As private enterprise gains in strength and influence in the Indian economy, there has been a rapid growth in the number of B-Schools to cater to the huge shortage of managerial talent. Unfortunately, few of them have a genuine vision to align budding managerial talent to the needs of the industry and society at large.
Leaders need to think intuitively and come up with out of the box solutions, while courses tend to follow the gravy train and emphasise on hard number crunching, which is not always the key to long term success for them or the companies they will lead in future. This is not unique to India, as Warren Buffett, Chairman, Berkshire Hathaway, once admitted, “Business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective.” After all, complex projections by some of the best managerial talent led to the sub-prime crisis. With India’s transition from a closed, savings based economy to a globally integrated capitalistic one, it is as important for Indian B-schools to make their students understand the relevance of sustainability in business and how sustainable business practices can be implemented in the corporate world.
Post slowdown, the Indian economy is recovering phenomenally well. Real GDP has grown at 7.2% during the just completed fiscal year 2009-10, up from 6.7 per cent during 2008-09 and the Reserve Bank of India is highly optimistic of an 8% growth. But the bigger question is whether we are ready for an 8-10% growth, and how inclusive it will be. Will its benefits reach the bottom 80%? Does India have the kind of natural resources or the ability to manage them efficiently to sustain the numbers? After liberalization, our economic model has shifted to export led growth and we have lived almost a century of development in just 20 years. India as an economy needs real planning as it prepares to humble China on GDP growth rates, and we need to develop technology and infrastructure to support the growth levels, keeping in mind limited natural resources, global warming and the growing population. Also, our financial institutions have to grow in size and stature, but also remain systemically strong to absorb the associated risks. These and many similar issues ensure that India Inc. has a far greater role to play, and consequently, so do Indian B-schools. Prof. Sushil Kumar (Centre for Food & Agri Business) of IIM Lucknow tells B&E, “Sustainable development is an important aspect and it should be part of the B-schools in India looking forward to shrinking resources.”
From entrepreneurial education to business policy making to sustainable development, new age subjects should be introduced in the B-school curriculum to introduce aspiring managers to the larger picture beyond financial numbers. Sustainable development is what the economy of India requires to be at the next level where it could be head to head with economies like US and Japan.
In a recent report from Accenture, 766 CEOs around the world have showed a deep rooted interest in ensuring sustainability and have figure it to be a key reason for success in business. 66% of CEOs around the APAC region have taken into consideration that consumers are an important aspect in driving the sustainability revolution in the long run and 50% considered their employees to be a strong driving force to sustainability. Besides these factors, educational reforms, financial reforms and new concepts of value would be critical drivers to help businesses reach the tipping point on sustainability. Ashok Mittal, Chancellor, Lovely Professional university tells B&E, “Sustainable development will certainly give the push to the (Indian) economy in the long term but for that, our tomorrow has to be planned today itself.”
India Inc. has to operate in a fast changing and integrated global economy. So the curriculum should be a reflection on the current state of the global economy and not on the past trends that are no longer relevant. American capitalism can no longer be considered the ideal model on which to base B-school education, as the past recession has proved. Businesses are already waking up to the criticality of sustainable development. It’s time that the courses in Indian B-schools also mirror that trend in the real world and produce world class leaders for tomorrow
Thursday, June 2, 2011
Advertise or Perish!.. Ashutosh Harbola simplifies the fall of Ambassador
Hindustan Motors lost its Pole Position, Just like GM in US, to The Japanese. If it had Invested in Emotional Advertising in The Early 1980s, History could have been Written Quite Differently
Advertising in maturing markets is a question of building brand preferences. But in the growing Indian market, even recall can be a tough ask, considering the plethora of brands in the fray. This was not the case with Hindustan Motors, the pioneer of India’s automobile revolution, when it rose to prominence from the 1950s to the early 1980s. Its Ambassador (Hindustan Motor’s pioneer product) was called “The King of Indian roads” at that time, despite being one of the lesser cherished legacies of the British Raj. There was an absence of both competition and the need for innovation, either in product or in marketing terms. Today, the car and the company are just about history.
Ambassadors have been in India since 1958 with a few modifications and have been based on the Morris Oxford III of the famous Morris Motor Company. Its other claim to fame has been the manner in which politicians and bureaucrats continued to patronise it blindly until the dawn of this century, long after the public had given it a rather undignified burial (as a brand in their perception set).
That decline happened almost instantaneously in 1983, when India’s greatest automotive success story till date first came to life in the form of the Maruti 800. Till then, Hindustan Motors was on a high trajectory. Since then, Ambassadors never made a comeback. The domestic sales for passenger cars in India between April to October, 2010 was 11,05,273 units. Hindustan Motors only managed to sell 6727 units, which even constitutes Lancer and Cedia (Mitsubishi JV) and managed to export only 1 unit. Maruti, in turn, sold a whopping 6,28,378 units in the same period. It has reportedly lost some 50% of net worth in the past few years and is a key BIFR incumbent.
Could the company have spent the past quarter of a century doing anything differently? The answer is simple. Advertising! If Hindustan Motors had advertised its key product well, it could well have become an iconic brand. Anuj Gupta, Senior analyst, Angel Trade, comments, “After Maruti became a success, Hindustan Motors could have still made a comeback by choosing the right mediums of advertising and creating a niche for themselves.” Nostalgia is one of the most exhilarating marketing tools. Volkswagen’s Beetle has worked on nostalgia and consistently reinvented itself through focused advertising perception reinforcements. Hindustan Motors could even have followed even the Harley path to cult glory. Harley is a century old brand that has developed a cult following over the decades, which refuses to wilt irrespective of the competition on any given day.
Hindustan Motors could have highlighted the Indian nature of the car, and positioned it for its features, which separated it from others, like strength and durability. Vishal Oberoi, CEO Market Excel Data Matrix Pvt. Ltd, comments, “Ambassador’s case is stuck in the approach of Hindustan Motors, who have a conservative approach unlike other automobile companies in India.” In this market, you cannot create cult followings unless you develop a stellar communication strategy. Even Apple, which is a marked antithesis to Hindustan Motors in innovation, has found it hard to penetrate into India, largely because of its disdain for advertising and building an emotional connect. The lesson has come too late for Hindustan Motors, but not necessarily for the marketers of the day in India. Like in the rest of the world, even in India, advertising matters!
Advertising in maturing markets is a question of building brand preferences. But in the growing Indian market, even recall can be a tough ask, considering the plethora of brands in the fray. This was not the case with Hindustan Motors, the pioneer of India’s automobile revolution, when it rose to prominence from the 1950s to the early 1980s. Its Ambassador (Hindustan Motor’s pioneer product) was called “The King of Indian roads” at that time, despite being one of the lesser cherished legacies of the British Raj. There was an absence of both competition and the need for innovation, either in product or in marketing terms. Today, the car and the company are just about history.
Ambassadors have been in India since 1958 with a few modifications and have been based on the Morris Oxford III of the famous Morris Motor Company. Its other claim to fame has been the manner in which politicians and bureaucrats continued to patronise it blindly until the dawn of this century, long after the public had given it a rather undignified burial (as a brand in their perception set).
