CFO India - December 2009 by Bhupinder Sharma

CHIEF FOCUS INFOSYS CEO TALKS ABOUT THE NEW ROLE OF CFOs p.14

WINNING SMILE SK JOSHI’S POWERS OF PERSUASION PUT BPCL ON TRACK p.24

CFO

TOP PRIORITY CFOs AND CIOs MUST WORK HAND IN HAND p.44

INDIA cfo-india.in

HOT PURSUIT Companies find it easier to raise money than get the right people to handle it p.18

PUBLIC ATION

DECEMBER 09 VOLUME 01 ISSUE 02 Rs 50

contents

24 SK Joshi

DECEMBER 2009 VOLUME 01, ISSUE 02

cover story 18 HOT PURSUIT

14 S Gopalakrishnan

It is really tough to find the right financial talent By Bennett Voyles

cfo profile insight 24 WINNING SMILE SK Joshi uses his powers of persuasion By Ullekh N.P.

view from the top 14 THE TIME IS NOW CFOs must become true business leaders By S Gopalakrishnan

big picture 44 TOP PRIORITY

COVER DESIGN BY BINESH SREEDHARAN

PHOTOS.COM

CFOs must work hand in hand with CIOs By Ullekh N.P.

in practice

38 OPPORTUNITIES IN ASIA THINK REGIONALLY, ACT LOCALLY Several global consumer enterprises are reshaping their business models to suit Asia’s high-growth markets. By Todd Guild

i think 16 INCREASE FUNDING TO SMEs ISSUES THAT KEEP A CFO UP AT NIGHT There are reasons to cheer and big challenges to tackle By Vishnu Bhagat, former CFO, Reebok India

cfo lounge 50 GIZMOS 51 TRAVEL

28 WORKING CAPITAL

Companies must look at more ways to improve cash flow By Burzin Dubash

31 LEADERSHIP

Rebuilding trust is crucial for businesses By John H. Zenger and Scott Edinger

36 TAXATION

Here’s everything you want to know about GST By Sachin Menon and Koshal Agarwal

AD INDEX

16 Vishnu Bhagat

from the editor’s desk letters to the editor topline leader’s world art review books

DECEMBER 2009

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from the editor’s desk ANURADHA DAS MATHUR editor@cfo-india.in

CFO INDIA cfo-india.in

MANAGING DIRECTOR: Dr. Pramath Raj Sinha

An employees’ market again?

THE UNCERTAINTY AROUND India’s economic recovery is receding. News reports, forecasts from key institutions, data from the Planning Commission and the views of economists—each suggests that the worst is behind us. And while the scars of the two-year-long bloodbath won’t go away soon, a happier 2010 seems to await us. Corporate performance has also been encouraging. Companies have a little less to worry about; therefore, so does the government. Advance-tax collections have perked up, delivering some respite. The only obvious blip on the horizon is the sky-rocketing inflation with no real indications that it will be contained. A resurgent corporate environment could mean jobs will return. Already, there are reports from executive search firms that hiring freezes have been lifted in many companies. Growth and expansion plans that had been put on hold are being revived which would create new job opportunities. A survey by Manpower Inc says India’s services sector is set to hire aggressively in the next quarter…. Are we seeing the return of an employees’ market? Given the experience of the boom years, companies will think hard before giving in to “demanding” employees. However, in the face of high levels of inflation, and the desire to chase potential growth, this might be difficult to do. What does this mean for you? As the CFO of your company, this could mean getting prepared for rising salary costs. It also suggests you might want to be circumspect about claims from leadership teams and business units that they will be able to contain employee-related costs going forward. You would need to juggle and manage costs on other fronts as we tread into a cautiously optimistic future— but on the people-cost front, you might find yourself having to relent. On the flip side, of course, for you as a sought-after finance professional, it could mean more opportunities—greater variety, scope and, possibly, higher compensation. I have always believed if you look hard enough, you can see the silver lining…. My very best wishes for the New Year to all of you….

EDITORIAL CONSULTING EDITOR: Ullekh NP CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK MANAGER DESIGN: Chander Shekhar SENIOR VISUALISERS: PC Anoop, Santosh Kushwaha SENIOR DESIGNERS: TR Prasanth & Anil T THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna MANAGER: Poonam Bhargava ASSOCIATE: Priyam Mahajan SALES & MARKETING V-P SALES & MARKETING: Naveen Chand Singh NATIONAL MANAGER (SALES): Pranav Saran (+91-9312685289) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli CO-ORDINATOR (AD SALES, MIS, SCHEDULING): Aatish Mohite SOUTH: Vinodh Kaliappan (+91-9740714817) NORTH: Vipul Goel (+91-9654447689) WEST: Sachin N Mhashilkar (+91-9920348755) PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath PRODUCTION EXECUTIVE: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AND PUBLISHED by Kanak Ghosh for Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India EDITOR: Anuradha Das Mathur C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AT Silverpoint Press Pvt. Ltd. D 107,TTC Industrial Area, Nerul, Navi Mumbai-400706

SUBSCRIBER SERVICES: Call +91-11-45069999 Visit CFO India’s Website

DECEMBER 2009

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letters to the editor

VOLUME 01 ISSUE 01 OCTOBER 2009

A GOOD MIX The magazine is very good. I really liked the cover story on Koushik Chatterjee (Nerves of Steel). The profile of the Suzlon CFO was also good. Overall, the magazine offers a good read. It is a good mix. I like the range too. —Uma Sachdev, Mumbai

SURVEY-BASED ARTICLES The write-ups are good. It is good to read a magazine meant exclusively for CFOs. I am sure there’s going to be more articles in CFO India’s next issues based on surveys among our CFOs … it is a clean-looking product. —Siddharth Singh, Delhi

Energy issues

It is a very well-written article indeed (CFO Profile, Battling Fierce Winds). Extremely good job done … however, you have been particularly harsh on Suzlon. Anyway, that’s the perspective CFO India has on Suzlon—I guess! Robin Banerjee, CFO, Suzlon Energy

LOOKING FOR MORE Went through the magazine—it looks and feels good. But I am not sure about the shelf life of the news section of the magazine. Since it is targeted at CFOs, perhaps it could have trends in numbers or something like that. Also, a bit of stock and debt markets will be nice. Cheers! —Dinesh Narayanan, Delhi

CLEAN AND READABLE Very nice. I like the content, design and the clean look. —Deepanjali Kakati, Delhi

BEST WISHES Read the first issue of CFO India. Makes great reading … all the best. —Raj Datta, CFO, Quattro BPO Services

STYLE AND SUBSTANCE

GOOD DESIGN

It gives me a lot of pleasure that finally here’s a magazine that I am going to look forward to every month … very hygienic in appeal, very well-written stories. There’s style and substance. —Parikshit Doshi, Bangalore

My congratulations! The issue looks very nice. The design is very good. —Sourav Majumdar, Mumbai

WELL-WRITTEN ARTICLES CFO India has done a wonderful job in putting together some very beautifully written articles....And your choice of including travel and art is a smart decision. The design looks good. —Riyas Komu, Mumbai

C F O

DECEMBER 2009

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DECEMBER 2009

Wind power gets a leg-up THE UNION GOVERNMENT HAS ANNOUNCED A PROGRAMME TO GENERATEmore wind power, incentivise its production and attract investments in the cleaner and renewable energy sector. The government will give 50 paise as incentive for a unit of electricity generated by wind power producers for 4-10 years. The sops will be given under the government’s generation-based incentive (GBI) for grid-interactive wind-power projects. The GBI is aimed at attracting investment in the wind-energy sector and increasing the quantum of grid-interactive renewable power, reports said. “We are implementing the GBI scheme for gridinteractive wind power producers … this would definitely boost windpower producers and help in cutting carbon emission,” New and Renewable Energy minister Farooq Abdullah was quoted as saying in the media. The incentive has been capped at Rs 62 lakh per MW and the total yearly disbursement will not exceed Rs 15.5 lakh per MW for the first four years. The sops, to be continued till the end of the current Plan period (2007-12), will

be provided to companies through the Indian Renewable Energy Development Agency, the financial development agency for the renewable energy sector. The incentive, however, will be limited to wind-power generation plants with a maximum installed capacity of 4,000 MW. The scheme will also allow the investors, apart from getting the tariff determined by state regulatory commissions, to get an incentive of 50 paise per unit of electricity for a period of 10 years, provided they do not claim the benefit of accelerated depreciation. The ministry had earlier announced the provision of 80% accelerated depreciation under the Income Tax Act for those investors who have a sound balance sheet to absorb depreciation benefits. The decision has been hailed by the domestic industry. “The GBI programme will create an attractive investment market for large integrated power projects and foreign direct investors, which will facilitate projects of 50 MW and above. It is an extremely positive step for the industry in India,” Tulsi Tanti, chairman and MD of Suzlon Energy, India’s largest wind turbine maker, was quoted as saying by the Business Standard newspaper. Wind energy accounts for over 70% of the total 15,540 MW of installed renewable energy generation capacity in India. With the availability of better and efficient wind turbines suitable for India’s moderate wind regimes and increased infrastructure for power evacuation, the country’s wind power potential, currently estimated to be over 45,000 MW, could go up, according to Abdullah. Meanwhile, the government also announced that it has allocated, as part of a national action plan, a fund of Rs 1 lakh crore to invest in research, development and innovation programmes in the country’s renewable energy segment over the next 10 years. Union minister of state for Science and Technology Prithviraj Chavan announced that the fund will be utilised for pilot projects and for carrying out new tests on equipment for power generation. A report in the Times of India added that the plan comprises involvement of 80 laboratories across the country for research and development in the renewable energy sector.

