUARTERLY, WWW.MCKINSEYQUARTERLY. COM. COPYRIGHT (C) 2012 MCKINSEY & COMPANY. ALL RIGHTS RESERVED. REPRINTED BY PERMISSION.
While Sitting Inside a Tent Success doesn’t come if you only plan and do not execute just like it takes hard work and not big talk to climb a difficult peak DAVID LIM
ABOUT THE AUTHOR David Lim, Founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader. He can be reached at his blog http:// theasiannegotiator. wordpress.com, or email@example.com
SETBACKS CAN HAPPEN at anytime, and they have a habit of giving you any warning. But what matters more is what you do about them that produces a good result. In 2009, we (my climbing partners Grant Rawlinson and Mohd Rozani) had planned to visit a remote glacier in the Central Tien Shan mountains in Kyrgyzstan. The “Heavenly Mountains” as they are know, stretch over a zone including parts of Kazakhstan and far western China. It’s the most northerly mountain range with any peaks over 7000-metres. After some years of research, the benefit of a couple of aerial reconnaissance missions on our 2000 and 2005 climbing expeditions, we identified a number of handsome pointy peaks in the 4000-5000-metre range that were still ‘ virgin’ peaks. While up to 500 people may summit Everest each year, it’s amazing how little attention the hundreds of yet to be climbed mountains of the world get. And that suited as fine. The mindset of a climber attempting these remote peaks however, needs to be different. These days, Everest is about maximising success by the employment of sherpas, fixed rope, large numbers of bottled oxygen, weather reports via satellite phones and all manner of means to help the average climber on the trade route succeed. After all, very little documentation of climbs have ever been made of peaks that well, haven’t been climbed before M AY 2 0 1 2
Our Kyrgyz Army helicopter dropped us off at the 3950m point of the Mushketova Glacierand chukka-wukka-ed its way down the glacier and disappeared from view. So there you are, the only humans in a hundred square kilometres and a four-day walk to the nearest road should anything happen. And if you’ve forgotten something, there isn’t a 7-11 around the corner. After some exploratory walks, we focused on climbing a straightforward snowy peak. The weather was fine, the skies blue, and we puffed our way up a pretty ridge to top out in the late morning. We called the 4468m peak “Kongsberg Peak” after one of our premier expedition supporters, and returned to our humble tents below on the glacier. A peak that had merely an “X” marked on the map now had a name. A real teachable moment happened a couple of days later when we awoke to attempt an ascent of the peak adjacent to Kongsberg Peak. It snowed all night, and at 3.30am when we began to prepare for the ascent, it hadn’t stopped. This was not lethal weather, but just unpleasant and difficult. Rozani announced from the confines of his other tent that he wouldn’t be venturing out that day. And so I sat there, rocking back and forth blowing some warmth into my fingers. For a few moments, self-doubt and pessimism set in. That is, until Grant looked to me and said, with a hint of sarcasm, “Dave, mountains aren’t climbed while sitting inside a tent”. I turned to him and said, “You’re right. Let’s just go and see what happens”. And so we did, picking our way in darkness across the glacier, with the glow of our headtorches; checking in with each other every hour or so. This non-stop team communication carried on as dawn broke. Then at 7am, something happened—the sun came out, and the clouds broke apart. Within a short space of time, we were bathed in the warmth of a fantastic sunrise. Soon we climbed, unroped up a rocky ridge, and made the summit in brilliant weather. We named the 4447m peak Resilience Peak for obvious reasons, and returned to camp, elated that we had taken such a risk that morning. But more importantly, we had chosen to take our chances (versus being pessimistic), communicating as a team, and pulled off the second virgin peak ascent of the expedition. Later in discussions, we realised that mindsets on mountains mirror situations in life. How are you communicating in times of challenge? It’s about building trust by transpar-
Mindsets on mountains mirror situations in life. How are you communicating in times of challenge? It’s about building trust by transparently communicating fears, opportunities, risks and progress
M AY 2 0 1 2
ently communicating fears, opportunities, risks and progress. At a critical point in the morning, Grant had supported the idea of for moving ahead, and assessing the situation as the elements of the climb revealed themselves. By just taking that chance to go, instead of bemoaning our bad luck with the weather, we positioned ourselves to reach the top when it mattered. On our return, we explored the mindsets of success with Rozani, and several days later, as a united team of three, tackled our hardest climb yet on that trip, and summitted the 5000-metre Majulah Peak, the highest virgin peak yet climbed by South East Asian mountaineers. I don’t think this was by chance. You get more successful on purpose, not by accident. But most importantly, when it comes to seizing opportunities in the face of uncertainty, you won’t find success by sitting inside your tent.
