Monday, May 30, 2011

Barca reigns supreme

Barcelona's majestic win over Manchester United in the Champions League underlined its status as the best team in the game today and, arguably, the best in the history of the game. Schumpeter, writing in the Economist, believes that Barca's success contains the answers to important questions of management. What is the right balance between stars and the rest of mankind? Should you buy talent or grow your own? How can you harness the enthusiasm of consumers to promote your own brand? He sees the answers as follows:
Barça puts more emphasis than any other major team on growing its own players. Other football teams often resemble the United Nations—the Arsenal first eleven, for example, frequently includes just two native-born Britons. Barça, by contrast, is still dominated by local players, and Catalan is often spoken in the dressing room....It is a boarding school that puts as much emphasis on character-training as on footballing skills. The students are relentlessly instructed in the importance of team spirit, self-sacrifice and perseverance. ...It is owned by its members (socis in Catalan), who now number 150,000, rather than by shareholders or foreign tycoons. far nobody has gone as far as Barça in giving customers a direct say in big decisions.
I have great regard for Schumpeter but, as readers of this blog would know, I am wary of drawing management lessons from anecdotal evidence. True, it's unwise to depend too much on stars and there is much to be said for home-grown talent. But would you say 'never' to stars? There are surely instances of other clubs that have done the opposite of what Barca has done and been at the top in their own time. If home-grown talent were all that mattered, the teams in the IPL would not bidding for foreign players and having them.

Moreover, what applies in football or some other sport may not be applicable to firms. As firms globalise, there is merit in hiring talent from overseas, at all levels, indeed in internationalising top management as well as the board. In sports, the nationality of the player does not matter- football is football, whether one is playing at home or abroad. Not so with firms, where knowledgeable of the local culture and the local economy and the ability to deal with policy-makers and regulators in the host country are important requirements for success.

Star CEOs do deliver dramatic improvements in performance, although there is an issue of whether these improvements are always sustainable. You can't deny that Lou Gerstner produced a lasting transformation at IBM.

Perhaps what is required is combination of home-grown values and diversity of talent. The values must be so deep-rooted that foreign talent also comes to imbibe it. But this is, perhaps, asking for the impossible. If Barca continues its reign for a longer period than anybody else, we may be able to draw conclusions. Until then, we must reserve judgement on what Barca represents- and its managerial implications.

Saturday, May 28, 2011

Greece can derail the world economy

Last May, after the IMF-EU rescue of Greece, I confidently forecast that the rescue would not work. There was no way Greece could service its then level of debt. A year later, it's being generally accepted that restructuring is necessary although the EU appears to favour 'soft restructuring', which is extending the maturities of debt instead of debt forgiveness or lowering of interest rates. This, of course, merely postpones the day of reckoning.

My forecast may have come true but I am not celebrating. The Greek debt problem is a lot worse than thought earlier. It appears now that even restructuring will not return Greece to insolvency. That leaves only two options: a fiscal union for the EU (with fiscal transfers from a 'centre' to the states, as in India) or the exit of Greece from the currency union. The first is politically distasteful; the second will create turmoil all round. Greece will be quite a nut for the new head of the IMF to crack.

More in my ET column, Greek jolt to world economy.

Friday, May 27, 2011

World class or not?

One of the pleasures of writing this blog is the high quality of responses it evokes. One anonymous reader talks of lack of ethical standards and even corruption at the IIMs. I cannot, for obvious reasons, comment on that. Most comments fault me for not addressing the core issue of whether the IITs and IIMs produce world-class research or not. They are right- I did not address this issue because it's difficult to deal with in a short post. Let me take a stab at it.

Perhaps, I should begin by posing some counter-questions. Is Infosys in the same league as Microsoft? Is ISRO equivalent to NASA? Are the IB and RAW comparable to MI5 and Mossad? Are our business dailies as good as Financial Times and Wall Street Journal?

There's no end to these comparisons and they will take us nowhere. No non-commercial institution in India needs to justify itself by comparing itself with somebody else who is regarded as best in class and then coming to conclusions as to its worth or utility. If that is the yard-stick, we will see mass hara-kiri.

The key issue is the impact the institution makes on its environment. Is it adding substantial value in the environment in which it operates? When the question is posed in these terms, the dimensions on which performance is measured change. You would not judge an IIT or IIM only on one dimension, namely, publication in international journals but on several dimensions: quality of students, interface with industry, impact on important sectors of the economy, inputs for policy-making, etc. The founding fathers of IIMA never talked about becoming 'world-class'. They spoke about two things: striving for excellence and striving for relevance. I guess I am talking about the same things.

The top American university is a marvel that has evolved over some three hundred years. It is supported by enormous private funding and it has put in place culture and processes that are not easy to replicate. Not just India but the rest of the world lags behind considerably: even the top European universities cannot hope to rival Stanford, Harvard, MIT and Princeton. In higher education, as in defence, the US stands alone.