CLIMATE CHANGE

PIB

ENVIRONMENT MINISTER JAIRAM RAMESH SAYS THE ACCORD IS GOOD FOR INDIA.

Deal in Copenhagen If there’s something that was elusive, except on the final day, at the 7-18 December Copenhagen summit on climate change, it was consensus. On the closing day, however, participants at the UN Framework Convention on Climate Change (UNFCCC) conference managed to sign an accord following a marathon debate. However, there were no clear deals on emission targets. India’s environment minister Jairam Ramesh said at the end of the two-week-long conference attended by 193 countries that it was “a good deal” for India. Ramesh said the Indian side “had very fruitful discussions with US President Barack Obama” and that “India has a good deal”. In Copenhagen, Prime Minister Manmohan Singh had said there was no question of India making its commitments legally binding. “The Prime Minister also said there was no question of making our unilateral commitments internationally legally binding ... we will reflect them in an international agreement in a suitable way but we are not going to take any internationally legally binding commitments. That is simply not on the cards,” Ramesh told reporters in Copenhagen, quoting the Prime Minister as having said. “Obama appreciated Singh’s statement,” the minister added. The accord says greenhouse gases and other emissions by all nations must be reduced to prevent average global temperatures from rising more than two degrees Celsius. “The red lines have been met,” Prime Minister’s climate change envoy Shyam Saran said, adding that India didn’t have to compromise on any of its fundamental stands.

DECEMBER 2009

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The central bank takes centre stage ALL EYES ARE NOW ON THE RESERVE BANK of India (RBI) which is likely to tighten money supply by hiking interest rates to contain inflation that has accelerated to a 10-month high in November. Inflation, as measured by the Wholesale Price Index, rose to 4.78% in November, from 1.34% in the previous month, government data said. Analysts say RBI may hike interest rates at the monetary policy review due next month or maybe even before that—India’s Central bank has adopted an accommodative monetary policy to help the country weather the global economic crisis. While RBI has shown increasing concern about price rise, the Union government wants to continue to focus on growth. Even after the worrisome news of galloping food prices came out, the government has ruled out any policy reversal, saying that stimulus measures will continue. Prices have been rising at a fast clip in the past few months thanks to easy monetary policies and a decline in production of agricultural commodities due to poor monsoon. But the Union government is reluctant to change its policy fearing that any such rollback could derail the revival of an economy that grew at 7.9% in the second quarter of the current financial year.

PHOTOS.COM

topline

INFLATION

IPO PLAN

Power play from Jindal Jindal Power is looking to raise Rs 10,000 crore through what could be the second-biggest IPO in the history of corporate India. The company plans to approach market regulator Sebi shortly to seek permission. The biggest-ever IPO is that of Anil Ambani’s Reliance Power, which had raised Rs 11,800 crore in 2008.

ADVANCE TAX

Looks like good news IN WHAT COULD BE SEEN AS A SIGN OF ECONOMIC RECOVERY following last year’s sluggish growth, most Indian companies have reportedly paid higher advance tax in the third quarter compared with the corresponding period a year ago. Reliance Industries is known to have paid Rs 8.5 billion as advance tax for the October-December quarter compared with Rs 4.5 billion during the corresponding period last year, reports said. HDFC Bank has reportedly paid Rs 4 billion during the quarter compared with Rs 3 billion last year. SBI, India’s largest bank, paid Rs 17.95 billion as against Rs 17 billion a year ago. Tata Motors, which didn’t pay any advance tax last year, has reportedly paid Rs 1 billion in the third quarter. Mahindra & Mahindra has paid a massive Rs 1.95 billion compared with Rs 45 million a year ago, a Press Trust of India report said. 10

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DECEMBER 2009

THE RISE IN ADVANCE-TAX PAYMENTS BY MANY COMPANIES INDICATES AN ECONOMIC RECOVERY

topline

TROUBLE IN DUBAI

Nightmare in dream city ABU DHABI MAY HAVE COME TO THE RESCUE OF ITS beleaguered neighbour Dubai with a $10 billion bailout of Dubai World, the conglomerate that once spearheaded the emirate’s growth, but are the troubles over? No, say analysts. The possible worldwide impact of the Dubai financial crisis is likely to hurt even Abu Dhabi, which along with Dubai is one of the seven emirates in the United Arab Emirates, they add. It all started after Dubai World asked creditors of its flagship property firms—Nakheel and Limitless—for a six-month repayment freeze on some of its debt. This has shaken global markets and raised apprehensions that the debt crisis may spillover to the rest of the world, including India. A substantial amount of India’s foreign remittances come from the Gulf. Indians in the UAE account for 10-12% of the annual inward remittances. Though India’s Finance Minister Pranab Mukherjee has said the impact of the crisis in Dubai would be minimal, he has admitted that Dubai’s problems could result in the return of many Indians. Forty per cent of the UAE’s population is from India although Indians do not have citizenship rights in that country. True, Abu Dhabi’s rescue plan has, averted a debt APPLE VS NOKIA default that threatened to trigger a string of debt downgrades across the UAE. But, reports quoting experts say, Abu Dhabi may not be able to hold back the tide for long. The conservative Abu Dhabi, which produces 90% of the UAE’s oil exports, had given no hint that it would come to the flamboyant business hub’s rescue. An analysis in the Wall Street Journal newspaper says that with Dubai due to repay $61.1 billion in bonds and loans before 2014, and its overall debt estimated at more than $100 billion, even Abu Dhabi may not have the liquidity to keep coming to the rescue. Allowing Dubai World to default threatened to wreak havoc on the regional economy. But by bailing out Nakheel, the most speculative of all Dubai’s ventures, the risk is that Abu Dhabi will find it hard to resist demands for future bailouts as ANALYSTS SAY THE LEGAL BATTLE, POTENTIALLY INVOLVING HUNDREDS debts fall due, so the pain is simply deferred, the OF MILLIONS OF DOLLARS, IS UNLIKELY TO END ANYTIME SOON. report adds. This crisis could also delay the recovery for the IN WHAT ANALYSTS PREDICT COULD BE A LONG LEGAL BATTLE, UAE’s real-estate sector, according to Goldman APPLE Inc has charged Nokia with anti-competitive practices Sachs. Data for the third quarter suggested the and patent infringement, as they fight for market share in smart UAE’s real-estate sector was showing signs of recovphones. Apple, which makes the iPhone and iPod, was respondery, with prices and rentals beginning to stabilise, ing to a suit that Nokia filed in October. That suit accused Apple of Goldman said. infringing 10 Nokia patents for technologies such as wireless data, Meanwhile, some analysts in India are of the view speech coding and security, reports said. that a huge rise in oil prices—to $140 a barrel levAnalysts say the dispute, potentially involving hundreds of milels—is likely to solve a lot of problems in the Gulf. lions of dollars in annual royalties, reflects the shifting balance of Though it is too early to say whether oil prices are power in the mobile industry as cell phones morph into handheld likely to rise to those levels, what one can easily say computers that can play video games and surf the Web, a Reuters is that this crisis has diminished Dubai’s role and report said. The countersuit heats up the fight between a rapidly enhanced Abu Dhabi’s in the UAE. growing Apple and the world’s largest maker of cell phones.

No love lost between them

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DECEMBER 2009

view from the top

S GOPALAKRISHNAN Facts & Trivia

EDUCATION: MSc in Physics and an MTech in Computer Science from IIT Madras

POSITIONS HELD: Formerly COO and president and joint MD, Infosys; he has been a director of Infosys since October 1994 and previously served on its board from 1981 to 1987 CHILDHOOD AMBITION: To become a doctor of medicine

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DECEMBER 2009

THE CHIEF EXECUTIVE OF INFOSYS TECHNOLOGIES LTD

says the world is witnessing the demise of the process-focused finance professional. He argues that it is now the age of the financial generalist.

ith global businesses evolving rapidly, at a pace that is indeed stunning, the responsibilities of chief financial officers are no longer confined to routine financial management—their role has increased significantly over the past couple of years. CFOs are now required to play a far more strategic role within organisations than they used to, and their responsibilities range from strategic financial planning and managing financial risks to helping corporations succeed in an ever-dynamic business environment. They are also expected to identify new opportunities for growth and help improve performance across different departments in their organisations. While core financial management remains the most visible, bread-and-butter duty of a CFO, the recent global economic downturn has expanded his role, bringing him face to face with myriad challenges, as well as opportunities. The finance function has suddenly acquired a new, broader significance. As we all know, there is an increased focus on optimisation of expenses, intelligent treasury and cost management. However, the attention of businesses has turned equally towards monitoring the company’s health and increasing cash flows into the company. Currently, several Indian companies are looking to introduce greater financial discipline into business operations and set the right balance between risks and caution. This means that today’s CFOs must possess the ability to assess and manage risk very accurately even in times as turbulent as the current one. So, along with traditional financial knowledge, CFOs today also need to be aware of business analytics to evaluate where their organisation stands financially at any given point of time. Mergers and acquisitions, for example, are an area where CFOs have to play a crucial strategic role within organisations. Being, very often, the

view from the top

most significant capital investment made by a company, it is the CFO who, along with the CEO, has to ensure that a merger or an acquisition plan meets the company’s larger corporate objectives. At the moment, I think it is fair to say that we are witnessing the demise of the process-focused finance professional. With most of their role being automated or outsourced, it is the financial generalist who is valued most today—that precious ability to manage uncertainty in a complex, ambiguous environment … it has become a muchsought-after attribute. In these times when companies come under increased public scrutiny and regulations, CFOs also have to be prepared to handle areas such as corporate governance. Therefore, the CFO’s role, which is quickly evolving into a more central role

CFOs have to be involved in providing strategic advice and decision support ... as risk emerges from all parts of the organisation, their expanded role is about managing diverse risks. within organisations, also extends to ensuring a strong commitment to ethical financial practices and standards, including enabling transparency. Companies are increasingly looking towards their CFOs to drive dynamic strategy development, evaluate and assess opportunities and boost performance—CFOs also have to be involved in providing strategic advice and decision support, responding to the knowledge that risk emerges from all parts of the organisation— and their expanded role is also about managing diverse risks. To put it straight, CFOs today have the opportunity, like never before, to broaden the scope of their office, and become true business leaders.

