Tuesday, October 28, 2008

Its not economics, stupid!

I am not sure if there is any one among the common people who understands what this world financial crisis is all about and how exactly is it going to affect them but I am quite convinced the experts don’t get it. Right up to the time when some of the strongest pillars of American capitalism were going bankrupt or were bailed out with unprecedented infusion of funds the experts were confidently reassuring the common people that all was well with the financial markets and the banks. Now when the party is over; the housing bubble caused mainly by aggressive sub prime lending has burst destroying trillions of dollars of investor’s wealth across the world, the experts are back, saying it was inevitable; as if they always knew this was coming.
The ‘bust’ has exploded many a myth. One of them being banks and insurance companies never fail and that people’s money in safe deposit with them, especially the bigger banks, is absolutely safe. The credit crisis has claimed retail banks like Washington Mutual Inc. which closed down and investment banks like Bear Sterns which was taken over by J P Morgan with dollops of help from the Federal Reserve. Filing for bankruptcy by Lehman Brothers, investment bankers that defined US financial systems for over a century, sent shock waves around the world leading to a global turmoil. American International Group, one of the most venerable insurers in the world, had to be taken over by the government for about $85 billion. It compelled Allen Greenspan, former chairman of the US Federal Reserve, who presided over much of the excess lending and expansion of the sub prime mortgage market that prompted the current global economic crisis, to say that he is in a state of “shocked disbelief”. He said, "This crisis has turned out to be much broader than anything I could have imagined. The world is going through a once in a century "credit tsunami". If Greenspan could not understand what hit the economy can you blame common people if they are wondering whether their deposits in the bank are safe or if the good old stocking is a more secure option to keep their money in? If the Banks in the US of A can fail how well equipped or capitalized are they in India to cope with a similar situation? Will the ‘$ 800 billion bailout package’ prove to be enough to tide over a $3 trillion crises without damaging the confidence of the banks, the financial institutions and above all the ordinary people not only in the USA but also in countries that are either directly affected because they funded the sub prime lending or others like India whose direct exposure is perhaps limited but where the signs of the impact of the ripple effect are now becoming ominously visible?
The experts were out again and were telling us that the Indian economy was insulated from whatever is happening in the US and Europe. The Indian banking system, they said, was very robust and the Banks were adequately capitalized and well equipped to face any challenges. The government and the Reserve bank of India, they opine, are on top of the situation and will do everything necessary to insure that the common man is not too affected by the ripple effect of the world financial crisis. The question is not whether the experts in the government and the RBI are willing to something or not. The question is do they know what to do? Will monetary measures taken by the government be enough when the problem is only partly economic and more psychological? Yet it is necessary to know how the Indian economy could be impacted and more importantly how the psyche of the Indian investor can be affected. Above all what is the opportunity side of this crisis.
It is naïve to think that India is so insulated from the world economy that it will remain completely unaffected by the momentous events in the USA and Europe. Indian economy is bound to be impacted since most US companies do business with companies in India. After all despite the tremendous progress made by the Asian tigers the USA and Europe still make up over 60% of the world economy. The whole world, let alone India, is expected to reel under the effect of the current financial crises considered as the worst since the Great Depression of 1929. That is the bad news. The good news is that India will, in all likelihood come out stronger if the government and the people recognize the opportunity to build infrastructure, invest in human capital and build social security safety nets.