That decline happened almost instantaneously in 1983, when India’s greatest automotive success story till date first came to life in the form of the Maruti 800. Till then, Hindustan Motors was on a high trajectory. Since then, Ambassadors never made a comeback. The domestic sales for passenger cars in India between April to October, 2010 was 11,05,273 units. Hindustan Motors only managed to sell 6727 units, which even constitutes Lancer and Cedia (Mitsubishi JV) and managed to export only 1 unit. Maruti, in turn, sold a whopping 6,28,378 units in the same period. It has reportedly lost some 50% of net worth in the past few years and is a key BIFR incumbent.
Could the company have spent the past quarter of a century doing anything differently? The answer is simple. Advertising! If Hindustan Motors had advertised its key product well, it could well have become an iconic brand. Anuj Gupta, Senior analyst, Angel Trade, comments, “After Maruti became a success, Hindustan Motors could have still made a comeback by choosing the right mediums of advertising and creating a niche for themselves.” Nostalgia is one of the most exhilarating marketing tools. Volkswagen’s Beetle has worked on nostalgia and consistently reinvented itself through focused advertising perception reinforcements. Hindustan Motors could even have followed even the Harley path to cult glory. Harley is a century old brand that has developed a cult following over the decades, which refuses to wilt irrespective of the competition on any given day.
Hindustan Motors could have highlighted the Indian nature of the car, and positioned it for its features, which separated it from others, like strength and durability. Vishal Oberoi, CEO Market Excel Data Matrix Pvt. Ltd, comments, “Ambassador’s case is stuck in the approach of Hindustan Motors, who have a conservative approach unlike other automobile companies in India.” In this market, you cannot create cult followings unless you develop a stellar communication strategy. Even Apple, which is a marked antithesis to Hindustan Motors in innovation, has found it hard to penetrate into India, largely because of its disdain for advertising and building an emotional connect. The lesson has come too late for Hindustan Motors, but not necessarily for the marketers of the day in India. Like in the rest of the world, even in India, advertising matters!
RURAL MARKETING: IT'S TIME TO "EYE THE PIE"...ASHUTOSH HARBOLA DIVES INTO UNLEASHING THE UNTAPPED POTENTIAL OF RURAL INDIA.
So far, Marketers were looking at Rural Markets with Enthusiasm & Speculation. It’s High time they gave up on The Latter
No one denies the fact that pace of change in today’s marketing world is extremely fast. But ‘fast’ proved to be a gross understatement in this case. Micromax launched its mobiles in the Indian market in 2008 with no baggage and a powerful vision. It was tough for a new player, as the mobile market was dictated by Nokia with almost 70% market share and a huge following. But Micromax realised an opportunity, which Nokia failed to address; the company introduced X1i, a mobile phone with a battery backup of 30 days targeting rural India, where electricity was a prime concern. The result was unexpected – within the next three years Micromax is the third largest player in the market and is seriously challenging Nokia’s domination. Micromax’s case clearly indicates the immense potential in the suburban regions of the country.
India has been termed as an agrarian economy, but not much has been done to utilise the massive potential of the rural market. There have been initiatives like AMUL and the Green Revolution, but they were not enough to boost the massive growth of the neglected parts of the country. It is indeed sad that there have been three major industrial policies since independence, but not one for agriculture, which was once the prime GDP earner for the economy. But times are changing as urban markets are almost at a critical stage; and marketers all around are hunting for opportunities in rural India. Arshit Pathak, MD, Kingtech Electronics India Pvt.Ltd (Group Company of G’FIVE International Limited) tells 4Ps B&M, “In the present scenario; cities do not hold much potential for mobile phone brands in terms of market volumes. It is the rural or the upcountry market, which is showing decent traction”.
Demand from rural India has been on a high trajectory and most importantly, the urban market has reached a saturation level with tele-density almost reaching 137.25%; and companies are now making a move to rural India, where telecom players are seeing the future. Tele-density reported in rural India till September 2010 by TRAI was a mere 28.42%. It’s strange that 11 long years have passed since the National Telecom Policy was introduced in India and the rural market has been completely overlooked by the giants. There is even a strong need to develop products that are a value proposition for the rural consumer as his tastes are altogether different from his counterparts in urban India. Sunil Raina, CMO, LAVA tells 4Ps B&M, “We have been penetrating the Indian market via the rural route. For this, we have been making customer oriented handsets with long battery life, entertainment applications and others”. The prime reason for Airtel’s success in the rural market was the launching of a 2 in 1 offer with Nokia by bundling Nokia cell phones and Airtel cards. A massive campaign was introduced to capture 34904 villages. The scheme became a hit and managed to generate Rs.168.2 million in just 12 months.
FMCG players have been looking at every opportunity to penetrate in rural India for years. The consumers here accounts for 60% of the total consumption and moreover, the biggest scope lies in the fact that most of the market is unorganised and handled by local players. Players like ITC have already been very successful here with initiatives like e-Choupal and HUL’s Project Shakti has been equally well known and celebrated. Retail giants were happy catering to urban masses but now, with the development of infrastructure in rural India, they are planning to tap this area. Deepak Mowar, Vice President (Hotels, Retail, Cinemas & Strategic Planning), Parsvnath Developers, tells 4Ps B&M, “It is very important to keep in mind that the rural population gives more importance to basic needs. Thus, the kind of products introduced should be well thought of.”
FMCG major Godrej introduced a nano refrigerator – Chotu Kool – precisely for the urban market. It was so designed that it could even support power cuts. Priced at Rs.3200, the little wonder successfully added 5000 villages to Godrej’s customer base in 2009 only. Such innovations can actually boost the buying power of the immensely value-conscious rural consumer. Even Thums Up started a campaign called ‘Thums Up Jalsa’ targeting rural India, and its sales grew by 37% in 2009 as against 18% in the previous year.
The automobile sector has also successfully forayed into the rural market. In 2007, Hero Honda started the Har Gaon Har Aangan campaign focusing on educating rural consumers on the product. It even targeted festivals in rural areas, which were generally related to harvest season – when farmers are in a buoyant mood. It even tied up with NBFC’s loan schemes to promote buying. Penetration levels in rural India for two wheelers are just 10%. Even Castrol India Ltd. successfully penetrated in rural India by educating farmers about the benefits of Castrol CRB over the competitors. Mayank Pareek, Executive Director, Maruti Suzuki India Limited addresses, “We have been seeing 10% sales from rural customers and the numbers will shoot up in the times to come.”
Even the banking sector has been looking at new ways of penetration. When ICICI entered rural India in October 2008 with its financing portfolio, the journey wasn’t easy for the banking tycoon initially. It had to play with the general mentality of consumers who preferred taking loans from locals rather than from banks, as it asked for a lot of paper work. To overcome the stiff resistance, ICICI started the Kamdhenu Cattle Loan Campaign, which completely changed their game in rural India. Spread over a period of 150 days across five states and 48 districts, the campaign generated the requisite awareness. Post campaign, awareness levels about cattle loan increased by over 20% amongst target group.
There have been many such cases in marketing history that have unleashed the potential of rural India; but obviously, infrastructure issues and the constraints of a scattered market are pressing issues. As the urban market is at a tipping point, it has become all the more difficult for companies to compete profitably if they are in this space alone. The rural market is the platform for companies to turn around businesses now. Another opportunity that stares them in the face is the huge budget allocation granted in the Union Budget to develop agriculture in India. And with it lies the obvious threat. If they are too late to cash in, someone else will. It’s a lesson that Nokia learned the hard way.