The quest for improvement and reform must be eternal and the IITs and IIMs must be held to account for higher and higher levels of performance. But to condemn them by comparison with the icons of American education, which is what "world class" is all about, can only demoralise faculty and undermine whatever good can come out of our system.

Thursday, May 26, 2011

Do IITs, IIMs add value ?

When it is said that the IITs, IIMs owe their eminence entirely to students, not to faculty, it is implied that they do not add value. True or false?

Well, an IIMB director answered this effectively a few years ago when some in the corporate world had made similar statements. He made an offer: he would make public the admissions list the moment it was finalised. Corporates could come and recruit anybody on the list right away. If the IIMs did not add value, neither the students nor the corporates should have a problem doing this. There were no takers. The companies' bluff had been called.

There is another way of responding to the contention that faculty do not contribute. The IITs and the IIMs admit a small fraction of applicants. An IIM would call for interview around 1000 students. Anybody familiar with the admissions process would know that there is very little difference in terms of the CAT score between a student ranked 800 and a student ranked 2500 in CAT. The former may make it to an IIM; the latter is left out and goes to some other B-School. If the difference in student quality, that is, the input is negligible, how come there is such a huge difference in output or outcome? How is it that the IIM student is hugely sought after while the non-IIM student is not? Ditto for the IITs. QED.

Wednesday, May 25, 2011

Jairam Ramesh on IITs and IIMs

The astonishing part of Jairam Ramesh's criticism of IITs and IIMs is his contention that a governmental research set-up can never attract young people. Ramesh presumably said this in order to justify his decision to set up a Maritime Research Centre in collaboration with the Mukesh Ambani group. The statement flies in the face of facts.

If a private institution in higher education were inherently more attractive, how is it that there are no private engineering colleges comparable to the IITs, no private B-schools comparable to the IIMs (with the exception of ISB), no medical college of the stature of AIIMS? A private institution in education can achieve quality only if it is private and non-profit. We know that is emphatically not the case in India, that the whole point about private institutions coming up in education is to make money, whether over the table or under it.

Indeed, when you look other places- France, Germany, Russia, China- the premier educational institutions are all in the public sector. The lone exception to state domination of quality institutions of education is the US. That is because of the tradition of private philanthropy supporting higher education, a tradition that is almost unique to the US. No other culture has it or has it in the same measure. That is why it is futile to expect private institutions elsewhere to produce anything comparable.

Even in the US, it is not as if quality education is the monopoly of the private sector. There are several distinguished universities that are part of government - the magnificent institutions of California university, University of Texas (Austin), Ohio State University, to name a few. Government presence in higher education need not be inimical to the pursuit of excellence and can indeed conduce to it- provided the governance structures are right. Several countries in the world have shown that it is possible to achieve this, and here in India, the success of the IITs and IIMs illustrates the same principle.

Thursday, May 19, 2011

Criminality or stupidity?

The question that is being asked for Pakistan's security agencies in the wake of the Osama bin Laden killing could also be asked of bankers and investment bankers in the sub-prime crisis. Hedge fund manager Raj Rajaratnam, has been convicted on charges of insider trading but no banker of stature has even faced charges for the turmoil caused by banks in the crisis.

It's plausible that poor judgement, rather than mala fide intent, underlay most of the problems at the banks, combined with such factors as poor regulation, lax monetary policy and current account imbalances. But can the bankers entirely escape blame, including the ones at the top at Bear Stearns and Lehman Brothers? John Gapper, writing in the FT, feels that investigations must continue in the hope of pinning blame on at least some people:
What is clear is that, both on the way up and in the panic on the way down, many banks valued and traded such assets for their own purposes and did their best to hunt out gullible buyers. The Senate inquiry report quotes a Goldman executive exulting that “I think I found a white elephant, flying pig and unicorn all at once” on finding an investor that would buy one of its collateralised debt obligations.

It beggars belief that somewhere on Wall Street, in the last days of the mortgage bubble, crimes were not committed. They are still worth finding.

Sure they are, but it's gonna be tough. Not only are some of these crimes difficult to prove but one has to reckon with the clout of Wall Street in these matters and the old boy's network among finance honchos that extends to the highest levels of goernment.

Thursday, May 12, 2011

Curbing inflation in India

The RBI signalled last week that it would tackle inflation head-on. The 50 bps hike in the repo rate was meant to send a strong signal to the market.

When inflation has been in the double digit range for two years running, the central bank has little choice. But, then, we need to be clear that high inflation in the recent past has been driven primarily by supply-side factors, fuel and food prices. Both these will stay at elevated levels in the coming months. Further, there is evidence that variations in demand in the period 2006-10 had little bearing on the inflation rate, particularly variations in non-agricultural GDP.