At the macro level what we can see is that the Sensex has gone well below the psychologically important 10000 mark and sunk even breached 8000 a day before Diwali on black Monday the 27th of October, 2008. It has eroding more than half of shareholder’s wealth in less than nine months. The Rupee is reeling at all time low and breached fifty to a dollar. Industrial production is growing at less than 5 percent against nearly 10 percent a couple of years ago. The trade deficit at $ 63.17 billion compares very unfavourably with the 12.6 billion deficit in 2006. Fiscal deficit today is at 1,16,890 crore against 77,740 crore in 2006. So fast has been the slide that people are reeling under the impact. Investors and speculators are still trying to figure out what hit them while TV news channels are leaving no stone unturned in fanning the fire and creating a Gloom and Doom situation. The good news about three bumper back to back harvests does not seem to mean anything to the media. Suffice it to say that the media is focused on less than ten million families or forty million people affected by the ups and downs of the stock markets and not concerned about the rest of the 960 million people who also live in India. They are not exactly rolling in luxury but are celebrating a happier Diwali than they have in years.
While it is true that the economic impact of the global financial crisis on India may not be as much as it will be on some of the countries whose banks funded the sub prime lending in the US the psychological impact could be tremendous. Some of the policy decisions the government took in the past have helped prevent a full blown impact on Indian banking and financial system. For example the conservative stance on total globalization and reluctance to go ahead with capital account convertibility shielded India to an extent while some other more integrated countries are finding it very hard to bear the onslaught of a Tsunami of a financial crisis. Yet companies like Lehman Brothers, Merrill Lynch, AIG and Morgan Stanley and many others have their captive research units, brokerage arms, investment banking arms in India employing several hundred thousand people in what is popularly known as BPOs (Business Process Outsourcing) and KPOs (Knowledge Process Outsourcing). Some of these jobs could be in jeopardy. For example Lehman Brothers’ Powai unit alone employed over 2,000 people most of whom will be rendered unemployed unless some other company buys out Lehman’s India operations and keeps the wheels running like TCS has bought out Citigroup Global Services Limited. Otherwise these companies will have to downsize their workforce to remain profitable and to cut costs. Goldman Sachs has already announced it will cut 10% of its global strength. That means 200 people in their India operations will lose their jobs. A lot of US companies have also outsourced their technology-related jobs to Indian companies like Satyam Computers, TCS, and Infosys which might be affected in the near future. However this might even turn out to be an opportunity for these companies as many more US banks and companies may want to outsource work to Indian companies to reduce costs.
Sectors like real estate, aviation, and information technology have already started downsizing their employee strength. Even though Subhash Goyal of Jet Air was arm twisted into taking back the 1900 employees, a day after they were sacked, there are newspaper reports about DLF and Kingfisher reducing their staff strength by 300 because of cash crunch and sluggish business. Technology companies like TCS and IBM had removed more than 500 people each citing poor performance long before the US woke up to the financial crisis. Tata Steel laid off 300. Young graduates and professionals who have been planning to take up jobs may have to wait longer and/or accept lower packages. In the absence of any significant safety net downsizing and lay offs could hit people who lose their jobs very hard. The Government needs to act and act fast. It must convert this crisis into an opportunity to institute safety nets for the urban and rural employees who could lose their jobs because of downsizing or else we might have an epidemic of suicides which may not be as severe as the farmers’ suicides of the last decade but could be a pretty serious matter. The gruesome killing by Karthik Rajaram, a 45-year-old Indian American, who lost his high-profile job to the global financial meltdown, of his wife, mother-in-law and three children before taking his own life, is both tragic and foreboding. It is critical to step up and recognize we are in some pretty troubled times.