No one denies the fact that pace of change in today’s marketing world is extremely fast. But ‘fast’ proved to be a gross understatement in this case. Micromax launched its mobiles in the Indian market in 2008 with no baggage and a powerful vision. It was tough for a new player, as the mobile market was dictated by Nokia with almost 70% market share and a huge following. But Micromax realised an opportunity, which Nokia failed to address; the company introduced X1i, a mobile phone with a battery backup of 30 days targeting rural India, where electricity was a prime concern. The result was unexpected – within the next three years Micromax is the third largest player in the market and is seriously challenging Nokia’s domination. Micromax’s case clearly indicates the immense potential in the suburban regions of the country.
India has been termed as an agrarian economy, but not much has been done to utilise the massive potential of the rural market. There have been initiatives like AMUL and the Green Revolution, but they were not enough to boost the massive growth of the neglected parts of the country. It is indeed sad that there have been three major industrial policies since independence, but not one for agriculture, which was once the prime GDP earner for the economy. But times are changing as urban markets are almost at a critical stage; and marketers all around are hunting for opportunities in rural India. Arshit Pathak, MD, Kingtech Electronics India Pvt.Ltd (Group Company of G’FIVE International Limited) tells 4Ps B&M, “In the present scenario; cities do not hold much potential for mobile phone brands in terms of market volumes. It is the rural or the upcountry market, which is showing decent traction”.
Demand from rural India has been on a high trajectory and most importantly, the urban market has reached a saturation level with tele-density almost reaching 137.25%; and companies are now making a move to rural India, where telecom players are seeing the future. Tele-density reported in rural India till September 2010 by TRAI was a mere 28.42%. It’s strange that 11 long years have passed since the National Telecom Policy was introduced in India and the rural market has been completely overlooked by the giants. There is even a strong need to develop products that are a value proposition for the rural consumer as his tastes are altogether different from his counterparts in urban India. Sunil Raina, CMO, LAVA tells 4Ps B&M, “We have been penetrating the Indian market via the rural route. For this, we have been making customer oriented handsets with long battery life, entertainment applications and others”. The prime reason for Airtel’s success in the rural market was the launching of a 2 in 1 offer with Nokia by bundling Nokia cell phones and Airtel cards. A massive campaign was introduced to capture 34904 villages. The scheme became a hit and managed to generate Rs.168.2 million in just 12 months.
FMCG players have been looking at every opportunity to penetrate in rural India for years. The consumers here accounts for 60% of the total consumption and moreover, the biggest scope lies in the fact that most of the market is unorganised and handled by local players. Players like ITC have already been very successful here with initiatives like e-Choupal and HUL’s Project Shakti has been equally well known and celebrated. Retail giants were happy catering to urban masses but now, with the development of infrastructure in rural India, they are planning to tap this area. Deepak Mowar, Vice President (Hotels, Retail, Cinemas & Strategic Planning), Parsvnath Developers, tells 4Ps B&M, “It is very important to keep in mind that the rural population gives more importance to basic needs. Thus, the kind of products introduced should be well thought of.”
FMCG major Godrej introduced a nano refrigerator – Chotu Kool – precisely for the urban market. It was so designed that it could even support power cuts. Priced at Rs.3200, the little wonder successfully added 5000 villages to Godrej’s customer base in 2009 only. Such innovations can actually boost the buying power of the immensely value-conscious rural consumer. Even Thums Up started a campaign called ‘Thums Up Jalsa’ targeting rural India, and its sales grew by 37% in 2009 as against 18% in the previous year.
The automobile sector has also successfully forayed into the rural market. In 2007, Hero Honda started the Har Gaon Har Aangan campaign focusing on educating rural consumers on the product. It even targeted festivals in rural areas, which were generally related to harvest season – when farmers are in a buoyant mood. It even tied up with NBFC’s loan schemes to promote buying. Penetration levels in rural India for two wheelers are just 10%. Even Castrol India Ltd. successfully penetrated in rural India by educating farmers about the benefits of Castrol CRB over the competitors. Mayank Pareek, Executive Director, Maruti Suzuki India Limited addresses, “We have been seeing 10% sales from rural customers and the numbers will shoot up in the times to come.”
Even the banking sector has been looking at new ways of penetration. When ICICI entered rural India in October 2008 with its financing portfolio, the journey wasn’t easy for the banking tycoon initially. It had to play with the general mentality of consumers who preferred taking loans from locals rather than from banks, as it asked for a lot of paper work. To overcome the stiff resistance, ICICI started the Kamdhenu Cattle Loan Campaign, which completely changed their game in rural India. Spread over a period of 150 days across five states and 48 districts, the campaign generated the requisite awareness. Post campaign, awareness levels about cattle loan increased by over 20% amongst target group.
There have been many such cases in marketing history that have unleashed the potential of rural India; but obviously, infrastructure issues and the constraints of a scattered market are pressing issues. As the urban market is at a tipping point, it has become all the more difficult for companies to compete profitably if they are in this space alone. The rural market is the platform for companies to turn around businesses now. Another opportunity that stares them in the face is the huge budget allocation granted in the Union Budget to develop agriculture in India. And with it lies the obvious threat. If they are too late to cash in, someone else will. It’s a lesson that Nokia learned the hard way.
CEO PAY COMPENSATION ISSUE.. Ashutosh Harbola clarifies the unjust payment structure of CEOs round the globe
While The Global Economy continues to Struggle with Unemployment and Depressed wages, CEOs of today seem to have Exceptional Immunity to all Cycles! B&E’s Ashutosh Harbola dives into The CEO Compensation debate.
“It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor,” said Arthur Kroc, CEO of McDonalds. But the interesting part about the entire debate on astronomical, even galactical, CEO packages is that shareholders and the general public believe that principles are a fairly common casualty at the corner office!
CEO compensation related issues continuously hog the limelight in US, where the debate on the ‘Say on Pay’ bill, the one that would let shareholders have a non-binding vote on executive compensation has been especially fierce. Consider the recent anger over Pacific Gas & Electric Company (PG&E), whose outgoing CEO Peter Darbee gets a golden parachute of around $35 million. His departure looked imminent after one of PG&E’s natural gas pipelines exploded in a San Francisco suburb last September, resulting in eight casualties and destruction of 38 homes. State officials have been adamant that ratepayers should not pick the tab for Darbee’s retirement, and the company recently announced that the bill would be paid by shareholders instead. But shouldn’t the question have been raised on the value of the compensation package itself, rather than on who pays?
In a number of cases, companies have failed to justify compensations with respect to their financial situation and their perception on what the CEO should be worth. Even the G-20 summit in 2009 managed to sense the unnatural rise in executive compensation and an open house discussion was awarded to an issue, which has been raised by only investors so far. Even Barack Obama addressed his concern on the rising salaries while announcing the bailout package post recession. Russia initiated a move to cap CEO salaries in 2009, which was followed by China. The communist nation put an upper limit of $410,000 for state owned companies.
But capping CEO pays hasn’t gone too far in the US. Data from American Federation of Labor and Congress of Industrial Organizations showed CEOs’ median pay going up by 23% compared to 2.1% for the average worker. The median pay was reported to be $11.4 million, which came from fixed pay, stocks and different stock options of the 299 companies of S&P 500. These huge pay packets ($3.4 billion in all) would have led to the possible employment of 102,325 median workers!