What role can demand management by the RBI play in such a scenario? It may not be able to influence demand but it can still influence the inflation rate by anchoring inflation expectations. That is what the RBI is seeking to do. If that is so, what expectations of inflation should the RBI target? In other words, what rate of inflation should we tolerate in the present scenario? It cannot be the previous comfort rate of 3-4%. It has to be something higher. The RBI needs to indicate what that is. Compressing demand to reduce the growth rate can otherwise end up inflicting costs on the economy that are greater than the costs imposed by high inflation.

More in my ET column, A 'new normal' for inflation?

Saturday, May 07, 2011

Comment from the Dawn newspaper

One of the most forthright and hard-hitting comments on the death of Osama bin Laden I have seen comes from a column in the Dawn newspaper of Pakistan. Cyril Almeida writes:

Did the 1965 war make any sense? It was hard to find any sense to it then, even less so today.

Did Kargil make any sense? Not then, not today.

Did hawking nuclear paraphernalia on the international market make any sense? Buying did perhaps, but selling? And now we
have the world’s most-wanted terrorist recovered from the bosom of the Pakistani security establishment.

So maybe it does make sense after all. The establishment has flirted with irrationality in the past. Now it appears to have
perfected it.

Where do we go from here as a country?

As long as national security and foreign policy remain in the hands of a cabal of generals — unaccountable and untouchable, a lay unto themselves, and in thrall to their own irrational logic — what future can this country have? Surely, not much of a future.

You cannot help admiring the courage and objectivity of the writer. This is why I find it difficult to buy the idea of Pakistan as a failed state. There must be something very right about a country where a leading newspaper can produce such a column.

Disapproving noises on bin Laden....

The Archbishop of Canterbury has incurred the wrath of Americans with his reaction to the killing of Osama bin Laden. The Archbishop was quoted as saying, "I think the killing of an unarmed man is always going to leave an uncomfortable feeling because it doesn't look as if justice is seen to be done". This led to the Europeans promptly being branded by their cousins across the Atlantic as "cheese-eating surrender monkeys".

Meanwhile, UN Human Rights Commissioner Navi Pillay wants the facts of the operation to be made available to the UN. She is quoted as saying,"The United Nations' top human rights official called on the United States Tuesday to give the U.N. details about Osama bin Laden's killing, saying all counter-terrorism operations must respect international law. It will be interesting to see whether the US complies with the request.

Monday, May 02, 2011

NRN's retort to Mohandas Pai

It doesn't pay to annoy the founder of Infosys. N R Narayana Murthy has responded to Pai's comments on succession at Infosys in an interview to BS. He contends that the preference for seniority was part of a policy that Pai himself had put in place:

We have a programme, iRace, which is an HR module for promotions and growth. In that, we have clearly said that with other things remaining equal, the person who has had a longer tenure will be promoted. This system was championed by the director-in-charge of HR (Pai). So, I am not saying anything that is different.
About Pai's questioning his own policy, NRN has this scathing put-down:
We must be very kind to him (Pai) because at times we all lose our rational thinking and make an emotional statement. After all, we have to be very kind and forgiving.
NRN also points out that Pai had told the media he was not interested in the CEO's past and then harped on the company making a distinction between founders and non-founders.

Sunday, May 01, 2011

New chairman at Infosys

Excuse me, but I am at a loss to comprehend the hoopla over the appointment of a new chairman at Infosys.

Media analysts asks whether this will make Infosys more aggressive, raise the bar at the company, etc. These questions are somewhat inappropriate once you grasp the following:
  • K V Kamath is supposed to be a non-executive chairman
  • There is also an executive co-chairman in Kris Gopalakrishnan.
  • NRN does not exit the firm, he stays on as Emeritus Chairman
It is not for a non-executive chairman to make a company more aggressive or even to define its direction. That is the CEO's role. The chairman is responsible only for governance: he has to ensure that the CEO is held accountable for objectives that he proposes and that the board agrees to. For Kamath to attempt anything more would amount to overstepping his role. Kamath himself was candid on this subject in response to questions posed to him yesterday after the board meeting. He said he thought Infosys was quite aggressive at it was and he would be happy to keep pace with it. That is the right spirit.

All the excitement over the appointment of a new chairman would have been merited only if governance was an issue at Infosys; that is hardly the case. So the appointment of a new chairman should have been a non-event. Companies appoint search committees to locate a CEO. Have you heard of committees making the effort for finding a chairman? For that matter, has the appointment of a chairman at any company generated such publicity?

If the CEO is to be given any direction, the primary responsibility will be that of executive co-chairman. Note also that NRN is very much around. One of the papers (BS) reported a few days ago that even as non-executive chairman, NRN had the last word on most matters, that all cheques of over Rs 5 lakh had to be signed by him and that he made it a point to meet heads of businesses regularly as non-executive chairman. It remains to be see whether he completely distances himself from the firm as emeritus chairman. It is fair to suggest that, had he wanted to do so, NRN would have exited the firm.