Another trend, a consequence of the world economic crisis, which could hit the middle class in India is raising interest rates. In the last couple of years it was the inflation rate that spoilt the party for Indian borrowers of home loans, personal loans and credit card purchases. Now it seems rising cost of money, because of illiquidity caused by distrust between banks, among other factors, will send interest rates soaring north. Banks have become so distrustful and wary of each other that inter bank lending, so crucial to smooth running of the banking industry, have dried up. They refuse to lend t each other for fear of default. Fear psychosis has gripped the banking sector and this is the real problem. If Lehman Brothers can file for bankruptcy what is a small Indian bank in comparison? So much for the Indian banking system being insulated from the events in the US. So the interest rates are headed north for some time to come whether we like it or not. Though the government has acted swiftly and has infused over Rs.185,000 crore in the economy with some desperate measures that led to easing of inter bank lending rates for the time being; rising interest rates is a trend which will take its time before it reverses. There is nothing much the government can do about it in the short run but can certainly pursue policies which will insure lower interest rates once the trend has run its course.
Similarly RBI’s effort to stop the slide in the value of the Indian Rupee against the dollar has failed miserably. India’s foreign exchange reserves were $274 billion down from $316 billion in May. The pile of reserves has come down as the RBI’s has been aggressively selling dollars in the market in an effort to stem the slide of the rupee against the US dollar. Yet that effort could not stop the rupee from slumping to its lowest level ever. The truth is when economics and psychology clash it is normally the later that triumphs. There is no other way to explain the failure of such massive government efforts to stem the economic rot. The problem in India is not that there is any real danger of a major bank failing or the government going bankrupt (like Iceland); the problem is that of confidence. There does not seem to be any dearth of capital as the government and the Reserve Bank have amply demonstrated; the problem is that of credence. The inter bank credit dried up not because there is no cash. It dried up because the banks don’t trust each other. The American sub prime lending crisis was caused by overzealous bankers disbursing loans to people who did not have means to return them. It would not be surprising if the Banks go to the other extreme now and become extremely skeptical and use extreme caution in sanctioning loans leading to lower lending and higher interest rates. ‘Greed’ was the force behind sub prime lending ‘fear’ has griped the market now. The confidence that borrowers will repay the banks’ money with interest every month has been shattered in the US and Indian borrowers will have to bear the brunt of this lack of confidence in the days to come. Some banks have already started charging higher interest on your credit card dues. What can you and I do about it. Well, pay off your loans and credit card dues as soon as possible. At least make a systematic plan and pay them off in the next three to six months. Else brace up for higher interest rates for that is the trend. With due apologies to Victor Hugo; you can stop invading armies but you can’t stop a trend once it has gained momentum and taken control of people’s psyche. A trend will run its course and that takes time.
There is some good news though, for people who have been wondering whether they will ever be able to buy a house during their life time. Real estate prices in Indian towns and cities are likely to come down by 10-15 per cent in the next few months. If the trend catches on the real estate prices could fall very sharply as developers are going to be hard pressed for cash with banks becoming so paranoid with news of housing loans being at the epicentre of the world financial crisis. Once again it is the psychology taking precedence over hard headed economics. The outcome could be developers lowering rates to lure buyers to shore up cash flows. The looming recession in the USA and Europe has brought steel and cement prices down. That should be a good news for the housing and we could see the revival of the housing activity sooner than most people expect.
The best way to begin to deal with the situation is to recognize the situation for what it is. In India it is critical but not crippling. People in the government also needs to remember that at such times it is not economic measures alone that will work. The government needs to work on the psychological and social aspects. The least it can do is not panic and not be seen to panic and have a long term perspective. The flip side of crisis is opportunity. The government can seize the opportunity and step up pace of building infrastructure when the cost of building it is low so that we are ready for the boom that will certainly follow these critical times. Whatever the state of the stock markets, commodity markets or even the currency markets the real Indian economy is still very robust and poised for another round of super growth albeit after a breather.