DECEMBER 2009

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i think

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DECEMBER 2009

ZODIAC SIGN:Scorpio PAST EMPLOYER: Ernst & Young

LAST BOOK READ: Predictably Irrational by Dan Ariely FAVOURITE RESTAURANT: My Humble House, ITC Maurya Sheraton, New Delhi

i think

Facts & Trivia

VISHNU BHAGAT COO, REEBOK INDIA,

says while there are reasons to cheer, the retail segment still has some big challenges to tackle

THE RESILIENCE SHOWN BY INDIA’S economy in the time of the global economic slowdown has been encouraging. The domestic stock markets have outperformed its global peers with QIPs and IPOs returning as popular instruments to generate funding. These investments are expected to fuel sustainable growth in the medium term. The interest rates have also softened and this could soon revive capital spending. The currency also seems to be stabilising and foreign exchange losses, hopefully, will not hurt Indian companies this year as much as they did in the last fiscal.

Consumer confidence has turned positive. We are experiencing a strong year-onyear growth in our same-store sales.

Consumer confidence has turned positive, too. In our company, we are seeing a strong year-on-year growth in our same-store sales. Not only have the consumer sales risen, the average transaction value (ATV) is also improving. This reflects quality growth—and this will boost our profit margins. The pace of opening of our franchise stores seems to be on track and we are all set to meet our opening targets for franchise stores for the year. There is relief in the commercial rentals segment. Also, the new franchise stores are being negotiated at lower rentals— and the older franchise store rentals have already been renegotiated and have been brought down to far more realistic levels. Even though most Indian banks do not have big global credit exposures— and their non-performing assets are still negligible—they seem to be riskaverse, especially when it comes to lending to SMEs (small and medium enterprises). Our business is franchisee-driven. Our franchisees, mostly SMEs, still find it difficult to raise money from banks both for working

capital as well as for expansion. Loans are still being disbursed to them at double-digit interest rates. This has led to a trade-off being done by the franchisees on whether to pay for purchases or to set aside funds for expansion. As a result, customer payments to us have slowed, resulting in higher working capital intensity. Though the Central government has instructed the banks to increase funding to SMEs recently, the desired impact is yet to be seen in our business. The opening of several malls are getting delayed beyond their committed timelines due to funding issues that several real-estate companies continue to face. Many malls are witnessing delays of more than 9 to 12 months! All this is making it difficult for us to plan for merchandise, especially because our products are seasonal. Finally, on the macroeconomic front, the sheer quantum of currency which has been printed globally is worrisome. This, coupled with the increase in countries’ borrowings, is setting the world up for a hyper-inflation scenario or a currency crisis in the future.

DECEMBER 2009

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PHOTOS.COM

COVER STORY

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DECEMBER 2009

Where’s THE

Talent? Why there are so few good senior finance executives in India–and what you can do about it BENNETT VOYLES

MANAGING TIGHT CASH, navigating volatile commodity prices, renegotiating covenants with impatient lenders, fending off a hostile takeover. Easy-peasy. The really tough job for a CFO? Finding somebody else who can handle his job. Even in a year of crashing markets and congealing credit, Ishaat Hussain, finance director of Tata Sons, has said it’s actually tougher for the Tata Group to find strong senior financial talent than it is to find financing. “We need a lot of well-trained, qualified people with a high degree of expertise. At present, money for good causes is available in plenty but good people are relatively scarce,” Hussain said.

DECEMBER 2009

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COVER STORY | WHERE’S THE TALENT

to Hong Kong. Foreign companies swoop in and snatch candidates, too, for the same reason as the BPOs: they know English, and they know Anglo-Saxon accounting. “The competition for Indian CFO talent also has the pressure from an export market ... you don’t have it in other Asian economies such as China,” says Rohit Ambedkar, managing director of the Singapore office of J. Robert Scott, a global executive search firm. After a few years overseas, maybe you’ll come back. Then again, maybe you won’t. If none of those choices pan WHY THE SHORTAGE? out, you may decide to go with a In a way, the reason for the shortage domestic, non-financial company. is simple: India is getting richer and And there you stay. Maybe after a busier by the day. But why is the con“OF LATE, THERE HAS BEEN few years in the finance office of a cern so extreme as to be the numA SURGE IN DEMAND AND service company, you hear about a ber one worry of Tata Sons’ finance GOING FORWARD WE DO great opportunity at a manufacturchief? After all, financial expertise SEE THAT THIS DEMAND ing company. But you can’t take it. is hardly a rare commodity in India. WILL CONTINUE.” There is a broad split between finanThese days, India is the world’s —JAMES AGRAWAL, CONSULTING DIRECTOR ciers who know service businesses bookkeeper: more than 100,000 AND HEAD OF BTI CONSULTANTS INDIA and financiers who understand new chartered accountants join the manufacturing and that further limworkforce every year and thousands of financially focused MBAs march out of business schools its supply, according to Ambedkar. This, too, exacerbates the shortage. In China, where manualongside them. Why would it be so hard to find a few hunfacturing is the core of the economy, CFOs for manufacturing dred ready to lead? As unlikely as it may seem, experts offer a number of rea- are harder to find than CFOs for services, says Ambedkar. However, in India, the situation is reversed: CFOs for manusons why so few end up in line for the throne. First, if you’re at the top of your class in business school, facturing are easier to find because service businesses are the larger, faster-growing part of the economy. you’ll probably want to join an investment bank. Finally, to be brutally honest, you may not be promoted “The preference for a finance graduate is a banking sector or investment bank or something like that,” says Madhu- because the boss doesn’t think a whole lot of you. Most of the kar Shukla, a professor of organisational behaviour at Xavier current generation of business leaders came of age under the License Raj, when running a business was more of a struggle. Labour Relations Institute (XLRI) in Jamshedpur. The banks are where the big money is, after all. Plus it’s As a result, some say, whippersnappers who haven’t had to challenging, exciting work, for a business where finance isn’t deal with the same level of frustration may seem to lack a certain level of resourcefulness and drive compared wth execua support function ... and did we mention the money? Or if those interviews didn’t go well, maybe you’ll end up tives of the old school. They’re also a bit sloppier. This may not be entirely your fault. Automation may have in the business process outsourcing (BPO) industry, where the money is also fairly good. “It’s a huge gain for the BPO made it more difficult for you to get the chance to make an industry, but it’s a huge loss for corporates,” says Gangapriya independent decision. Jonathan Trevor, University Lecturer in Human Resources Chakraverti, India business leader of Mercer’s Information Product Solution unit in New Delhi. Many of those who join and Organisations, Judge Business School, University of BPOs grow up to become process experts, not finance experts, Cambridge, speculates that automation gives finance heads more data at their fingertips, reducing the need to rely on she says. Not Indian finance experts, at any rate: if they ever do fill out juniors to make decisions. Eventually, he believes, less delegation may translate into a form, chances are it’s for a U.S. filing. They never develop less opportunity to develop the leadership skills needed to expertise that can be used outside the BPO world. Or maybe you decide to let somebody come whisk you off take charge. Hussain is not alone in feeling hard-pressed for talent. With the Indian economy rising so quickly and the reputation of Indian financial executives climbing right alongside it, the demand for financial talent continues to outstrip supply. That’s good news for senior finance people, many of whom have got used to double-digit salary rises every year. It’s not such good news for a company that needs more financial leadership—and needs it right away.

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DECEMBER 2009

WHERE’S THE TALENT | COVER STORY

THE WIPRO WAY

When it comes to financial management, Suresh Senapaty, CFO, Wipro Technologies, says his department follows these four best practices:

CATCH THEM YOUNG

Wipro has a two-year programme for young CAs and MBAs that includes classroom work and a lot of shared time. “This programme builds a great foundation for future finance leaders and also builds a great bond,” Senapaty explains.

SHOW SOME HOME-GROWN STARS

“Most of our senior executives are Wipro-veterans and have grown with the organisation and become its internal pillars and external faces. This gives confidence and aspiration to a lateral candidate that he will indeed find his home run with Wipro,” he says.