DAVID LIM IS A LEADERSHIP AND NEGOTIATION COACH. CONNECT WITH HIM ON HTTPS://WWW.FACEBOOK.COM/ EVERESTMOTIVATION, OR SUBSCRIBE TO HIS FREE E-NEWSLETTER AT DAVID@EVERESTMOTIVATION.COMCC
05.12 SKODA SUPERB AMBITION
A little less Superb
Skoda Superb’s Ambition variant offers itself to you at a much smaller price tag. So what’s the catch? Amit Chhangani IT’S BEYOND THE realm of contention that the Skoda Superb is arguably the best car to buy in the 20 lakh D segment. It offers incomparable legroom, great interiors, a whole range of toys to play with, impeccable safety features, along with an automatic transmission to die for at a price which reminds you of a clearance sale. Unfortunately, even at that price, some guys get heartburns when they have to contend with a car from a segment
below for not being able to extend the already outstretched budget that wee bit. Skoda has answered the ‘ambitions’ of all such blokes with the newest cut-price variant of the Superb. The new variant, christened Superb Ambition offers the luxury car at 3 lakh less than the top of the line variant. We recently drove the 1.8 litre TSI petrol version to figure whether the Czech carmaker has stripped the car of all dignity in a
The Škoda Superb is a large family car built by Czech carmakers Škoda Auto (now owned by Volkswagen) and modelled on the VW Passat. The Superb name was originally used by Škoda for large models, between 1934 and 1942
bid to make it more affordable. We’re glad to announce we were wrong.
THE AUTOMATIC TRANSMISSION IS MISSING BUT A SUPER ENGINE, SMOOTH DRIVING QUALITY AND ADDED SAFETY FEATURES MAKES THIS A GOOD BUY
Looks From the outside, the Ambition variant doesn’t give itself away, so you don’t lose any visual brownie points. More visible giveaways, however, can be found within the cabin. Skoda have taken away the brilliant 7 speed dual clutch DSG transmission in favour of a six-speed manual unit. That difference alone contributes majorly to reduced cost. Having said that, the technologically advanced TSI mill goes a long way in ensuring that the creamy smooth, linear power deliver and ample power does its part to try and make up for the lost brilliance of the DSG. There are other discreet omissions too. Skoda have taken out the six-CD changer, made redundant of late by the emergence of the USB audio port in modern cars. Unfortunately, no variant of Superb supports USBs, and so is the case with the lower priced Ambition variant. The sunroof has been replaced with a hard metal top. The steering mounted controls have disappeared, but the immaculately crafted steering wheel itself remains leather wrapped and is one of the best in any segment to hold and operate. There is no Cruise Control either, but I am yet to meet someone who has ever been able to use the feature consistently in Indian driving conditions, expressways included.
Safety You have to give it to Skoda that they have not taken away any of the key safety features from the Ambition. It still is one of the safest cars to travel in with eight airbags, ABS with EBD, Anti Slip Regulation (ASR), an electronic differential lock for that added grip and control, Active Front Head Restraints and Traction control. You also get parking sensors, and a
17.66 lakh (ex-Mumbai)
POSITIVES • Great space, comfort and luxury • Loaded with features even after several omissions • Great value for money NEGATIVES • No automatic transmission • No USB port VERDICT Good value for money if you are willing to forgo some of the luxuries of the original Superb
reasonably powerful halogen projector headlamp. So what have they taken away you’d ask? Well Skoda have removed the magical Adaptive Frontlight System (AFS) which makes lamps swivel in the direction the steering wheel turns for better road illumination. The bi-xenon power has also been replaced with vanilla Halogens.