Monday, August 4, 2008

Training Future Leaders

When we were setting up Punjab Micro Circuits and Research Laboratories (PMCRL) one thing that was uppermost in my mind was that we could not afford to fail. Failure was not an option not only because no one sets out to achieve that goal but also because I had already messed up two earlier projects. It was, I felt, my last chance. All three promoters of the Company were FGEs (First generation entrepreneurs) and not one was a management graduate. This was a good thing and a bad thing but mostly a good thing. It was a good thing because we were not bound by any academic constraints or restricting management principles, and bad because we spent too much time in unstructured discussions and lost vital time. Many a time I wondered if our great effort will one day be likened to the exploits of the three musketeers tilting at wind mills. So I can understand exactly what Google co-founder Larry Page meant when he said in a recent 'Fortune' interview, "You have this fear of failing and of doing something new, which is very natural. In order to do stuff that matters, you need to overcome that."

There are so many areas to work on when you are building an organization from a scratch. There were a dozen government and financial Organisations to liaise with, a deadline to be met, and fifteen odd employees- who will grow to over a hundred by the time the project is implemented- to be coordinated into a cohesive team when all you have by way of an office is the boot of your car. The car, more often than not, also doubled as the conference room, office and even bedroom. You need to be creative at such times not only when it comes to creating new ways of getting work done but also to find solutions to day to day challenges and improve performance both at work and at home. Our experience proved that creativity suffers when people are shackled with fear while the only way to overcome fear is action.

The lessons we learnt while setting up the company laid the foundation of our organizational policy designed to support integration of work and personal life. Executing the project we were all very stressed and excited at the same time but no one was scared of doing new things because no one, feared being reprimanded. Absence of fear was the result of trust that was slowly built in that motley team. Every one knew that all of us were focused on successful implementation of the project and whatever decision anyone took was with the intention of achieving our goal. We all made our share of mistakes but no one doubted anyone's intentions or commitment to the project. We followed the epithet, 'do what ever it takes to insure success as long as it is ethical.'
When I look back and think I feel we were able to maintain a better work-life balance back then, when we had no systematic organizational policy designed to support integration of work and personal life, than now- twenty eight years later- despite a persistent well meaning HR team to inspire employees to take advantage of it. The reason in all likelihood was that we were all absolutely clear about what we had to achieve and there was deadline to meet. The team was not only aware of the collective goal which was to start commercial production by a set deadline but everyone was aware of the responsibilities of other team members. Communication was the key. Everyone was 'Listening' to everyone else and information flew up, down and laterally and more often than not more than once. Each one was willing to help the other. No one took a chance or assumed anything. There were, in the beginning, no rules about reporting at a given time or spot. There was no starting time no closing time and no office building. If we did not see someone for a week we knew he was as busy as a beaver trying to meet a deadline or is taking time off with his family having finished his allotted work for that period. We beat the final deadline for starting trial run by two weeks and partied like Rockstars.
Over time I noticed we slowly relapsed in a more structured less productive phase where most people were more conscious about the right amount of time spent at office than showing results despite a very liberal HR policy in place promoting work life balance and self regulation. I am certainly not suggesting that enhanced structuring always leads to less productivity. But it is intriguing and worth an enquiring why don't more employees use the resources offered by their companies, as we did, to enjoy a better more joyous time with their families or friends? What stops them from playing a more active role in their communities and organise their own social do's despite encouragement from policies? One reason I found was the lack of trust between the team leaders and their team, between managers and other employees. The other was sheer laziness on part of managers in trying more liberal attitudes in allowing employees to take decisions on matters that concern their work life balance. It was easier to be strict.

Don't throw the baby out with the water
Whenever I have run a company- and I have run a few and some successfully too- I have experimented with flexible work arrangement because of the fruitful experience I had while setting up PMCRL. People were free to leave after finishing their work for the day and work after hours if there was work unfinished. Yet people would finish their work and keep sitting idle in office but refused to go back home, perhaps because they were afraid they will be identified as not committed to the company if they did not dedicate the requisite "face time" that tradition demands; Some simply feared their boss would say "no" to their going despite clear company policy not to retain anyone after their work for the day was finished. Of course there were cases where some employees misused the facility and would leave despite pending work. But such people were few and such cases far between. They were normally not tough to discipline. Yet there were instances when our managers took too harsh a view too quickly and withdrew the facility from everyone in their department. This created confusion between departments following the rule and others that did not. Confusion is one of the toughest things to work with. The problem was that such managers followed a whim rather than the principle. A desirable long term goal was given up for short term convenience. It was easier to be strict and conventional.
Mostly department heads withdrew the concession rather than take on the onerous task of effectively communicating to their departments the responsibility that went along with the facility. Managers and leaders in the organisation must not grudge the facility employees are allowed. Once the facility is allowed it is their right not a privilege as long as they earn it- every day. This means they understand the responsibility every privilege or right entails. The act of the Managers who take the easier way out and withdraw the facility is akin to throwing the baby out with the water. Change takes time. It takes patience and it takes a big heart on the part of the leader.

