Monday, July 27, 2015

Goodbye to performance appraisals?

I am not bowled over by the news - rather inaccurately reported in many places- of Deloitte and Accenture doing away with performance appraisals. First, they are not doing away with appraisals, they are doing away with annual appraisals. These, they have concluded, involve too much time and money and do not produce commensurate benefit. An FT article estimates that Deloitte must have wasted £ 200 million every year on these appraisals.

Deloitte will replace its elaborate appraisal with a set of four questions. Accenture will provide appraisal on the go. All of which is fine. But it's important to understand that, while can and must improve the methodology of appraisals, we can't eliminate performance appraisals altogether. We still need to determine who are to be promoted. Where there are performance- linked incentives, we will need measurement of performance. Appraisals won't disappear.

So the real question to ask is: how do we improve appraisals? The first thing is to realise that performance is best measured over a long period, certainly more than one year. This happens in the case of promotions but not in the case of variable pay (except at the very top level). If we accept that there are serious problems with annual appraisals, we should also accept that variable pay linked to annual performance is not a great idea. It rewards a few and demoralises the many, it is prone to error and getting the quantum of reward right in a given situation is also a problem. Doing away with variable pay will substantially reduce the need for annual appraisals.

What about appraisals for promotions? Well, the most important thing, as this article in the New Yorker emphasises, is to eliminate biases to the extent possible. One way to do so is to get make sure that a person is evaluated by many people, not just by one big boss. (You can call this 360-degree feedback or whatever you like). In some businesses, we could even get customers to evaluate certain people.

The second thing is to focus intensely on selection. Once you are reasonably confident you have the right people, you don't have to worry so much about 'managing' performance. Thirdly, upto a certain level, let promotions be time-bound, in other words, go by seniority (as in the bureaucracy). Again, the logic is that if a person has come through an intense selection process, he or she should be able to do well upto a certain level. This fosters cooperation and team spirit which are more important for performance than individual effort, however accomplished an individual may be.

Annual appraisals, especially for the purpose of handing out incentives, are divisive, subject to bias and errors in measurement and a serious obstacle to team work. How many companies, including Deloitte and Accenture, have had these for a years if hard to comprehend.

Monday, July 20, 2015

Growing irrelevance of B-schools

Everybody knows what B-schools are for. They are a screening mechanism for companies that want to hire bright people. Whether the courses they teach add value to businesses is unclear. Whether their faculty and research have anything to contribute is even less clear.

This is not a situation peculiar to any country. It's a problem that B-schools everywhere have to face up to, as is evident from an article on UK B-schools. If B-schools are not seen to be contributing much to businesses either through their students or their research, it is only natural that industry should stop perceiving much value in them. In the UK, where it's fifty years since the London  and Manchester business schools started taking in students, this seems to be happening:
Perhaps even more worrying for business schools, there is no sign that business sees them as part of the solution any more. When the UK and global banking system went into a tailspin, few called to deans and professors for help. Did anyone expect the UK government’s plan for productivity to give a leading role to business schools?....Support for business school research by UK business shrunk by over 50 per cent in real terms between 1999/2000 and 2009/2010.
Why is this happening? Because B-school research is tailored to the requirements of their hot universities rather than to industry. Academic research has become an end in itself, with little thought given to whether such research is of any use to industry:
Reports on graduate aspirations might indicate that they want learning that is applied and connected to the ‘real’ world, but the evidence suggests that business academics are engaging less and becoming more inward-looking. This reflects the “capture” of business schools priorities by their host universities. Where they can, universities are increasing their control over their favourite cash cows. Faculty naturally respond by seeking academic legitimacy rather than economic contribution. The chair of the Chartered Association of Business Schools Angus Laing might see its members as central to solving the economic challenges faced by the UK but this can pall into insignificance against a good research assessment. 
For B-schools, the implications are frightening: if the corporate world should find an alternative screening mechanism that is as effective- say, hiring bright graduates through a competitive process- where would B-schools end up? In India, it's even more frightening that there is no indication that these issues are even being raised for discussion. 

Thursday, July 09, 2015

Grexit drama is still unfolding

It does appear that unfolding events point to a Grexit. Today, Greece is supposed to present its plan. The EU, the IMF and ECB will review the plan and give their response on Sunday. If they find the plan unacceptable, it will be Grexit. That means, immediately, that Greece will not have the euro as its currency. Eventually, it could also mean that Greece leaves the European Union.

Is this inevitable? Well, yes, because the EU is unwilling to accept that debt restructuring must be the basis for any deal. It's the IMF that made a powerful case for restructuring ahead of the vote in Greece on the referendum, a fact that Yanis Varoufakis, recently ousted as Greece's FM, gleefully latched on to his blog. The IMF showed that not even heroic austerity- a primary surplus of 2.5% for 50 years- can lead to debt sustainability for Greece.