A research report of American Federation of Labor and Congress of Industrial Organizations stated that between 1993 and 2008, the top 1% of Americans, captured a mammoth 52% of income growth in the US. Reports have even stated that the 2008 crisis was a result of the huge pay structure that CEOs have been getting. California-based compensation firm Equilar revealed that seven of the largest companies on Wall Street increased their compensations and benefits to $122 billion in 2007, a rise of 10% yoy. In contrast, aggregate net revenues fell by 6% yoy. These firms suffered mortgage losses of around $55 billion and destroyed some $200 billion in shareholder value.
The issue is vital enough to hold relevance in any period. Ray R. Irani, Ex-Chairman and CEO, Occidental Petroleum Corp. took home a sum of $76.1 million in 2010, almost double his 2009 compensation. Compensation expert David Hook tells B&E, “CEOs and the next layer should have a compensation ratio of 1:3, which in all senses is perfect”. In Ray R. Irani’s case the next layer was only taking home one sixth and he was making 1771 times more than the median wages of derrick operators in the industry. A huge 54% of shareholders voted against the plan and showed Irani the way out. Irani managed to make $857 million in the last decade and was reportedly the third highest paid CEO. Non-promoter CEOs have outshined promoter CEOs in issues of salary and benefits. Steve Jobs, promoter CEO, Apple, has fixed his pay at $1 per annum and is arguably one of the best CEOs of all times. In another instance, Sam Palmisano, Chairman, CEO & President, IBM reported a rise in his annual compensation of 30% from $24.3 million in 2010 (though IBM met share price targets). Not so proportionately, net income went up by 10.45% to $14.8 billion. IBM curbed other compensations of Palmisano by 3%, the 30% rise can be questioned if times change.
Lloyd Blankfein, CEO, Goldman Sachs managed a double pay rise making it to $18.8 million in 2011. Constant pressure from investors compelled the company to cut Blankfein’s salary who was drawing $68 million in 2007 and was responsible for the alleged misselling of toxic mortgage related derivatives for which Goldman Sachs had to pay a mammoth $550 million as fine. Salaries to five top directors ($69.5 million in 2010) have faced the flak even recently in 2011, as a group of nuns who are investors have asked the company to review its policies.
Another research conducted for major corporations of Wall Street found that the median pays of CEOs of top 50 companies have gone up by 30% in 2010. It does not add benefits like luxury retirement plans, platinum plated health care plans and the much talked about use of luxury jets. Total executive pay to these CEOs jumped to $126 million from $83 million in the previous year.
Even their Indian counterparts are not behind. Just like stock markets, companies seem especially optimistic about the future. Recently, V. Vaidyanathan, ex-CEO and MD, ICICI Prudential Life Insurance shifted his base to Future Capital Holdings for a mammoth Rs.500 million and 2 million warrants worth Rs.474 million, which are convertible in February 2012. It has even beaten the salary of Mukesh Ambani (Rs.250 million) and Kalanithi Maran (highest paid CEO last year, Rs.400 million).
There are packages that are well deserved too. Allan Mulally’s compensation increase of 48% to $26 million makes sense as he took Ford Motors through the tough days of recession without even taking a dollar of the bailout package from the US government unlike GM and Chrysler. And indeed, it is tough to monetarily quantify the role of leadership in inspiring an entire organisation to scale peaks or to even control slides. But it is when such ambiguity is misused to encourage excesses and create a bubble of sorts for CEO compensation that companies need to be scrutinised. Read the column by Shelly Karabell, Executive Editor, INSEAD Knowledge to understand a new metric in this area.
“It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor,” said Arthur Kroc, CEO of McDonalds. But the interesting part about the entire debate on astronomical, even galactical, CEO packages is that shareholders and the general public believe that principles are a fairly common casualty at the corner office!
CEO compensation related issues continuously hog the limelight in US, where the debate on the ‘Say on Pay’ bill, the one that would let shareholders have a non-binding vote on executive compensation has been especially fierce. Consider the recent anger over Pacific Gas & Electric Company (PG&E), whose outgoing CEO Peter Darbee gets a golden parachute of around $35 million. His departure looked imminent after one of PG&E’s natural gas pipelines exploded in a San Francisco suburb last September, resulting in eight casualties and destruction of 38 homes. State officials have been adamant that ratepayers should not pick the tab for Darbee’s retirement, and the company recently announced that the bill would be paid by shareholders instead. But shouldn’t the question have been raised on the value of the compensation package itself, rather than on who pays?
In a number of cases, companies have failed to justify compensations with respect to their financial situation and their perception on what the CEO should be worth. Even the G-20 summit in 2009 managed to sense the unnatural rise in executive compensation and an open house discussion was awarded to an issue, which has been raised by only investors so far. Even Barack Obama addressed his concern on the rising salaries while announcing the bailout package post recession. Russia initiated a move to cap CEO salaries in 2009, which was followed by China. The communist nation put an upper limit of $410,000 for state owned companies.
But capping CEO pays hasn’t gone too far in the US. Data from American Federation of Labor and Congress of Industrial Organizations showed CEOs’ median pay going up by 23% compared to 2.1% for the average worker. The median pay was reported to be $11.4 million, which came from fixed pay, stocks and different stock options of the 299 companies of S&P 500. These huge pay packets ($3.4 billion in all) would have led to the possible employment of 102,325 median workers!
A research report of American Federation of Labor and Congress of Industrial Organizations stated that between 1993 and 2008, the top 1% of Americans, captured a mammoth 52% of income growth in the US. Reports have even stated that the 2008 crisis was a result of the huge pay structure that CEOs have been getting. California-based compensation firm Equilar revealed that seven of the largest companies on Wall Street increased their compensations and benefits to $122 billion in 2007, a rise of 10% yoy. In contrast, aggregate net revenues fell by 6% yoy. These firms suffered mortgage losses of around $55 billion and destroyed some $200 billion in shareholder value.
The issue is vital enough to hold relevance in any period. Ray R. Irani, Ex-Chairman and CEO, Occidental Petroleum Corp. took home a sum of $76.1 million in 2010, almost double his 2009 compensation. Compensation expert David Hook tells B&E, “CEOs and the next layer should have a compensation ratio of 1:3, which in all senses is perfect”. In Ray R. Irani’s case the next layer was only taking home one sixth and he was making 1771 times more than the median wages of derrick operators in the industry. A huge 54% of shareholders voted against the plan and showed Irani the way out. Irani managed to make $857 million in the last decade and was reportedly the third highest paid CEO. Non-promoter CEOs have outshined promoter CEOs in issues of salary and benefits. Steve Jobs, promoter CEO, Apple, has fixed his pay at $1 per annum and is arguably one of the best CEOs of all times. In another instance, Sam Palmisano, Chairman, CEO & President, IBM reported a rise in his annual compensation of 30% from $24.3 million in 2010 (though IBM met share price targets). Not so proportionately, net income went up by 10.45% to $14.8 billion. IBM curbed other compensations of Palmisano by 3%, the 30% rise can be questioned if times change.
Lloyd Blankfein, CEO, Goldman Sachs managed a double pay rise making it to $18.8 million in 2011. Constant pressure from investors compelled the company to cut Blankfein’s salary who was drawing $68 million in 2007 and was responsible for the alleged misselling of toxic mortgage related derivatives for which Goldman Sachs had to pay a mammoth $550 million as fine. Salaries to five top directors ($69.5 million in 2010) have faced the flak even recently in 2011, as a group of nuns who are investors have asked the company to review its policies.