ENCOURAGE REFERRALS

“We have found that employee reference is a great source for spotting external talent. Since existing finance employees know what it takes to work in Wipro, the referrals are typically great-fits. In fact, existing employees take pride in the fact that ‘X or Y, who is doing quite well, was his or her referral’. This builds a great virtuous cycle whereby great guys refer more great guys,” Senapaty says.

STAY ON THE CUTTING EDGE

Top finance people like to be where they are doing cutting-edge work. Senapaty says that Wipro finds this to be a key differentiator. “For example, we were the first in India to implement Employees Stock Options (in the early eighties) and cash-flow hedge accounting ... we were also among the few Indian companies that published a sustainability (GRI) report ... this thought-leadership can be a great ‘pull’.”

NO ROOM FOR WALLFLOWERS Finally, after years of hard work, you get an unusual email. The boss wants to chat! Waiting in his reception room, your heart pounds. Is this your big break? Are your 15 years of blood and sweat about to pay off? No, probably not. The reason is that the skills that got you hired and promoted are not the skills you need to get further up the ladder. After all that fuss about needing you to be more careful and paying precise attention, it turns out that that’s not actually what they want. At this point, having a broader outlook, and being slightly more extroverted and outgoing, “starts to matter a lot”, says Sandeep Surana, a partner at executive search firm Heidrick & Struggles in Mumbai. Prasad Kaipa, executive director of the Centre for Leadership Innovation and Change at the Indian School of Business, puts it more poetically as a need to advance beyond the first three (of the seven) “Chakras” (energy vortices). But the bottom line is that they just don’t think you have the right stuff. Once, the CFO was not much more than a glorified bookkeeper, but today, many CFOs are more akin to a vice-CEO or a chief operating officer. Senior financial executives need the same set of social and diplomatic skills as any C-level execu-

tive—maybe even more, since finance touches every function of any business, observers say. And even if by some miracle you’re a bon vivant who has cleverly disguised himself as a sober number-cruncher all these years, you may still not be right. At the moment, companies are especially keen on people who over the past two years have developed “a deep understanding of risk and business contingencies”, says Surana. So beyond being a happy-go-lucky worry wart, companies also need advanced, specialised financial expertise. Cash management and capital formation are crucial for fast-growing companies and failures in either area can be fatal. Expertise on mergers and acquisitions is also in demand right now. Not that the boss has many other good choices. Although more Western finance people today say they are open to an assignment in India, headhunters say that not many offers are actually made. “People talk about it, but how much it happens, I have my own doubts,” says Surana. Despite regulatory liberalisation and maybe a spiffy modern office, the task of an Indian CFO is inherently more complex than an equivalent post in a more developed country—and a challenge that few foreigners, ultimately, may be prepared to take on. “The complexities they are dealing with are some-

DECEMBER 2009

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COVER STORY | WHERE’S THE TALENT

pay. At the CFO level, for example, thing that no one clearly undersalaries range anywhere from Rs 40 stands until you are in India,” says lakhs to 4 crore per year, dependMercer’s Chakraverti. ing on the industry and the size of Poaching talent from another the company, according to a recent domestic company is also easier said survey of 100+ companies by Omam than done. Although job tenure is Consultants of New Delhi. reportedly declining, loyalty remains Most companies are painfully relatively high in the country—espeaware of the need to keep up with cially after the recent economic the rest of the market. For CFOs, scare. “People are slightly more cirmedian salary increases over the cumspect,” says Surana. past five years have climbed anyThis is especially true for startwhere from 11 to 15% every year— ups. “Most countries in Asia suffer and for top performers, anywhere the same affliction, the loss of face from 18 to 30%. And even CFOs in if you join a business that doesn’t the stingiest companies took home do well,” explains Ambedkar. Today, more than 10%-11% raises in four headhunters must make a substanof the past five years, according to tial offer to get someone to make Omam’s latest data. Of this, 70% of the jump, particularly as society as “IT’S A HUGE GAIN FOR the amount is base pay on average a whole still does not take kindly to THE BPO INDUSTRY, and 30% is variable. failure. It is one reason hi-tech startBUT IT’S A HUGE LOSS In some respects, these raises are ups tend to attract more Indians FOR CORPORATES.” working. Between pay packages now returning from Silicon Valley and —GANGAPRIYA CHAKRAVERTI, INDIA BUSINESS approaching Western standards and other places abroad. LEADER, MERCER’S INFORMATION PRODUCT the prospect of foreign postings at And the situation is getting SOLUTION UNIT, ON EROSION OF TALENT more and more Indian companies— worse—or better, if you’re a finance long a coveted perk with a foreign executive looking to get ahead. company—fewer are going out of While the weak economy of earlier this year softened demand for executives for a little while, their way to look overseas for a boss, headhunters say. Not surprisingly, pay raises are apportioned unevenly, with today business seems to be picking up once more. Headhunters say orders for senior finance executives are picking up, in the riskier bets raising their offers more than blue chips. Increases vary, too, by size. Medium-sized companies are India and all over Asia. sweetening CFO salaries faster than other cap sizes now, according to Omam, and the youngest financial service companies seem particularly generous. FINDING THE TALENT But pay is not the only thing. Group recognition is also Companies are responding to the challenge of finding and important. As Napoleon noted, “a soldier will fight long and attracting talent in a variety of ways. The simplest solution, of course, is a little more of the hard for a bit of coloured ribbon”. Wipro, for instance, prouniversal solvent. Pay hikes are a clear opportunity at many vides a lot of recognition to internally promoted executives companies, as there are tremendous variations in executive (see sidebar), a hint to the new recruit that it is possible to rise in the organisation. Another measure that some companies are trying now is to offer more leadership training to prepare more people to take charge. Year 2005 2006 2007 2008 2009 The good news is that there may be hope for the wallflowers yet. Kaipa says Median 15% 14% 13% 14% 11% that he finds Indian business people on the whole are actually better able to Maxima 30% 28% 22% 25% 18% adopt a longer-term, big-picture view Minima 11% 10% 10% 10% 8% than their American counterparts. The reason, he believes, is that Indians tend Source: Omam Consultants to identify less with their job. At the

Average Indian CFO salary increases in five years

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WHERE’S THE TALENT | COVER STORY

same time, he argues that Indian philosophy encourages a bigger-picture view of society that extends far beyond one’s own job function. Other aspects of learning to be an executive can be more problematic. One of the biggest challenges: learning to see gray. Typically, says Kaipa, finance executives need to learn how to handle ambiguity. Coming from a job where the answers tend to be relatively clear, an environment where there can be a number of answers, all equally valid, can be an enormous challenge, Kaipa says. Others are more skeptical that the pool of top talent can be expanded very much, even with more pay and more training. “Yes, there is a shortage of CFO-level people in India ... but I don’t think that’s exclusive to just India,” says Ambedkar, the recruiter. “I think the talent pool world wide at the C-level ... is a very finite pool of people.”

WEIGHING THE RISKS But does all this special treatment of one group create new risks for the company—and the executives—particularly if workers begin to feel vulnerable? In Grenoble, France, for instance, workers at a Caterpillar power plant held four top executives hostage for 24 hours early this year to try to stop a plant shutdown—it ended only after President Nicolas Sarkozy offered to protect the factory. In China, in July, angry workers even beat their general manager to death, to stop a plant takeover. However, others argue that income disparity shouldn’t be much of a worry to an Indian company. Trevor at Cambridge argues that Indian society doesn’t have the same kind of egalitarian tradition that say France does. The presence of huge variations in pay by itself seems unlikely to him to have much impact on the company’s culture. Even foreigners brought in at foreign wages reportedly don’t seem to excite much envy. On the other hand, just because the plant isn’t going to riot doesn’t mean that it’s good for the company. “The evidence that incentives do actually promote long-term value creation is shaky,” warns Trevor. Misplaced incentives can turn off employees, turn off executives, and produce all kinds of terrible, unintended consequences, Trevor says. Some pundits in the country have even blamed the crash on misguided incentive systems that led traders and executives to mis-assess the risk—a heads I win, tales you lose system that was very good at generating wealth for the people running the company, but not so good at generating wealth for the shareholders. For his part, Suresh Senapaty, the chief financial officer of Wipro Technologies, says his company tries to pay well, in the third quartile, but avoids making pay the deciding factor in recruitment. “Salary is important but never a sufficient reason. This is typically the last discussion,” he explains.

“UNLIKE IN CHINA AND IN MOST OTHER ASIAN ECONOMIES, INDIAN COMPANIES HAVE TO COMPETE WITH OVERSEAS OFFERS FOR HOME-GROWN FINANCIAL TALENT.” —ROHIT AMBEDKAR, MANAGING DIRECTOR OF THE SINGAPORE OFFICE OF J. ROBERT SCOTT

THE 60% SOLUTION That’s the big picture. In the meantime, even without going back to school or reading Dale Carnegie, your boss just may ask you in with another chat. As with any market, the market for talent is all about the alternative. As goofy as you looked to him last month, this month you may be looking better. The news from the headhunter may well not have been good—it keeps getting harder to find external candidates. “Of late, there has been a surge in demand in the country and going forward we do see that this demand will continue,” says James Agrawal, consulting director and head of BTI Consultants India. In the end, your boss may have decided that you’re not so bad after all: look at Wipro, where Senapaty says the company will promote internal candidates even when that person is only 60% prepared. Or maybe your boss just got a great offer himself....