Joseph Stiglitz is among the heavyweight economies who have thrown their weight behind the idea of further debt relief for Greece. But the EU will have none of this. They say the EU states have taken their hits. Thus far and no further. If there's no debt relief, more austerity will be mean more economic contraction for Greece. Instead of facing austerity hell, the Greeks would rather face the hell that would be unleashed by Grexit- that's what the 'no' vote on the referendum meant.

Why would Germany and others in the EU be willing to put up with the risks of a Grexit? One reason could be that they are confident of containing any economic contagion. It could also be that they think that events have really spun out of control, so any attempt at agreement on Greek debt is futile. Perhaps, governments in Europe think they shouldn't be feeding leftist movements elsewhere by indulging Greece.

Well, neither the US nor the IMF is taking as sanguine a view. Perhaps the US is also concerned about the political fall-out (a strengthening of parties similar to Syriza in other countries, Greece edging closer to Russia) but it's clear that they are not under-estimating the economic fall-out either. The Americans should know. They have seen the consequences of the Lehman implosion and what it did to the world economy. 

Wednesday, July 01, 2015

IIM Bill: what's the fuss about?

The ministry of HRD is embroiled in yet another controversy involving the IIMs. Such confrontations have been going on since 2004 when Murli Manohar Joshi, then HRD minister in the NDA government, wanted the IIMs to reduce their fee for PGP to Rs 30,000.

Every time, there is a run-in with the government, the IIMs contend that their autonomy is under threat. Legions of alumni are mobilised. An adulating middle class and a media that believes that government can do no good rush to the support of IIMs. Politicians and bureaucrats beat a hasty retreat. We have seen this played over and over again.

Thus, in 2007, the government advertised the post of director of IIMA. Faculty and alumni went to town saying this was a threat to autonomy! One would have thought that they would have insisted on the widest advertising and search for the post.

In 2005, IIMB wanted to set up a campus in Singapore. The then minister, Arjun Singh, stalled this, saying they needed to create more seats in India in the first place, not an unreasonable point. IIMB claimed its autonomy was under threat. There was a huge ruckus. In 2010, Kapil Sibal called their bluff. He said they could go ahead. Nothing has been heard of the proposal since.

On another occasion, the government advised the IIMs to reduce their board size from an unwieldy 25 to around 15- a perfectly sensible suggestion. Again, the war cry of 'autonomy in danger' was raised before the IIMs came around to accepting the proposal.

I happen to have studied the history of IIMA and written about it (Brick by Red Brick). In the course of my research, I was struck by the fact that no chairman or director of IIMA had ever complained about lack of autonomy for nearly four decades until the early 2000s. That was a period in which IIMA and other IIMs were heavily dependent on government for funds- and yet there was no talk of government interference. If anything, those at the helm of IIMA had showered praise on the government for its support and restraint.

Things began to change in the early 2000s once the leading IIMs ceased to depend on government of funds- thanks, initially, to burgeoning consulting income and, later, to steep increases in the fee charged for various programmes. Some directors reckoned that since they were not taking money from government, it suited them not to be subject to government oversight. (Going by this logic, ONGC and SBI should also be resistant to government oversight- not only are they not taking money from government, they hand in generous dividends!).

That's how the clamour for autonomy started. Some of the IIMs articulated their position on autonomy through Position Papers. What do they mean by autonomy? The leading IIMs, notably IIMA and IIMB, would like to become board-driven institutions, with the government only setting very broad objectives. All major appointments- the chairperson, board members and the director- would be done by the boards. The board would decide the fee. The board should also be free to delink compensation from government so that the IIMs could become globally competitive (a privilege not granted to ONGC or SBI, which are commercial entities).

It astonishes me that those who make these proposals should show lack of understanding of the legal position. There was report on the IIMs prepared by V K Shunglu, former CAG, in 2004. He said that the concept of autonomy espoused by IIMA was simply not supported by the Articles of Association of the Institute. Shunglu cited a Supreme Court judgement that upheld the government's right to regulate admissions, fees and service conditions of employees even in private aided institutions.

If the IIMs come to be covered by an Act of parliament, it will be even harder,legally speaking, for government to adopt the hands-off approach that the IIMs want. After all, the government is accountable to parliament. It is just not possible for the government to leave all matters, including matters of governance, to the IIM boards. The self-perpetuating board- with the chairperson and members being appointed by the board, as also the president of the university- is a feature that obtains in private universities abroad, not in public universities. What the leading IIMs propose thus amounts, in effect, to an attempt at privatisation of the IIMs.

Legalities apart, there's the question of who will enforce accountability in the IIMs if the government were to withdraw. The IIM boards consist of people with little stake in the institutes. So when people say that matters should be left to IIM boards, they mean, in effect, that matters should be left to directors. Government withdrawal would thus result in a dangerous governance vacuum at the IIMs.

One last point. If I can write freely today not only about IIM matters but also on matters of public policy, it's because I'm protected by the service rules of the government of India . Government is thus the saviour and protector of my autonomy. I must confess that the prospect of being at the mercy of an all-powerful board - and, by implication, an all-powerful director - fills me with more than a little trepidation. 

More on the IIM Bill in my article in the Hindu, No reason for IIMs to be alarmed.