Another research conducted for major corporations of Wall Street found that the median pays of CEOs of top 50 companies have gone up by 30% in 2010. It does not add benefits like luxury retirement plans, platinum plated health care plans and the much talked about use of luxury jets. Total executive pay to these CEOs jumped to $126 million from $83 million in the previous year.
Even their Indian counterparts are not behind. Just like stock markets, companies seem especially optimistic about the future. Recently, V. Vaidyanathan, ex-CEO and MD, ICICI Prudential Life Insurance shifted his base to Future Capital Holdings for a mammoth Rs.500 million and 2 million warrants worth Rs.474 million, which are convertible in February 2012. It has even beaten the salary of Mukesh Ambani (Rs.250 million) and Kalanithi Maran (highest paid CEO last year, Rs.400 million).
There are packages that are well deserved too. Allan Mulally’s compensation increase of 48% to $26 million makes sense as he took Ford Motors through the tough days of recession without even taking a dollar of the bailout package from the US government unlike GM and Chrysler. And indeed, it is tough to monetarily quantify the role of leadership in inspiring an entire organisation to scale peaks or to even control slides. But it is when such ambiguity is misused to encourage excesses and create a bubble of sorts for CEO compensation that companies need to be scrutinised. Read the column by Shelly Karabell, Executive Editor, INSEAD Knowledge to understand a new metric in this area.
Thursday, March 31, 2011
Is Microsoft Dead? And Why Steve Ballmer should quit? Ashutosh Harbola tells...
Steve, You just went too Soft there!
Ever since it began, Microsoft was Globally hailed for its Innovations, and even feared, Hated & Fined for its Anti-Competitive practices. But especially since Steve Ballmer took The Helm, Microsoft has only Moved Downhill, becoming a Pale shadow of its former self.
Two childhood friends Bill Gates and Paul Allen, who had a strong passion for computer programming, started a company in 1975, which preliminarily developed interpreters for microcomputers. Since then, Microsoft has been the temple of innovation and a clear market leader under the leadership of Bill Gates. Great empires are built on foundations laid by great visionaries, and it is undeniable that Bill Gates and Microsoft were right up there among the harbingers of the software industry as we know it today. The magnitude of their contribution can be gauged from the fact that global IT spending touched $1.5 trillion in 2010 according to IDC.
But the true test of visionaries is the ability to create empires that last beyond them. In 2008, Bill Gates had declared, “We have achieved the ideal of what Microsoft wanted to become.” By this statement of Bill Gates, who stepped down as Microsoft CEO in 2000 (and Steve Ballmer took over) and as executive Chairman in 2006, one would like to believe that he crossed that rubicon as well. But is Bill’s statement a statement of achievement, or still one of wishful thinking? Well, they do say that time will tell. And to be frank, it has been doing so for quite a while, though we do not believe that Bill would exactly like to hear its verdict so far! To understand that, we need to look at what transpired since the time Gates stepped down and Ballmer stepped in.
It took Steve Ballmer 20 long years to become the top man at Microsoft, ever since he dropped out from Harvard to join the company. Incidentally, even his joining heralded a turning point of the IT industry with the dot com bubble bust, and ironically, the relations between Steve and Bill were also hardly the kind you would expect between a CEO and his succèssor. The Wall Street Journal reported the same and an internal source in the board clarified the entire issue. Steve was reported as having said, “Once Gates leaves, I am not going to need him for anything”. And he even reportedly added, “Use him, yes, need him, no.” In fact, Gates even stormed out of that meeting, according to sources. Two camps had been built since then, with respective allegiance to Ballmer and Gates.
With a start like that, the signs seemed quite ominous. In 2000, the company’s M-cap was recorded at a mammoth $586.2 billion, and was leading the list of top companies in the world. Even the conglomerate GE, which stood at second place was way behind with an estimate of $474,956 million. It’s almost a decade since then, and Ballmer’s leadership has come under scrutiny not once but on many occasions. The company’s M-cap in the fourth quarter of 2010 was only recorded at $238,784.5 million, almost one third of what it was in 2000 as reported by Financial Times Global 500. The decline is a clear indication of the pessimism of investors in the company. IT analyst Jeff Kagan comments to B&E on the company’s major problem, “Microsoft has happy customers and it is a natural for them to transform and lead the new industry. They have just not done that over the last decade”.
One common logic given is that those valuations were unfair as they were at the peak of the dotcom bust. But consider Apple, which did not even manage to grab a place in the top 500 list based on M-cap in 2000. It has immensely grown over the decade and even surpassed Microsoft with an M-cap of $295.89 billion in 2010. Apple’s growth can be attributed to its innovative approach and its ability to deliver unique products to the market. Over the past decade in particular, Microsoft failed to create that effect, even though it had all optimal resources to leverage. Microsoft’s core business is still the Windows & Window’s division, where 80% of sales are obtained by partnering with OEM’s and 20% by independent selling. This is the bread & butter of Microsoft, contributing the maximum profits.
They call it the phenomenon of the one trick pony. Microsoft reported $18.49 billion in revenues in 2010, compared to $14.97 billion in 2009. The revenue increase in the segment was because of the overall demand in the PC and laptop segment. Interestingly, Microsoft’s major revenue in this segment is because of its OEM partners, who provide Windows as the operating system. Another reason for the growth of this segment is the lack of competition and the general tendency towards using Windows. It is argued that things could have been very different if Apple would have partnered with OEM’s to only sell the MAC as the operating system. However, that’s one rare area where Steve Jobs truly missed the bus. Though there have been competitors like Linux, which have offered operating systems like Ubuntu, but they were not able to create a buzz with them. While the software division of the company remains strong, its other divisions remain weak. While Microsoft may remain relevant today, a serious question with respect to its ability to sustain itself, say, ten years down the line, still persists. One learns to have a better appreciation of this point when one learns that Microsoft’s consolidated revenues grew by only 7% in 2010 yoy, whereas Google booked 26% and Apple grew by a mammoth 70% in revenues. It’s a clear indication of poor leadership at Microsoft. Nearly all the verticals have been booking low growth.
Somehow, being on the wrong end of anti-trust cases sounds far better than the Microsoft’s present situation. It is well known how Microsoft lost to Google, since it could never realise the importance of the search engine. To be true, Bing has been gaining share since launch. As compared to a market share of 5.55% in February 2009, it had reached a share of 9.87% in August 2010, within a span of 18 months. But Google’s market share has hardly budged in the same period, from 72.11% to 71.59%. Microsoft even lost the market share of Internet Explorer, which in early 2000, was a market leader and grabbed nearly 90% of the overall market. Today Internet Explorer, with all its versions, holds nearly 40% of the market. On the other hand, Google Chrome, which was launched in late 2008, has grabbed a market share of nearly 15% in a span of just two years. In the same tune, Google’s popularity has spread to e-mail, and Microsoft has been able to do little. Although Microsoft has come up with upgraded versions of Internet explorer, the market has not been too welcoming.
Microsoft has even tried its luck in the smartphone and tablet segments. In the smartphone OS space, Symbian, Android & Research in Motion lead with market shares of 37.6%, 22.7% and 16% respectively. Microsoft meanwhile languishes at 4.2%. The deal with Nokia could help for now (for which they have Elop to thank!), but the latter still faces issues with respect to declining market shares. The deal could even be seen as the association of two market losers in the smart phone segment. Even Nokia is on a decline and its much popular Symbian’s sales went down by 32.2% in 2010. The decision has raised doubts about its plans with the Meego OS, which was earlier slated to be Nokia’s next big deal in mobile phone OS.