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CFO PROFILE SK JOSHI, DIRECTOR, FINANCE, BPCL

Smile WINNING

Last year, when BPCL went through one of the most turbulent times in its history, SK Joshi used his powers of persuasion to raise funds. As things look up, his newest challenge is to manage growth. ULLEKH NP

EARLY LAST YEAR, ASHOK SINHA, THE CHAIRMAN AND MANAGING DIRECTOR OF STATE-

run Bharat Petroleum Corporation Ltd (BPCL), made an SOS call to the government: we are running out of cash very fast. By next month, we will have no cash for day-to-day operations. His concerns were really grave because oil marketing companies (OMCs) such as BPCL, which buy crude oil at market prices, sell petrol, diesel, kerosene and liquefied petroleum gas at government-mandated prices and incur losses— they call it under-recoveries. Well, this was months before the going got tougher for them—the price of crude oil was yet to touch a peak of $147 a barrel; it did in July 2008.... But believe it or not, in the past 18 months, despite the tough environment, none of BPCL’s strategic initiatives were allowed to suffer for want of funds. 24

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ZODIAC SIGN: Leo LAST BOOK READ: Black Swan by Nassim Nicholas Taleb FAVOURITE DISH: Thai Prawn Curry NEWSPAPERS HE READS REGULARLY: All economic dailies and periodicals MUSIC HE LIKES: Old Hindi/ Marathi songs GAME HE USED TO PLAY FAIRLY WELL: Cricket

DECEMBER 2009

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JITEN GANDHI

Facts & Trivia

cfo profile

Some analysts attribute the phenomenon to the company’s aggressive approach. “Of all the OMCs, no other company was as aggressive as BPCL in their approach towards publicsector banks. They were pushing these banks to the wall to raise money,” says a person close to the matter who didn’t wish to identify himself or the name of the company he works for. Sinha, however, laughs off the charge, but says that “our finance team may have used their powers of persuasion, but even then there’s a limit to pushing banks to the wall”. Sinha adds, “Our team did a commendable job in these tough times.”

MAN OF ACTION

Joshi tends to get a bit self-effacing at this point about the expectations on him as finance director. He says he is first a board member of BPCL. “That is my primary responsibility,” he says. “My role as finance director comes second….” At BPCL, like in other major OMCs in India such as Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL), raising funds last year was a big challenge in order to survive, but spending money productively was a bigger challenge. S Radhakrishnan, director, marketing, BPCL, says Joshi’s role was very crucial in the past one year—it will continue to be so, he adds. In fact, in the past one year, his colleagues looked up to Joshi to deliver results. “As director, finance, Mr Joshi made sure that money was spent productively … he also made several changes to our capital expenditure plans to suit the company’s needs of the time,” adds Radhakrishnan. BPCL is India’s second-largest public-sector downstream refining and marketing company. Big as it is, the company was in a bad spot for over a year until a few month ago. As Joshi says, “Last year inventory losses were very high.… Forex losses were high too … not getting oil bonds on time also put a lot of burden on us.” The Centre issues oil bonds to OMCs to compensate for selling products at discounted rates. But, as an analyst puts it, “any delay in issuing such bonds puts finance guys on their toes to manage numbers”.

As soon as you enter his spartan office in Mumbai’s sedate, tree-lined Ballard Pier area, SK Joshi gets up to shake hands with you and then gifts you a smile that is as benevolent as smiles go. His shy demeanour, which is quite in contrast with his tough-as-nails professional approach, surfaces only when he talks about himself. Once he starts speaking about the company, for each question, there’s a detailed answer and you’ve to listen attentively so that you don’t miss some key points. He keeps reeling out numbers to explain his company’s position, then and now. Then and now—that doesn’t mean 25 years back and now. The numbers that you hear from him are from last year—the past 18 months, to be specific. “Last year was turbulent. The under-recoveries had peaked. In addition, there was volatility in overseas markets and record rise in crude oil prices,” says Joshi grimly, tapping on his table—the only sign that gave away his nervousness while talking about that period. The period he is talking about—when crude oil prices rose steadily to touch a peak of $147 a barrel last year, until prices fell to $80 levels a couple of months later—was tough for him, perhaps the toughest ever in his career and the history of his company, BPCL. “It wasn’t just tough, it was abnormally bad,” says he, rather mildly. Joshi says earlier banks used to approach BPCL, offering to lend money. “In the past one year, we had to run after banks for money.” SK JOSHI, DIRECTOR, FINANCE, BPCL

“Earlier, banks used to approach us, offering to lend money. Last year, we had to run after banks for money.”

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IN LOVE WITH NUMBERS, CHALLENGES Since the time he could remember, Joshi loved numbers. He loved math in school and wanted to pursue accounting as a career. Born in the Konkan region, he went to school in Mumbai where his parents shifted a couple of years after he was born. They wanted him to become an agriculture officer when he grew up, but Joshi had his sights set on an accounting career in the corporate world. The first challenge in his life was to convince his parents of his choice. “I was always oriented towards subjects relating to the commerce stream,” he says. He went on to graduate in commerce from M L Dahanukar College of Commerce at Vile Parle in Mumbai. A promising student, Joshi also qualified to become a chartered accountant.

ADVERSITY AS OPPORTUNITY Some measures that Joshi had initiated last year were to “bring down the deficit”. “We told the dealers that we don’t have the money to buy crude. They must pay promptly to help us sustain the business on which they depend,” he says. Soon, BPCL put in place an online collection system where the dealers could deposit money, reducing the time required for processing payments. “Not only did this improve the collection (of payment from dealers) system, but default on dealer payments also almost became history,” Joshi notes, adding that it was tough times that forced them to go for such a move. “We saved Rs 60-70 crore last year through that step,” he says. Then, Joshi and his team focused on improving supply chain optimisation to cut costs. “We also had to ensure good integration between refining and marketing. This has helped us in a big way,” Joshi says. As a result, the entire supply chain process of BPCL showed drastic improvement, cutting costs by Rs 30-40 crore last year. Joshi says since BPCL is a highly technology-intensive company, it could cut its inventory costs through appropriate use of technology. It also saved money to the tune of Rs 70-80 crore by slashing the customer-LPG cylinder ratio. “Considerable focus was put on the retail assets and capital expenditure appraisal process with a view to maximising asset velocity. This was sought to be achieved by way of additional customer-oriented initiatives,” says Joshi. This year, Joshi expects the crude prices to be stable. “If the government issues oil bonds on time, the marketing companies should be comfortable,” Joshi says. In the second

quarter ended 30 September, BPCL reported a net loss of Rs 158.8 crore, largely because the Centre didn’t issue it bonds to compensate for losses on cooking fuel sales. However, its quarterly losses narrowed from Rs 2,625.3 crore a year ago. From now on, one major challenge for Joshi is to manage growth—BPCL’s Bina refinery is expected to go on-stream in the next 6-8 months. The upgradation of Kochi Refinery Ltd is expected to be completed by June. BPCL’s upstream business is also steaming ahead and the company is getting into new arenas such as renewable and cleaner energy.

DOTING FATHER, DUTIFUL HUSBAND When he isn’t crunching numbers, raising funds or busy managing growth, Joshi is a thorough family man. A calm person by disposition and choice, he considers home as the best place to unwind and beat stress. “Whatever I’ve learnt from my parents—good value systems and the need for a good education—I have tried my best to pass them on to my children.” No wonder, his son, Suneet, has followed him to the accountancy profession after

In his 31 years at BPCL, none was as daunting as the challenge he faced last year ... some of the major measures he initiated in the past 18 months were to bring down the deficit. completing his CA. His daughter Prachi, too, is following in his footsteps to become a chartered accountant. His wife, Rekha, used to be a banker before she decided to become a home maker to take care of their children. Interestingly, like many of his PSU counterparts, Joshi, too, is reluctant to speak to the media about himself. And finally when he opens up, we learn that he loves reading management books, listens to “light” music, loves old Hindi and Marathi songs and was born on 15 August, India’s Independence Day. But we still don’t know about his favourite actors, movies, holiday destinations or, for that matter, the names of his seniors at BPCL whom he says have greatly inspired him. But you realise it is all about habits and inertia. A do-gooder, a hands-on finance chief and an admirer of the likes of former president APJ Abdul Kalam, Joshi sometimes lets his smile do the talking, unless you are asking questions about BPCL’s finances. All his life, he has talked more about his company and very less about himself. And clearly, economy with words fits his high-profile role as crisis manager at one of India’s most reputed state-owned companies.