Power But there is no taking away the plushness of the interior, the amazing dynamics, the wafty ride quality and the incomparable legspace. The engine has enough juice at lower rpm range as well, but it’s only after 4000rpm that you get that intoxicating gush as the machine leaps forward—it’s a beauty of an engine, and the power delivery is surprising to say the least for its size. The 1.8 litre unit dishes out 160PS of power at 4500 rpm and 250 Nm of peak torque at a really low 1500 rpm. As we traversed the windy roads leading up to Lonavala on the expressway we realised that the Superb delivers a mind boggling mix of great ride quality and reassuring dynamic ability. All in all, the Ambition variant may not have some bells and whistles, but it doesn’t lack even a teeny bit in terms of snob value, especially to the onlookers. M AY 2 0 1 2
Asus G55VW Gaming Laptop This bruiser of a machine sports a quad-core i73610QM Ivy Bridge chip with 2GB NVIDIA GTX 660M graphics over 12 GB of DDR3, 1,333MHz RAM and a 750GB HDD. This high-end system will set you back by $1,475
Sennheiser HD 439 Surprisingly good, and does not cost a bomb Vishal Mathur SOUND IS SOMETHING that always divides opinion. It is quite difficult to find headphones that manage to keep most of the demographic happy. Sennheiser’s HD 439 does come incredibly close to doing that and at a price that doesn’t burn a hole in the pocket. From the outset, the 439 does have a chunky design, but is quite lightweight. It fits well over the ears, and the generous cushioning helps if you are going to wear these for a long time. During tests, we wore them for 4 hours at a stretch, and they weren’t the least bit uncomfortable. The generous space for the ears to fit in is very welcome. While they aren’t noise cancelling, the snug fit does block out the ambient noise considerably. Like most Sennheisers’ the HD 439 isn’t bass heavy. But critically, the thump response is tight. This headphone focuses more on low-mids, and they are incredibly clear. Having said that, we did not at any point of 56
M AY 2 0 1 2
time feel that they are too sharp, or unbearably treble heavy on the ear. Getting back to the point of bass, it doesn’t really show its hand unless you want it to. On an iPod Touch with the No equalizer setting, the sound was soft and vocals clear. You could distinctly make out the bass, but for the purists, it was just the perfect dollop. Change the equalizer setting to bass heavy, and the thump does come in a lot more quantity. However, at no point did the HD 439 become “bass heavy”. The Sennheiser HD 439 has almost everything going for it. It isn’t pricey, it is very comfortable to wear and the sound should appeal to anyone and everyone who doesn’t want a bass heavy set of cans. SPECIFICATIONS: Frequency response17-22500 Hz; Sound pressure level (SPL)- 112 dB; Impedance- 32 ; Cable length- 1.4 m; Connector- 3.5 mm PRICE:
Nikon D3200 A 24.2MP successor to the D3100, aptly called the Nikon D3200. Powered by the EXPEED 3TM image processing engine, the Nikon D3200 is called a HDSLR by the company, with 1080p HD video recording (30 fps) with full time autofocus. Will set you back by around 37,000
Lava XOLO X900 The first Intel Medfield powered Lava X900 was globally launched in India sporting a single-core 1.6GHz Atom Z2460 processor, 4.03inch touchscreen, Android v2.3, an 8MP camera and 1GB RAM. It is expected to retail at around 22,000 and more affordable options are expected soon POWERED BY
ad Re Y st OG Mo L E ’s NO ZIN dia CH GA In TE MA
Chill, Work, Eat The WelcomHotel Sheraton in New Delhi touches a chord with its genuinely friendly staff and great hospitality Dhiman Chattopadhyay A SUITE AT the heart of noisy south Delhi, even if it means five-star luxury, is not always an event one looks forward to with undue excitement. So when I walked in to The WelcomHotel Sheraton in New Delhi on a blazing hot Monday, my adrenaline wasn’t quite pumping. All that however changed in less than 24 hours. By the time I left the next morning, for another conference in the suburbs, I had become a ‘convert’. The Sheraton offers all that you would expect in a five star, but what makes it stand out is the warmth and the personal attention that every guest gets from the staff.