As far as tablets go, the game is too much in favour of Apple anyway, which sold 46.6 million units in 2010, booking a growth of nearly 87.2%. Another area where Microsoft has been betting big now is the cloud computing market. But the platform is almost new and CTOs around the world are not very optimistic about the technology with the involved risk of putting the entire data on the cloud platform. A research report of IDC Enterprise panel of 2010 reported that 89% of respondents were worried about security issues on the cloud platform. But the biggest problem with Microsoft remains that the cloud will eat away its core model, as it will prompt more users to go for rent based usage of its OS.
Another sign of alarm is that many top executives have left the company or been ousted. The most alarming was that of Chief Software Architect Ray Ozzie, who was supposed to succeed Gates at one point. Then, there have been many exits at lower levels. Other critical exits included that of Stephen Elop, Microsoft Business Division President and now CEO of Nokia and Server & Tools Business (STB) president Bob Muglia (who was removed by Ballmer). Now Ballmer is speculated to be implementing a major upheaval in management and promoting more technical people, since he wants the company to compete better in segments like cloud computing and tablets. It is speculated that even the recent top management exits in India, starting with that of Microsoft India Chairman & Corporate VP Ravi Venkatesan himself, have a lot to do with the shake up being implemented globally. Venkatesan has himself admitted to the media that the company’s OEM alliances were in trouble and the company was late to respond to innovation. The critical part is that the mobile penetrated India much faster than the PC, and it is another area which has been Microsoft’s Achilles Heel. Analysts believe that this turnaround is a synonym of incapable leadership and these issues would have been entertained much before. One analyst tells us that the company has been trying too hard to ensure diversity in expertise and specialisation as much as possible, in the hope that it would produce results. The bitter truth is that it hasn’t. Microsoft officials refused to comment on the story when contacted by B&E.
Meanwhile, Ballmer has been on a roll in one area, which is booking profitability from his share. In November 2010, Ballmer was reported to have sold 12% of his stake worth $1.3 billion. One theory is that he is reliving the rat and sinking ship analogy. And if that is not the case, then one thing is for sure. Ballmer, and Microsoft, need the ‘original’ Bill Gates much more now than ever before.
Ever since it began, Microsoft was Globally hailed for its Innovations, and even feared, Hated & Fined for its Anti-Competitive practices. But especially since Steve Ballmer took The Helm, Microsoft has only Moved Downhill, becoming a Pale shadow of its former self.
Two childhood friends Bill Gates and Paul Allen, who had a strong passion for computer programming, started a company in 1975, which preliminarily developed interpreters for microcomputers. Since then, Microsoft has been the temple of innovation and a clear market leader under the leadership of Bill Gates. Great empires are built on foundations laid by great visionaries, and it is undeniable that Bill Gates and Microsoft were right up there among the harbingers of the software industry as we know it today. The magnitude of their contribution can be gauged from the fact that global IT spending touched $1.5 trillion in 2010 according to IDC.
But the true test of visionaries is the ability to create empires that last beyond them. In 2008, Bill Gates had declared, “We have achieved the ideal of what Microsoft wanted to become.” By this statement of Bill Gates, who stepped down as Microsoft CEO in 2000 (and Steve Ballmer took over) and as executive Chairman in 2006, one would like to believe that he crossed that rubicon as well. But is Bill’s statement a statement of achievement, or still one of wishful thinking? Well, they do say that time will tell. And to be frank, it has been doing so for quite a while, though we do not believe that Bill would exactly like to hear its verdict so far! To understand that, we need to look at what transpired since the time Gates stepped down and Ballmer stepped in.
It took Steve Ballmer 20 long years to become the top man at Microsoft, ever since he dropped out from Harvard to join the company. Incidentally, even his joining heralded a turning point of the IT industry with the dot com bubble bust, and ironically, the relations between Steve and Bill were also hardly the kind you would expect between a CEO and his succèssor. The Wall Street Journal reported the same and an internal source in the board clarified the entire issue. Steve was reported as having said, “Once Gates leaves, I am not going to need him for anything”. And he even reportedly added, “Use him, yes, need him, no.” In fact, Gates even stormed out of that meeting, according to sources. Two camps had been built since then, with respective allegiance to Ballmer and Gates.
With a start like that, the signs seemed quite ominous. In 2000, the company’s M-cap was recorded at a mammoth $586.2 billion, and was leading the list of top companies in the world. Even the conglomerate GE, which stood at second place was way behind with an estimate of $474,956 million. It’s almost a decade since then, and Ballmer’s leadership has come under scrutiny not once but on many occasions. The company’s M-cap in the fourth quarter of 2010 was only recorded at $238,784.5 million, almost one third of what it was in 2000 as reported by Financial Times Global 500. The decline is a clear indication of the pessimism of investors in the company. IT analyst Jeff Kagan comments to B&E on the company’s major problem, “Microsoft has happy customers and it is a natural for them to transform and lead the new industry. They have just not done that over the last decade”.
One common logic given is that those valuations were unfair as they were at the peak of the dotcom bust. But consider Apple, which did not even manage to grab a place in the top 500 list based on M-cap in 2000. It has immensely grown over the decade and even surpassed Microsoft with an M-cap of $295.89 billion in 2010. Apple’s growth can be attributed to its innovative approach and its ability to deliver unique products to the market. Over the past decade in particular, Microsoft failed to create that effect, even though it had all optimal resources to leverage. Microsoft’s core business is still the Windows & Window’s division, where 80% of sales are obtained by partnering with OEM’s and 20% by independent selling. This is the bread & butter of Microsoft, contributing the maximum profits.
They call it the phenomenon of the one trick pony. Microsoft reported $18.49 billion in revenues in 2010, compared to $14.97 billion in 2009. The revenue increase in the segment was because of the overall demand in the PC and laptop segment. Interestingly, Microsoft’s major revenue in this segment is because of its OEM partners, who provide Windows as the operating system. Another reason for the growth of this segment is the lack of competition and the general tendency towards using Windows. It is argued that things could have been very different if Apple would have partnered with OEM’s to only sell the MAC as the operating system. However, that’s one rare area where Steve Jobs truly missed the bus. Though there have been competitors like Linux, which have offered operating systems like Ubuntu, but they were not able to create a buzz with them. While the software division of the company remains strong, its other divisions remain weak. While Microsoft may remain relevant today, a serious question with respect to its ability to sustain itself, say, ten years down the line, still persists. One learns to have a better appreciation of this point when one learns that Microsoft’s consolidated revenues grew by only 7% in 2010 yoy, whereas Google booked 26% and Apple grew by a mammoth 70% in revenues. It’s a clear indication of poor leadership at Microsoft. Nearly all the verticals have been booking low growth.