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cfo profile

Later, he did his MBA from the University of Hull in the UK. Joshi had a short stint at Mumbai’s Tata Institute of Fundamental Research before joining BPCL in 1978, shortly after its nationalisation. “There was a lot of prestige associated with BPCL since it was a successor to Burmah Shell.” It was a career on the fast track: He was first hired for the internal audit department in the southern region, a posting that he says gave him “a good understanding of the oil business”. He also liked the job rotation policy that gave him the chance to see various facets of the finance function. “I have worked in internal audit, management accounts and corporate treasury. I have gone through several promotions before being appointed as director (finance),” says he. Most importantly, notes Joshi, the company offered numerous opportunities to excel and undertake challenging tasks. Certainly, in his 31 years at BPCL, none was as daunting as the challenge he faced last year.

inpractice

working capital TAKE A HOLISTIC VIEW, CREATE LASTING VALUE

Burzin Dubash dwells at length on ways to optimise procure-to-pay cycle of companies

orking capital is the cheapest and the most accessible finance available. It provides businesses with the crucial opportunity to pay down costly debt and regain borrowing headroom. A focus on working capital can help management drive transparency and accountability throughout the organisation. Most companies focus on reducing debtor days, delaying vendor payments and/or bringing down inventory instead of taking a more holistic view while managing working capital. Create long-term value. Focusing on working capital management provides companies the opportunity to create lasting value. Working capital is a lens through which management can examine an organisation’s productivity and efficiency. Implemented correctly, working capital management will make companies much stronger tomorrow than they are today. In order to drastically improve management of working capital, companies need to take a cross-organisational view of the cash-conversion cycle, including procurement to pay, forecast to fulfillment and orders to cash cycles. They need to break down and evaluate individual components of each element of the cashconversion cycle and then bring about lasting changes in how cash is managed. Holistic approach. The fundamental problem with enhancing working capital management is that typically the whole function doesn’t come under a single person. The responsibility for procurement, inventory manage-

PHOTOS.COM

ment, customer contracting, credit management and logistics are with different parts of the organisation, with often competing agendas. If companies want to shrink the cash-conversion cycle, they need to get everyone in the supply chain—from procurement to production and treasury through to customer service, working together and thinking like a CFO. 28

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reduction, workflow system solutions, cash flow management, internal controls and vendor (supply chain) financing. So let’s examine how businesses and their AP professionals can do justice to the following objectives:

CREATE CROSS-FUNCTIONAL RESPONSIBILITIES: Our experience has shown that companies can best manage working capital by creating cross-functional teams with the CFO as the “overall sponsor”. This helps create a common view and shared responsibility for outcomes. Team members need to collectively agree on cash targets and key performance indicators. This ensures that every team is held accountable to each other and also to the organisation. Also, it is critical that non-performance is properly dealt with; reward and compensation need to be tied to these collectively reached cash-

product paramount? Determining the key drivers for the business will guide you in your approach to managing AP.

NEGOTIATE CREDIT PERIODS SMARTLY: Your ability to optimise the credit period will be driven by a range of factors, including the relative importance and dependence of your business on particular suppliers and their dependence on your business as a customer. Where goods required in the business can be sourced from a number of suppliers there may also be opportunities to negotiate favourable terms with existing or new suppliers—who will be keen to retain or win you as a customer.

inpractice

In my previous article, I had talked about the three key processes that could be optimised in almost every enterprise to release that precious working capital. While I had dealt with inventory management previously, I will look at some strategies of optimising the procure-topay (P2P) cycle in this article. Effective management of the P2P cycle is one of the easiest ways for businesses to improve cash flow, and a regular review of policy and procedures in this area also helps in identifying further opportunities to deliver hardcore rupee savings. Creditor management is about maximising the period from purchasing goods and services to paying for them, thereby reducing working capital requirements in the business. This objective of maximising the credit period must be carefully balanced to ensure relationships with suppliers are not damaged and stock levels optimised. The accounts payable profession (if that’s an appropriate term to use) is unregulated though there are international standard-setting bodies, an example of which is the International Accounts Payable Professionals (IAPP), an association of more than 5,000 members in the US, Canada, the UK and other countries. What is interesting is that as part of its Professional Standards Framework, the IAPP has established a new definition of the accounts payable function: Accounts Payable (AP) is a strategic, value-added accounting function that performs the primary non-payroll disbursement functions in an organisation. As such, the AP operation plays a critical role in the financial cycle of the organisation. AP enables an organisation to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of the entire payables process. In addition to the traditional AP activities whereby liabilities to third-party entities (suppliers, vendors, taxing authorities, etc.) are recognised and paid based on the credit policies agreed to between the company and its suppliers, today’s AP departments have taken on much wider roles, including fraud prevention, cost

REDUCE THE NUMBER OF SUPPLIERS: By reducing the number of suppliers by striking up key strategic sourc-

Effective management of the P2P cycle is one of the easiest ways to improve cash flow ... a regular review can spot opportunities. flow targets and key performance indicators (KPIs).

HAVE A CLEAR AP MANAGEMENT POLICY: All companies should set a clear policy on creditor management that will underline their approach to sourcing and negotiating terms and conditions. That policy should take account of optimal stock holding levels (including the importance of holding buffer stocks to avoid stockouts) and timing of other cash flows within the business. The purchasing strategy should be aligned to business goals and priorities should be set. Is price the most important issue, or is certainty of supply or quality of

ing partnerships, companies can usually negotiate better payment terms, and greater reliability in terms of product quality and supply, while decreasing the AP workload and the risk of payment errors. However, care must be taken to ensure that overdependence on too few suppliers does not carry too high a risk for the business.

PARTNER WITH YOUR SUPPLIERS: Partnering with your suppliers is by agreeing to pay them on set dates— which could assist in negotiating extended credit terms for yourself. Stockholding considerations will be important in negotiating with suppliers, in terms

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inpractice

of the holding costs to both your business and the supplier. Better terms can often be agreed by negotiating purchasing agreements where commitments to take set (or minimum) quantities at set dates are made, thereby enabling your suppliers to better plan their production schedules.

BOOST FRAUD PREVENTION AND DETECTION MEASURES: AP fraud techniques have increased in recent years, as more people have learnt to penetrate AP systems and make fraudulent transactions. Companies now must protect themselves against a variety of AP fraud techniques. In response to these security issues, leading companies establish systematic antifraud controls that focus simultaneously on fraud prevention and detection. Key fraud prevention and detection measures include the following: z Publishing a clear code of ethics regarding financial fraud; z Segregating AP job functions so that no individual employees can single-handedly authorise and access payments; z Employing stringent controls to monitor AP applications; z Managing vendor master files closely to reduce potential for payment error and fraud; z Using data analytics to constantly monitor key AP trends; and z Performing random procurement audits.

USE COMPLIANCE EFFORTS AS PROCESS IMPROVEMENT OPPORTUNITIES: As an integral part of corporate finance operations, AP departments are likewise heavily engaged in compliance efforts. Rather than viewing this as a burden, however, forward-looking AP departments use compliance efforts to build world-class performance. It is important 30

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that management takes a step back periodically to critically review their operating processes and strive to bring in greater efficiencies and controls leading to an overall improved AP function.

STRATEGIES FOR BRINGING IN EFFICIENCIES IN YOUR AP PROCESS z Automate or eliminate steps in invoice processing. z Leverage technologies such as optical character recognition (OCR) and work-flow systems to digitise invoice documents. z Integrate ERP systems; use electronic invoice matching applications.

Too often, the AP process breaks down precisely where invoice processing begins. Companies commonly find themselves spending a lot of time tracking delinquent invoices or re-keying information erroneously into the AP database. Worse yet, suppliers sometimes add to the confusion by issuing a single invoice for multiple shipments or in some cases, multiple invoices for the same shipment, thus making the task of matching invoices to receipts even more difficult. As a result, companies end up wasting precious time correcting invoice errors, delaying the entire payment process. Fortunately, companies that apply best practices have found a way to circumvent the problem by leveraging infor-

By going for key strategic sourcing partnerships with suppliers, companies will be able to negotiate better terms of payment. z Implement a No-PO (purchase order) No-Pay policy. z Use electronic fund transfers for just-in-time payments to maximise your credit terms. z Rationalise payment terms to a few standard periods. z Rationalise payment-approving authorities. z Keep your payment date commitments to your vendors. z Explore payment discounts from your vendors. z Eliminate disputes; create a single point of contact within the organisation with whom vendors can interact to resolve their disputes. z Reduce errors; overpayments, payments made to the wrong vendors, fake invoices, or even late payments represent a common problem for payables. z Train personnel; provide your accounts payable staff with regular formal training.

mation systems and redesigning the AP process to automate or eliminate steps in invoice processing. Today, many electronic applications are available to integrate the procurement, receipting and payment activities and to make less burdensome the need to re-key invoice information or to match invoices with receipts manually. And, with most of the routine transaction processing tasks in AP becoming automated and process driven, AP professionals can take part in more value-added activities, including being a catalyst for cost-control efforts while at the same time ensuring strict compliance with the organisationâ&#x20AC;&#x2122;s procurement policies. THE AUTHOR IS EXECUTIVE DIRECTOR, AXIS RISK CONSULTING. HE CAN BE REACHED AT burzin.dubash@axisindia. co.in. THE VIEWS HERE ARE THOSE OF THE AUTHOR.

CHALLENGING TIMES DEMAND INSPIRING LEADERSHIP The view of business and its leaders has been damaged as a result of the financial crisis. Rebuilding trust is a prerequisite to restoring trust in the business community.

inpractice

leadership

BY JOHN H. ZENGER AND SCOTT EDINGER

BY ANOOP PC

f someone throws something at you, your natural instinct is to duck so you won’t get hit. If you start to fall, you’ll instantly grab something to steady the fall. Individuals are born with instincts. What natural instincts do leaders portray when challenging times arise? In the midst of turmoil, one natural instinct that arises within many is to pull back, act cautiously, conservatively circle the wagons and keep low to the ground. Such actions are understandable. When things are uncertain and when there are psychological brick-bats being thrown your way, the tendency to duck and hide is probably instinctive. But is that the best way to react in these circumstances? The trust of employees and society in the leadership of some sectors of the business community has been seriously eroded. Worse yet, in some cases it has been profoundly damaged. In such times, natural instincts are the least effective response. Conversely, here’s an entirely different approach—one that is based on recent research—for how leaders can impact the people within their organisations and the external clients they serve.