LOCATION: ,Saket, Delhi TELEPHONE: +91 11 42661122 USP: Ideal for conferences, great food RESERVATIONS: http:// www.starwoodhotels. com/sheraton/reservations/index.html
CLOCKWISE FROM TOP: THE ENTRACE TO THE SHERATON; ONE OF THE MEETING ROOMS; THE DAKSHIN WHICH SERVES DELECTABLE SOUTH INDIAN CUISINE ; THE PAN ASIAN ALL SET TO WELCOME DINERS
Dakshin, the specialty south Indian restaurant serves some amazing Kerala and Andhra cuisine. Mandeep Chauhan who served us recommended the Meen Varuval (Pan Fried Sole Fillet), Kodi Koora (Chicken in a tomato gravy), Veinchina Mamsam (Cubes of lamb in a dry masala of coconut and golden onions), Beans Parippu Usli and Malabar Paratha. Awesome! The dinner was no different. Most diners at The Sheraton’s signature The Pan Asian would confirm that Chef Nakamura and Chef Peter along with Assistant F&B Manager, the ever-smiling Suhail Vadgaonkar make it a point to walk up to every diner and check if they are comfortable and enjoying the food. The food was delectable and the Korean grilled meat and the sushi platter went wonderfully well with the pinot noire Suhail chose for me. In between meals and a spa treatment, I managed to check out what the hotel offers. The rooms are spacious (340 sq ft upwards), with Wi-Fi connectivity while guests have access to the 24-hour business centre. The 24/7 Bay Watch coffee shop is a great place to catch up for a quick chat. The hotel also has an outdoor swimming pool, a fitness centre and a shopping arcade. And yes, the banquet facilities can over a 100 people, as the hotels GM Benita Sharma explained. Want true luxury? Check into one of the executive suites (like I did) on the 7th floor and find a massage chair in your room along with a stepper, lest you want to workout in the confines of your suite. An exclusive conference lounge on the same floor is another perk—a quiet place for that client meeting over a drink. So if its a couple of days in Delhi where you are organising a conference and also want to spend time chilling out—look no further than The WelcomHotel Sheraton. M AY 2 0 1 2
Tantalising Tasmania Leave the heat behind, head to the colder climes Down Under and check out Hobart, the capital of Tasmania Anil Mulchandani TASMANIA PACKS A diversity of landscapes within its relatively compact area—from glacial mountains to white beaches and clear seas, dense forests and rolling green hills, wild rivers, waterfalls and bird-rich lakes. Looking for a break in May, we decided on the coastal regions of Tasmania, which are usually pleasant and chilly during this time with temperatures ranging around 12-16C. As the flight from Sydney landed in Hobart, we had a bird’s eye view of the city spread over hills and along the Derwent River to the harbour. After checking into the Henry Jones Art Hotel, near the photogenic waterfront of Sulivans Cove, we drove out to the four-storey Georgian buildings at Salamanca Place, which was once the site of metal foundries and flour mills but now houses vibrant arts and culture scene at shops, galleries, studios, cultural performance venues and public art spaces. Bars and cafes dot the streets here and the friendly staff create a lively atmosphere. We are told that on Saturday, the food scene is quite amazing when stalls sell gourmet cheeses, superb sauces, jams, fudge and fresh fruits. While we are told that the fish-n-chips with beer is a quintessential Hobart harbour experience, we had table reservations at the award-winning Marque IV where we indulged in their seven course signature tasting dinner menu. 58
M AY 2 0 1 2
Next morning, we set out for the Freycinet National Park with a brief stop at Kate’s Berry Farm, which is run by Kate Bradley, a super cook and an active community person. We enjoyed the delectable desserts and strawberry ice-creams at her farm shop overlooking strawberry bushes, and brought some jams and other preserves to take home. Closer to the park, we halted for an oysters and fish lunch at Freycinet Marine Farm. Continuing onwards we came to the enviably
BELOW: THE MAIN MARKET CITY AT HOBART IS ALWAYS BUZZING WITH ACTIVITY. LEFT: A STUNNING VIEW OF HOBART FROM THE TOP OF MOUNT WELLINGTON IN TASMANIA
LEFT: WALLABIES IN THE WILD ARE A COMMON SITE FOR TOURISTS DRIVING TO AND FROM HOBART. FAR LEFT: THE COLES BAY IS ONE OF THE MANY EXPANSES OF MAGNIFICENT SILVERSAND BEACHES THAT DOT TASMANIA
located Freycinet Lodge. The lodge has 60 plush cabins, set among characteristic Aussie bushland at the southern end of Richardson beach. The cabin room had every conceivable contemporary comfort from a mini-bar to a modern bath, but no TV as it was in a national park—but who needs a TV when one can get live footage of the local wildlife from your own room? While sipping a beer, I watched a brush-tailed possum on the branch of the tree and just outside my room was a wallaby so tame it was easy to forget it was wild! Walking down to the restaurant in the lodge, we tucked into a delicious three-course dinner featuring freshly caught fish among the many other highlights. We awakened the next day to the call of a kookaburra and