Somehow, being on the wrong end of anti-trust cases sounds far better than the Microsoft’s present situation. It is well known how Microsoft lost to Google, since it could never realise the importance of the search engine. To be true, Bing has been gaining share since launch. As compared to a market share of 5.55% in February 2009, it had reached a share of 9.87% in August 2010, within a span of 18 months. But Google’s market share has hardly budged in the same period, from 72.11% to 71.59%. Microsoft even lost the market share of Internet Explorer, which in early 2000, was a market leader and grabbed nearly 90% of the overall market. Today Internet Explorer, with all its versions, holds nearly 40% of the market. On the other hand, Google Chrome, which was launched in late 2008, has grabbed a market share of nearly 15% in a span of just two years. In the same tune, Google’s popularity has spread to e-mail, and Microsoft has been able to do little. Although Microsoft has come up with upgraded versions of Internet explorer, the market has not been too welcoming.
Microsoft has even tried its luck in the smartphone and tablet segments. In the smartphone OS space, Symbian, Android & Research in Motion lead with market shares of 37.6%, 22.7% and 16% respectively. Microsoft meanwhile languishes at 4.2%. The deal with Nokia could help for now (for which they have Elop to thank!), but the latter still faces issues with respect to declining market shares. The deal could even be seen as the association of two market losers in the smart phone segment. Even Nokia is on a decline and its much popular Symbian’s sales went down by 32.2% in 2010. The decision has raised doubts about its plans with the Meego OS, which was earlier slated to be Nokia’s next big deal in mobile phone OS.
As far as tablets go, the game is too much in favour of Apple anyway, which sold 46.6 million units in 2010, booking a growth of nearly 87.2%. Another area where Microsoft has been betting big now is the cloud computing market. But the platform is almost new and CTOs around the world are not very optimistic about the technology with the involved risk of putting the entire data on the cloud platform. A research report of IDC Enterprise panel of 2010 reported that 89% of respondents were worried about security issues on the cloud platform. But the biggest problem with Microsoft remains that the cloud will eat away its core model, as it will prompt more users to go for rent based usage of its OS.
Another sign of alarm is that many top executives have left the company or been ousted. The most alarming was that of Chief Software Architect Ray Ozzie, who was supposed to succeed Gates at one point. Then, there have been many exits at lower levels. Other critical exits included that of Stephen Elop, Microsoft Business Division President and now CEO of Nokia and Server & Tools Business (STB) president Bob Muglia (who was removed by Ballmer). Now Ballmer is speculated to be implementing a major upheaval in management and promoting more technical people, since he wants the company to compete better in segments like cloud computing and tablets. It is speculated that even the recent top management exits in India, starting with that of Microsoft India Chairman & Corporate VP Ravi Venkatesan himself, have a lot to do with the shake up being implemented globally. Venkatesan has himself admitted to the media that the company’s OEM alliances were in trouble and the company was late to respond to innovation. The critical part is that the mobile penetrated India much faster than the PC, and it is another area which has been Microsoft’s Achilles Heel. Analysts believe that this turnaround is a synonym of incapable leadership and these issues would have been entertained much before. One analyst tells us that the company has been trying too hard to ensure diversity in expertise and specialisation as much as possible, in the hope that it would produce results. The bitter truth is that it hasn’t. Microsoft officials refused to comment on the story when contacted by B&E.
Meanwhile, Ballmer has been on a roll in one area, which is booking profitability from his share. In November 2010, Ballmer was reported to have sold 12% of his stake worth $1.3 billion. One theory is that he is reliving the rat and sinking ship analogy. And if that is not the case, then one thing is for sure. Ballmer, and Microsoft, need the ‘original’ Bill Gates much more now than ever before.
Monday, February 21, 2011
Will Rishad Premji Rise To Power
The Recent exits of The CO-CEOs at Wipro has once again Caused Experts to Critically review Wipro’s ownership-Management Equation. Are these Experts indeed off The Mark?
Wipro’s equation with its CEOs has bordered on the uncanny more than once. It did not make any sense then, it does not make particularly significant sense now. When Wipro’s poster boy CEO Vivek Paul quit the company, it was hard to find people who would want to believe in Wipro’s credentials as a professionally managed company. It was openly speculated what Paul’s decision had to do with his uneasy equation with Azim Premji, Chairman and 76% shareholder in Wipro. People were also compelled to make comparisons with what had transpired between former Ford Chairman Henri Ford II and Lee Iacocca years back at Ford Motor Company in the US. Also, conjectures that claimed that the road was being cleared for Azim’s son Rishad Premji were being made even then.
If these voices were somewhat in the closet then, they have had a field day in the past few weeks; as Wipro said (read marching orders) to its joint-CEOs Girish Paranjpe & Suresh Vaswani on January 21. This time, Premji himself acknowledged that the joint-CEO structure was put in place for the downturn & they need to have a simpler organisational structure post recovery, which has brought T. K. Kurien to the helm.
In later interactions with national dailies, Premji has minced no words in saying that the company had been particularly lacking lustre when it came to leveraging the growth phase of the IT industry post-recession. Indeed, the company has been underperforming its peers in the IT industry to the extent that it has come under the risk of being overtaken by Cognizant, which has been on an aggressive growth trajectory. The company reported a consolidated net profit of Rs.13.19 billion, up by just 3.36%, and a revenue increase by 1.26% sequentially to Rs.78.29 billion (IT services contributed 76% to this figure) for the quarter ending December 2010. Operating margins remained flat at 22.2%. Infosys, in comparison, posted 2.3% growth in revenues to Rs.71.06 billion and net profit increase by 2.5% to Rs.17.8 billion (qoq basis).
According to K. Sudarshan, Managing Partner, EMA Partners India, “The joint-CEO structure does not work too well in large organisations. It works in some instances, like investment banks, where the client relationships are defined and the areas of operation are defined.” But then, why was the structure instituted in the first place? Analysts say that this normally happens when two people are eligible for the same post and the company does not want to lose either of them. However, the outcome has certainly not been pleasant.
Meanwhile, the rumour mills can now speculate at leisure on the future trajectory of Rishad Premji’s profile. He was promoted to the level of Chief Strategy Officer in September 2010 and has recently been appointed as head of Wipro’s M&A strategy. Earlier, he was GM, Treasury & Investor Relations.
One point that is still bothering analysts is that Wipro has been giving Rishad such key roles so early in his career. An analyst, on condition of anonymity, told B&E, “Premji’s son is Premji’s son and it would not take him 25 long years to be on the hot seat, but it will be interesting to see how he will be ultimately brought on board”. Markets have been negative since the announcement of the results and the CEO exits on January 21. Wipro’s shares had fallen by 8.38% within a week of the announcement to close at Rs.437.9 on January 28. It is difficult to speculate how far the fall relates to the results, or to what extent it links to the top management reshuffle. But one thing is for sure – in a family run business, the ideal way forward for the owner is to choose the most eligible person to lead his business, independent of any bias. Azim Premji is the undisputed king at Wipro (unlike a certain N. R. Narayana Murthy, who just holds around 10% of Infosys shares); but that doesn’t dilute the necessity of making this distinction between professional and personal bias. While Azim Premji has always claimed to abide by this philosophy for Wipro, the world outside doesn’t seem to be so sure.
Wipro’s equation with its CEOs has bordered on the uncanny more than once. It did not make any sense then, it does not make particularly significant sense now. When Wipro’s poster boy CEO Vivek Paul quit the company, it was hard to find people who would want to believe in Wipro’s credentials as a professionally managed company. It was openly speculated what Paul’s decision had to do with his uneasy equation with Azim Premji, Chairman and 76% shareholder in Wipro. People were also compelled to make comparisons with what had transpired between former Ford Chairman Henri Ford II and Lee Iacocca years back at Ford Motor Company in the US. Also, conjectures that claimed that the road was being cleared for Azim’s son Rishad Premji were being made even then.