Helping employees overcome suspicion
On the other end of the spectrum the un-policed employees suddenly treated with a lot of respect feel suspicious and sometimes even guilty. They think why are they being treated so well? What have they done to be treated with so much respect and trust? In the absence of similar experience of being treated with dignity and trust at work, school or college, they are a bit bewildered and could ask themselves, ' Is there a trap here? Why do we deserve this increased flexibility and discretion?'. The impatient managers who ideally should be the agents of change, feeling the policy is too quixotic give up before trust is built and before giving change a chance. The result is that nothing changes. We need to give change a chance. Trust building is a process and can sometimes take a bit longer to build . We need to be patient and give it time.

Relevance in Business Schools - Helping students overcome fear
Relevance of helping students overcome the fear of trying something new cannot be overemphasized. Years of cognitive study and spoon feeding at schools colleges and other cram shops has numbed their curiosity and dampened their appetite for initiative. They seem all set to become programmed answering machines. Any attempt to treat them as responsible adults and thinking young men and women confuses them. Sadly, there is unbelievable disbelief in their response when treated with respect and dignity. Their body language suggests they do not expect that treatment. They seem to ask, "Are we really being encouraged to be completely responsible for our actions and behaviour? Does this teacher really want us to be independent and fearless and own our own lives? You mean I can actually take my own decisions on my strengths and weaknesses and design my own strategy to improve myself? I don't believe this. Is there a trap here?” That is the bad news. The good news is they do begin to come around after an year or so of trust and confidence building. Slowly they begin to realise that they have to take responsibility and be independent and proactive to succeed not only while at the business school but also in life. The main job of the faculty is to help these youngsters make the transition from being dependent to becoming independent. Only an independent proactive person can contribute positively and fit into an interdependent flat world.
We need to begin to treat management students like responsible and independent adults for them to have a chance to become efficient managers who are capable of managing change and achieving significant goals. Management school faculty has a special responsibility in achieving this desirable goal. Their responsibility is not restricted to delivering lectures, marking papers and generating reports. Their involvement will have to extends much beyond that if we have to turn out managers and leaders who can play a decisive role in bringing about the intrinsic socioeconomic change which is essential if India has to play a dominant role in the future world order. That will requires a long term vision, a well thought out strategy and patient execution of a dynamic plan. It is also essential that the faculty and administrative staff share and communicate the vision with all stake holders. The faculty has to take the lead and the efforts of the administrative staff have to be synergistic. All effort of the administrative staff has to be to assist the faculty to achieve desired results. Yet in most business schools and professional colleges the faculty is seen to take the backseat. Is it because it is easy to take the back seat and easier to be strict?

Sunday, June 1, 2008

Can managers be management gurus?

TT Ram Mohan’s view that that a manager can never become a good teacher, a player a good coach or a dancer a good dance instructor is simplistic. (ET, May 29).There is no caveat against an investment management teacher becoming a billionaire by playing the market, either. He can do it, if he has faith in the theories he teaches. I am sure there must be some teachers who atleast became millionaires if not billionaires through investments while teaching the subject. That’s not to bad either. Lord Keynes not only taught but practiced what he taught. As a bursar of Kings College starting with a capital of £30,000 in 1922, he maintained an incredible annual compounded rate of growth of 12% for 24 years. In 1946 when he died, he left the fund at £380,000. This was achieved during a period that saw the crash of 1929, the worse ever crash in history and the Second World War. The British Stock Market fell by 15% during this period. I am sure there are several other investment management teachers who successfully play the stock markets.