drove to the Friendly Beaches for a walk on the fine white sands fringed by clear sea waters, with many shore birds. After the walk, we took a flight over the Wine Glass Bay that has become a symbol of Tasmania’s scenic beauty because it showcases granite rocks, green hillsides, golden sands and blue sea waters at a single site. The views from the small aircraft was simply superb. After this we set out for the walk to the Wineglass Bay lookout through bush country, passing beautiful pink-granite formations. We saw a kangaroo and some bird-life on the way before reaching the top for the panoramic view of the bay. After lunch we went for a quad-biking trip in the park. It begins with a lesson on handling the bike and a practice run after which you ride along bush tracks, climbing hills and winding your way through native eucalyptus forest to the coast for breathtaking views. As I was a bit nervous of going down in the dark, Sam who runs the tour drove me back to the starting point. And it was back to the Bay Restaurant of the lodge where we enjoyed duck and fish platters. We did several other things and spend a few more days checking out the fantastic sights of Tasmania. I am willing to bet that anyone who spends a relaxed week here on holiday, will not regret a single penny spent! HOW TO GET THERE: From India, you can fly to Sydney or Melbourne, and change for Hobart WHERE TO STAY: For an unusual experience stay at the Moorila
Estate, a winery set on a sauce-pan shaped promontory on Derwent River, about 12km from Hobart. The Henry Jones Art Hotel is good too. M AY 2 0 1 2
hat every cloud has a silver lining has taken on a new meaning. During a discussion with leading CEOs of multinational companies recently, we were contemplating the current state of affairs—both political and economic. And we managed to discover a ‘silver lining’. Any guesses on what it might be? Here is the drift of the conversation. It has always been tough to do business in India so why are businesses despondent this time round. What’s changed? For starters it is the politics. We have witnessed fragmentation for the last 20 years, but never in the absence of leadership. Indira Gandhi, Narasimha Rao, and Atal Behari Vajpayee certainly had the ability to get things done. In fact, even the Secretary to the Prime Minister during their tenures was empowered to make things happen. Suddenly now, no one has the power to get things done, and rather unfortunately, everyone has some power to stop them! The upside is that there are some states with leaders who are forging ahead and have a semblance of authority or the ability to build consensus and allow for growth and development. Narendra Modi, Nitish Kumar and Jayalalitha are showing the way. But think for a moment—none of them have any second-in-line. So there is no leadership in the national parties and no succession 60
M AY 2 0 1 2
in the others. A continued period of flux is therefore not inconceivable. It’s also the nature of MNC leadership. A number of MNCs came to India during the 1990s in response to the reforms. The senior leadership truly lived through the pain of the reforms and developed a sense of the way India operated. They also built strong relationships, both personal as well as for their companies. Many of them have moved on creating renewed unfamiliarity. Finally, there is the problem of mixed signals on ideology. As the Government grapples with the very real problem of inclusive growth - the ideological indications have gotten mixed up. Are those in decision-making positions socialist, left-of-centre, a little bit right, or reformist—what should we expect? So it’s a new environment, new people and an uncertain future. The econ-
omy isn’t a source of comfort either. Clearly this is a recipe for a crisis-inthe-making, right? Well, yes, and that’s where the silver lining is! India, as incisive political journalist and observer, Shankkar Aiyar points out—only undertakes reforms in response to a crisis (this is also the theme of his book, ‘Accidental India’). At other times, it runs on crossed fingers. So if a crisis seems to be brewing, we are in the vicinity of reforms. Here’s where we can make a difference. At every opportunity, we must articulate how we are inching closer to a crisis. Whether it is lower growth, lower margins, higher overall costs (necessitating lay-offs) or changing tax laws with retrospective effect. This is not the time for sugar-coating the truth and dressing up the numbers to look good. Its about jolting the government out of its reverie and into some action. Herman Hesse said, ‘everything becomes a little different as soon as it is spoken out loud’. Its time to say it as you see it. I am convinced, but what do you think? Anuradha Das Mathur, Editor, CFO India