If these voices were somewhat in the closet then, they have had a field day in the past few weeks; as Wipro said (read marching orders) to its joint-CEOs Girish Paranjpe & Suresh Vaswani on January 21. This time, Premji himself acknowledged that the joint-CEO structure was put in place for the downturn & they need to have a simpler organisational structure post recovery, which has brought T. K. Kurien to the helm.
In later interactions with national dailies, Premji has minced no words in saying that the company had been particularly lacking lustre when it came to leveraging the growth phase of the IT industry post-recession. Indeed, the company has been underperforming its peers in the IT industry to the extent that it has come under the risk of being overtaken by Cognizant, which has been on an aggressive growth trajectory. The company reported a consolidated net profit of Rs.13.19 billion, up by just 3.36%, and a revenue increase by 1.26% sequentially to Rs.78.29 billion (IT services contributed 76% to this figure) for the quarter ending December 2010. Operating margins remained flat at 22.2%. Infosys, in comparison, posted 2.3% growth in revenues to Rs.71.06 billion and net profit increase by 2.5% to Rs.17.8 billion (qoq basis).
According to K. Sudarshan, Managing Partner, EMA Partners India, “The joint-CEO structure does not work too well in large organisations. It works in some instances, like investment banks, where the client relationships are defined and the areas of operation are defined.” But then, why was the structure instituted in the first place? Analysts say that this normally happens when two people are eligible for the same post and the company does not want to lose either of them. However, the outcome has certainly not been pleasant.
Meanwhile, the rumour mills can now speculate at leisure on the future trajectory of Rishad Premji’s profile. He was promoted to the level of Chief Strategy Officer in September 2010 and has recently been appointed as head of Wipro’s M&A strategy. Earlier, he was GM, Treasury & Investor Relations.
One point that is still bothering analysts is that Wipro has been giving Rishad such key roles so early in his career. An analyst, on condition of anonymity, told B&E, “Premji’s son is Premji’s son and it would not take him 25 long years to be on the hot seat, but it will be interesting to see how he will be ultimately brought on board”. Markets have been negative since the announcement of the results and the CEO exits on January 21. Wipro’s shares had fallen by 8.38% within a week of the announcement to close at Rs.437.9 on January 28. It is difficult to speculate how far the fall relates to the results, or to what extent it links to the top management reshuffle. But one thing is for sure – in a family run business, the ideal way forward for the owner is to choose the most eligible person to lead his business, independent of any bias. Azim Premji is the undisputed king at Wipro (unlike a certain N. R. Narayana Murthy, who just holds around 10% of Infosys shares); but that doesn’t dilute the necessity of making this distinction between professional and personal bias. While Azim Premji has always claimed to abide by this philosophy for Wipro, the world outside doesn’t seem to be so sure.
Sunday, September 5, 2010
IT SECTOR: STPI EXTENSION: Way past their vacation time!
The tax holiday provided to Indian IT companies at the dawn of this century was historic and path breaking, as it enabled the industry to reach the enviable stature that it enjoys today. But retaining this tax holiday doesn’t make sense from a futuristic perspective by Ashutosh Harbola
It was one of the few instances when the Indian government actually played a key role as an enabler for business. The tax holiday given under the Sunset Clause u/s 10A and 10B of the Income Tax Act for companies operating under Software Technology Parks of India (STPI), which provided massive exemptions for the IT industry in India, was launched in the heydays of the dotcom boom in 2000-01. The incentives were available for providing software and IT enabled services for 100% exports including exports of physical services and included exemption in custom & excise duty, reimbursement of Central Sales Tax and exemption in corporate tax on 90% of export turnover (applicable for a 10-year period).
The dotcom boom fizzled out, but the tax holiday has been a major component of India’s success as a global outsourcing hub, making more than 8000-odd IT units more competitive. In 1990, the Indian IT industry generated a mere $150 million in software and computer-related services. In FY 2008-09, the Indian IT-BPO sector had reached $71.7 billion in aggregate revenue. Software and services exports (includes exports of IT services, BPO, Engineering Services and R&D and Software products) reached $47 billion, contributing nearly 66% to the overall IT-BPO revenue aggregate.
Ever since the golden decade came to an end in 2009, a debate has been raging on whether it needs to end at all. IT companies pressed for an extension by three years, but were granted only one. In the 2010 budget session, Finance Minister Pranab Mukherjee declared that the holiday will not be extended. Industry association NASSCOM and a number of players feel this will seriously hamper India’s competitiveness. Arvind Goyal , Director-Finance, Pitney Bowes India Pvt. Ltd. cautions that this will also reduce India’s attractiveness as he says, “Local duties and tax structure do play a. vital role in swaying decisions of global IT players in favor or against of setting up captive center in one of the countries.” Infosys Chief Mentor Narayana Murthy however feels that the extension isn’t needed from Infosys’ perspective.
It’s been almost 20 years since the sector has been awarded some or the other kind of benefits. These benefits made sense when the industry was at a nascent stage. In 2009, IT services alone have grown up from $13.5 billion to $35.2 billion since 2005 with exports contributing 76% (CAGR of 32% in 2000-2009 period). Direct employment in Indian IT-BPO sector crossed the 2.2 million mark, an increase of about 226,000 professionals over FY 2008 and indirect job creation is estimated at about 8 million. As a proportion of national GDP, the sector’s revenues have grown from 1.2% in FY1998 to an estimated 5.8% in FY2009. Net value-added by this sector, to the economy, is estimated at 3.5-4.1% for FY 2009.
Understandably, the government’s point of view is that the sector is self sustaining and its time to provide incentives to other sectors that need them more. The total revenues foregone by the government due to tax holidays for the IT and ITES Sector are `269.76 billion for the fiscal year 2009-10 while overall revenues foregone on account of corporate and non-corporate tax concessions are estimated to be `842.97 billion. After all, the government needs to scale up its budget size, cut down expenditure on interest payments and invest in agriculture and other unorganized sectors, which constitute 90% of the workforce in India.
Still the IT industry is moving to the SEZ’s now to grab tax benefits. But small and mid -sized companies will never be able to make it there because of high land cost and higher tax rates. BPOs will have to look for newer destinations as it will be a tough survival call for them indeed. Companies who deal in volumes are moving to the special economic zone. Praveen Bhadada, Manager-Consulting, Zinnov Management Consulting Pvt. Ltd. feels the impact is minimal at around 2-3% as he says, “Cost savings that the companies are able to generate operating out of India are far greater as compared to the tax burden that this withdrawal may result in.” Moreover, Indian IT companies need to urgently move up the value chain and provide lines of business and executive management related offerings. This decision against extending the tax holiday could actually push the fitter ones to make the inevitable evolution. So it does appear that the IT industry is raising unnecessary alarm on the issue; though it may be argued that smaller players may need protection. Goyal of Pitney bowes India agrees, “Indian industry should be able to reap the dividends of the reference architecture they have created by early mover advantage.”
Financial subvention for weak industries is logical and desirable, so that they may achieve their potential. But after these industries reach a certain scale, it enters the realm of protectionism, which helps no one. The Indian IT sector must take several key steps to take the next leap forward. In our view, pushing for STPI extension isn’t one of them.
Ashutosh Harbola
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