Similarly there certainly are some great players who became great team managers and coaches. Franz Beckenbaur, the great German footballer lifted the FIFA World Cup for Germany as a player in 1974 and repeated the feat as the manager in 1990. Sir Alex Fergusson, arguably the greatest football manager today, who led Manchester United to the European double by winning both, the English Premier League and the UEFA Champions League this year, was a successful professional footballer in the Scottish Football League. Sandip Patil, Robin Singh, John Wright, Bob Woolmer were all good cricketers before they went on to become very successful coaches because they had it in them to be good instructors. Having played the game well in the past couldn’t have hurt or disqualified them from becoming cricket gurus. Obviously not all good dancers will make good dance teachers. But being a good dancer is certainly not a handicap for a dancer to teach dance successfully. If anything it is a great advantage if you can also “show’em” rather than just “tell’em”. One reason why literary critics don’t make great writers could be that they just know the theory and never practiced creative writing. But a good writer can certainly become a good critic. T.S. Elliot, S.T. Coleridge and Henry James come to mind immediately. It is so powerful to be able to demonstrate what you teach. It impacts. It goes home because it has the stamp of authenticity. Do all writers have to become critics? No, not if they don’t want to. Similarly not all managers want to become teachers but there will be some who have that strong desire and drive to share and pass on the lessons they have learnt to the younger generation of managers. Business schools should spare no effort to get them on their rolls as faculty.

It is easier transition for managers from management to teaching than it will be for academicians to become managers in the same way as it is easier for writers to be a literary critic than it is for critics to become writers. The reason for that is simple- both managers and writers have practiced their respective craft. Yet a manager will need to brush up his theoretical knowledge and undergo some training before he takes on the mantle of an effective instructor and make their ‘experience’ relevant to the subject they teach. That is not a big issue. A little bit of training will take care of that. If T T Ram Mohan’s experience as banker ‘does not add an awful lot’ to teaching a course on banking, it is a pity. One way of bringing the real world into the classroom is to bring some practicing and former managers, who want to make the transition, to teach in business schools. They will bring a wealth of practical personal experience to the subject they teach. More importantly with their contacts in the industry and business, they can facilitate active and fruitful interaction between business schools and the ‘real world’. They will not only add another dimension to teaching they may help manage business schools better.

This does not mean that there is no place for academicians and scholars in the faculty. They will always be responsible for imparting most of the courses and will perhaps continue to be the mainstay of instruction in business schools. Otherwise where will we get our Druckers from. There should be a good balance of both academicians and managers in the faculty of business schools.

I started with Keynes combining theory and practice with consummate expertise. Let me conclude it with a true story- an absolutely delightful nugget. Participating in a workshop on soft skills last month in Jaipur I found myself standing next to an impressive looking elderly scholar during the tea break. He turned out to be the head of a business school and needed little provocation to start vexing eloquent about investment in general and stock market investments in particular. He told me about dozens of books he had published and hundreds of seminars he had conducted on the subject. Ten minutes into the discourse I had this very strong urge to scram but I stood there listening to him out of politeness. I thought there was no way to get a word in even sideways. But my opportunity came when he interrupted himself to ease a succulent ‘rassogulla’ into his mouth. “You must be making millions in the stock markets.” I said. He held me by my arm; took his time to chew, savour and swallow the Bengali delicacy and said with a beatific smile, “ halwai mithai kabhi nahin khaata. I never invest in the stock markets.”

But you know what, I would rather dine at a restaurant whose owner eats there than at one whose owner eats elsewhere. There is a big difference between what Keynes demonstrated and what this business school head represents. We need to take corrective action now before business schools turn into academic dens. “There is still time.” as R.Gopalakrishnan says. (E.T. May 19)

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