THE NEED FOR INSPIRING BEHAVIOUR Data collected by the authors in 2002 documents research from a database of some 200,000 multi-rater feedback instruments (360-degree feedback) pertaining to some 20,000 leaders. This extensive database provided the ability to identify 16 leadership competencies that differentiated the highest-performing leaders from the rest. Many of those who were coached after completing the 360-degree feedback instrument created a personal plan of development by which to become a more effective leader. In doing that, a frequent question was, “On which of these 16 competencies should I focus?” The research had conclusively shown that merely working on one’s lowest scores was not the best way to proceed. For at least two-thirds of leaders, it was far more valuable to work on strengths than

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leadership

Emotional connect FROM A database of 10,000 people, the authors explored the top 10% with the highest scores on the dimension of “inspires and motivates to high performance” to ascertain what behaviours separated them from the rest. TEN CHARACTERISTICS stood out, which arrayed themselves into three categories that have been labelled: attributes, behaviours and emotions that follow such behaviour. ATTRIBUTES ARE qualities that are fairly broad. You could not say to someone, “go do X.” It is a quality or characteristic that someone possessed. The three attributes are: role model, change champion and initiator. BEHAVIOURS CAN be characterised as actions that can be specifically identified; they are capable of being learned and practised by someone wanting to acquire that skill. THE SURVEY indicates that beyond the stereotypical motivational speeches, there are myriad approaches leaders can take. THE MOST encouraging news in all of the research is that there is no single way for a

leader to drive an emotional connection with his or her team as a means to inspire and motivate.

weaknesses. To which the question was often, “Which strengths?” A second stage of research was launched seeking to find the one or two competencies that make the greatest difference. Several distinct tests were utilised to find this answer. Which competencies best separated the top 10% of performers from the bottom 10%; Which competencies best separated the top 10% from those in the middle; Which competencies were most highly correlated with those leaders who had the highest scores on employee engagement and commitment; and which competencies were seen as being most important for a leader to develop in the eyes of the people who worked with that leader? What did they wish this leader did better? Remarkably, the answer to all four of the previous questions was the same: The single competency that led the list in all four of the tests described above was: “Inspires and motivates to high performance.” This response led to further research and analysis of this leadership quality. The more it was explored, the clearer it became that of all the leadership characteristics one would seek in a leader, this one had extremely dramatic effects.

WHAT INSPIRING LEADERS DO DIFFERENTLY When people think about inspiring lead32

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ership the term that often comes to mind is “charismatic.” Yes, it’s thought, “inspiring leaders have that certain something about them; they have charisma.” On the other hand, what really is charisma, and how does it add to a leader’s attributes? Asking 10 different people for their definition or description of “charismatic” will easily yield 10 different answers. Reviewing the relatively little that has been written on the subject by scholars in the past 25 years still finds widely diverging answers. Most scholars will begin with the fact that the word’s origin is Greek and it means a “gift” or to “favour,” while some will argue that charisma entails highly unconventional behaviour and personal risk-taking. Still others describe it as being highly extroverted and self-confident; some describe it as being involved in a noble mission; while others say that charisma is simply about being determined. An approach to answering the question about what inspiring leaders do differently could be described as a “reverse engineering” strategy, which is what the authors have done, drawing on their database of collected information on leaders. The first step was to identify a number of leaders in the database who are described by their subordinates and peers as being highly inspiring. Then, by taking advantage of all the other data available about these indi-

viduals, their overall patterns of behaviour were analysed to determine what they do differently. From the database of 10,000, the top 10% with the highest scores on the dimension of “inspires and motivates to high performance” were explored to ascertain what behaviours separated them from the rest. Ten characteristics stood out, which arrayed themselves into three categories that have been labeled: attributes, behaviours and emotions. ATTRIBUTES are qualities that are fairly broad. You could not say to someone, “go do X.” It is a quality or characteristic that someone possessed. The three attributes are: role model, change champion and initiator. The interpretation of these three attributes is that they describe the need for leaders to step forward and assume the full responsibility of their positions. Everyone has likely witnessed instances where people fail to do that and the consequences that follow such behaviour. For example, there are numerous cases of a strong controller or financial executive who is promoted to vice-president of finance. After a few months it becomes clear that this person is continuing to do exactly what he or she had done before, and has not accepted the full responsibility. In some cases, the person appears to be unaware of what the new position requires. In other cases, there was simply too much discomfort with leaving past practices and having to adopt new ones. Whatever the cause, the individual’s lack of stepping fully into their new role had serious consequences to the organisation. But it can often take years to fully resolve and usually means putting a new person into that role. BEHAVIOURS can be characterised as actions that can be specifically identified; they are capable of being learned and practiced by someone wanting to acquire that skill. Among these are: setting stretch goals; conveying vision and direction; communicating powerfully; developing people; practising teamwork and collaboration; and fostering

ages team members to sign up for development programmes and sends the clear signal that going there is more important than one more day at their post, that’s inspiring. When the leader delegates an assignment and makes certain that the individual receiving the task understands that part of the motivation for making this assignment was the development of this person, that’s inspiring. The message that the leader values the individual for more than the

The message that the leader cares about a person’s long-term career enhancement is extremely inspiring. This is especially valuable in finance. following year. The executives agreed that if they reached the mark, the entire company would take a week’s vacation together with partners. This lofty goal inspired everyone to put forth their best effort—and they succeeded. Conveying vision and direction seems like such an obvious and simple leadership activity. Yet, rather consistently, the research on why organisations miss their targets shows that there is a general vagueness about where the firm is headed and how each individual’s work contributes to the end-goal. Communicating powerfully comes naturally to some but not all. It takes time and demands a willingness to share information. It requires trust that the information will not be misused or used against you. The key to successful communication, however, may be in the realisation that communication isn’t solely about giving speeches, writing memos and sending emails. It is as much about asking questions and listening intently for the answers. Developing people may not sound inspiring at first. But the evidence is clear that when a leader deliberately carves out time to coach and mentor employees, that’s inspiring to the employees. When the leader encour-

work that is produced is inspiring. And the message that the leader truly cares about the person’s long-term career enhancement is extremely inspiring. Teamwork and collaboration is not a new target for managers to be concerned about. Evidence strongly shows that it not only produces better results than competition and adversarial relations; it also inspires people. Though research may not address the “why” question, it is likely because employees have more fun when working collaboratively. No one is guessing about whether it is okay to be assisting this group on this project. People celebrate each other’s success and lament any shortfalls or problems. Working collaboratively is more productive. Energy is not being sapped by politics and jockeying about who receives more credit than others. Innovation. While some believe that the average person resists change, that conclusion should be rejected. It has everything to do with how the change process is managed and how the change is perceived. In reality, most people seek some variety in what they do. When they have a hand in creating the change, and when they feel safe about things being done with them rather than to

them, then innovation and change can become very inspiring. So what are the ways that leaders can connect? One conclusion that can be made is that the more techniques leaders use, the more effective they are. The six styles of emotional engagement are: Enthusiast: expresses high energy, is outwardly passionate; Visionary: paints an enticing picture of the future and is clear about the path to get there; Principled: conveys strong personal values and encourages others to articulate their core beliefs and values; Involver: engages people, draws them in, conveys high respect; Expert: displays in-depth knowledge of the technology, stays abreast of what’s evolving in the technical arena; and Driver: relentlessly pushes to achieve goals, and meets milestones on the way. The clear message is that inspirational leaders present themselves in widely differing ways. Some are soft spoken, while others are highly extroverted. Regardless of personal style, an individual can be inspirational for a good portion of colleagues.

THE ELUSIVE QUALITY OF TRUST In The Trusted Leader, co-authors Robert Galford and Anne Seibold Drapeau provide a useful way to think about trust: They reduce it to a formula: Trust =

C+R+1 S-I

The components of the formula are as follows: C = credibility, R = reliability I = intimacy, S-I = self interest Trust in leaders is elevated when subordinates, colleagues and clients believe these leaders know what they are talking about. Trust is elevated if they are clearly knowledgeable and technically competent. Trust is further enhanced when there has been a track record of

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innovation. The steps for implementing each can be identified. The principles underlying them are reasonably wellresearched and straight-forward. Setting stretch goals. Most leaders recognise that a well-defined goal enhances motivation. What some leaders have realised, however, is the magic of an aggressive goal to which the entire team is dedicated. A small company set for itself a target to reach 30% top-line growth in the

leadership

Styles of engagement ONE CONCLUSION authors make from the survey is that the more techniques leaders

use, the more effective they are. THE SIX styles of emotional engagement, according to them, are: ENTHUSIAST: EXPRESSES high energy, is outwardly passionate; VISIONARY: PAINTS an enticing picture of the future and is clear about the path to get; PRINCIPLED: CONVEYS strong personal values and encourages others to articulate their core beliefs and values; INVOLVER: ENGAGES people, draws them in, conveys high respect; EXPERT: DISPLAYS in-depth knowledge of the technology, stays abreast of what’s evolving in the technical arena; and DRIVER: RELENTLESSLY pushes to achieve goals, and meets milestones on the way. THE CLEAR message is that inspirational leaders present themselves in widely differing ways. Some are soft spoken, while others are highly extroverted. REGARDLESS OF personal style, an individual can be inspirational for a good portion

of colleagues.

these leaders repeatedly doing precisely what they said they would do. This predictability translates into a strong feeling that such leaders are highly reliable. The final element on the top line is something the authors refer to as “intimacy” This term, devoid of any sensual connotations, describes the feeling of warmth and closeness between the leaders and their colleagues. The evidence is clear that trust goes up when dealing with someone who is not cool, distant and aloof; but who is inclusive, approachable and warm. Think for a moment about the implications of this for financial leaders. To what degree have recent events gnawed away at perceptions of credibility and reliability? Add to that the stereotype of the financial executive as a person who is numbers-focused and more uncomfortable with the “human” dimensions of business. Obviously, there are large numbers of financial executives who completely contradict this stereotype, and who are charming and often extraverted. There are also a number of financial executives who are interpersonal and distant. This gets in the way of building trust. It becomes easy to see why the top line of this equation has been diminished in so many cases. The bottom line of the equation is equally important. Everything on the top line is divided 34

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by the degree to which people perceive the motives of the leaders to be self-centered. Anger toward some in the financial community has erupted, and it will take time and genuine effort for that to dissipate. Financial executives embedded inside nonfinancial organisations have escaped that wrath in large measure. However, they have an important role to play in recreating trust toward the entire finance function. The formula above presents some valuable insights into what must be done. In some cases, the self-interest denominator is so large that it overwhelms whatever is on the top line. On the other hand, if the values on the top line are low, then trust will never be established.

OPPORTUNITY FOR FINANCIAL EXECUTIVES The role of inspiring and motivating the workforce has often been seen to be the bailiwick of the human resources function and the operating executives. Financial executives were to focus on the optimal utilization of resources, reporting processes, relations with the banking community and “the Street” and planning the financial strategy of the business. But these are not normal times. The long-term success of any business is strongly influenced by the level of commitment and engagement of its entire

workforce. The language and behaviour of key financial executives is no longer hidden within executive suites and boardrooms. In these days of “twitter” and blogs, the words of an entire executive team can become known immediately. In this environment, financial executives have a great responsibility and an even greater opportunity. Recently, a senior financial executive was extremely outspoken about the operating challenges of his organisation and his disdain for a good deal of the behaviour of the firm’s chief executive officer. His view was that he was merely being honest. In reality he was being destructive. Those who were aware of his views were dispirited. Some left the organisation. There were many other far more constructive ways in which he could have made his views known and influenced the direction of the firm. To be sure, financial executives should not provide misleading information or put a positive spin on circumstances that do not deserve it. But it is also easy to become so objective and focused on the negative, that positive messages get completely lost. The greater hope is that wherever warranted that the financial executive could help to broadcast uplifting and encouraging messages. Such an impact on the esprit de corps of the business is huge. It extends beyond those who report directly to the senior finance executive, and goes directly to all levels and functions in the firm. Wherever and whenever possible, executives need to give people something to believe in and to hope for. In other words: as a leader, provide inspiration when you can. ABOUT THE AUTHORS John H. Zenger, D.B.A., a member of the HRD Hall of Fame, is CEO of Zenger Folk-man, a firm that brings empirical research, innovative development methods, and software tools to leadership development. Scott K. Edinger is executive vice-president at the firm, where he consults with Fortune 500 companies to initiate and implement large-scale performance improvement and leadership initiatives. This article is first published in Financial Executive magazine (July/August 2009). Reprinted by permission.

inpractice

taxation EVERYTHING YOU WANT TO KNOW ABOUT GST

One of the most important tax reforms ever proposed, GST is expected to spur economic growth BY SACHIN MENON AND KOSHAL AGARWAL

he proposed Goods and Services Tax (GST) will be the single-most important tax reform in India after the introduction of Value Added Tax (VAT) in 2005. GST is expected to boost Indiaâ&#x20AC;&#x2122;s economic development by breaking existing trade barriers between the states. GST was originally scheduled to be introduced from 1 April 2010. However, Finance Minister Pranab Mukherjee has indicated that while the government and the states are serious about introducing GST, he would not be surprised if the implementation is delayed by a few months. On 10 November, the Empowered Committee of State Finance Ministers released a discussion paper on GST, summarising the broad contours of the proposed reform.

TAXES TO BE SUBSUMED Currently, excise duty is levied on the manufacture of goods, VAT/CST (Central Sales Tax) on the sale of goods and service tax on the provision of services. Further, there are several other taxes that are levied on various transactions such as Octroi, entry tax, entertainment tax, additional duty of customs, surcharge and cess. The discussion paper provides that excise duty, VAT/ CST, additional customs duty of customs under sections 3(3) and 3(5) of the Customs Tariff Act (SAD/CVD), entry tax, surcharges and cess would be subsumed by GST. This means that customs duty, Octroi, electricity duty, toll tax,

royalty, stamp duty, passenger tax and road tax and so on will remain outside the GST regime.

GST STRUCTURE PHOTOS.COM

India will have a dual GST system, which means taxable value of all economic transactions (except those that are exempted/excluded) will be taxed by the Central government (CGST) and state governments (SGST) simultane36

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SUPPLY OF INTER-STATE GOODS AND SERVICES GST would be a destination-based consumption tax; hence, the taxation of inter-state supply of goods and services is critical.

Under the proposed reform, though GST is to be levied in the destination state, the origin state should allow for a refund of various taxes paid on the manufacture/or procurement of goods. Considering the difficulty in providing refund etc., a new concept, integrated GST (IGST), could be also on the cards.The Central government will levy IGST on all inter-state transactions, including goods and services. IGST will be a combination of CGST and SGST. The inter-state supplier of goods or services will levy IGST on inter-state transactions and the IGST liability can be discharged by the supplier by availing of tax credit of the IGST, SGST and CGST paid on procurement of goods and services, locally or inter-state. Further, all supply of services and goods for a consideration would be subject to GST. It follows that stock transfer of goods from one state to another would also be subject to IGST, which otherwise would have resulted in accumulated input credit. IGST charged by the supplier would be eligible as tax credit to the buyer of goods/services and IGST paid on inter-state transactions—it can also be adjusted against out-

house every month based on the details provided by the assessee.

TAX CREDIT GST will expand the tax credit base and it is expected that it will be a true value -added tax, which means all the relevant taxes paid by the entrepreneur will be allowed as set-off against output tax liability. GST paid on the purchase of goods would be eligible as tax credit to the service provider and vice-versa. GST will iron out the various existing issues relating to the classification and valuation of goods and services. Currently, the taxation of various economic activities is exposed to dual taxation where VAT and service tax—both— are levied. Under the GST regime, the classification of an economic activity as goods or services will not be relevant as long as the applicable GST rate on goods and service is same. It is now time for the industry to be prepared for implementing GST and take active steps. Various action points for the industry include mapping of GST’s impact

GST will be a destination-based consumption tax ... in this reform, taxation of inter-state supply of goods and services is critical. put CGST, SGST/IGST liability. IGST will require setting up of a Central government clearing house. The transfer of funds will essentially happen between a state and the Central government’s clearing agency. In the IGST model, the Central government will play a dominant role through the clearing agency for settling inter-state transactions. As each state is an importer as well as an exporter, only the net sum will be transferred to respective states. This will be calculated by the clearing

on business models, product pricing, sourcing patterns as well as to scale up IT systems required to comply with the GST returns and record keeping. SACHIN MENON IS EXECUTIVE DIRECTOR, TAX AND REGULATORY SERVICES, AND KOSHAL AGARWAL ASSISTANT MANAGER, INDIRECT TAX, PRICEWATERHOUSECOOPERS

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ously. GST could be levied in the range of 16%-20%: the Centre will levy CGST at the rate of 8%-10% and the states will levy SGST at the rate of 8%-10%. It is expected that a lower rate of 4%-5% would be applicable to essential goods. The introduction of GST will have a far-reaching impact on the services sector since it will be levied GST by both the Central and state governments at a cumulative rate of 16%-20%; currently it is subject to a tax at the rate of 10%. The discussion paper provides that tobacco products will be covered under the GST regime along with a non-VATable additional levy of excise whereas alcoholic beverages and petroleum products will fall outside the GST regime. Supplies to SEZ units will enjoy zero-rated status in the GST regime (taxes paid on procurement will be refunded; there won’t be any tax on output). Further, imports under the GST regime would be subject to CGST and SGST and that means countervailing duty (CVD) and additional duty of customs (ADC) would be replaced by CGST and SGST. Further, the GST paid on imports will be eligible as tax credit and would be allowed as set-off against output tax liability. The draft paper envisages that the existing special industrial area incentive schemes will continue to its expiry date though not necessarily in the same form. However, it also envisages that no new exemption/ remission will be allowed. It also envisages that a threshold of Rs 10 lakh both for goods and services should be applied at the state level. Further, at the Central level, a higher threshold is envisaged: Rs 1.5 crore for goods and a similar higher limit is expected to be applied for services.

insight THINK REGIONALLY, ACT LOCALLY

The most successful global consumer enterprises are radically reshaping their organisations and business models to suit Asia’s rapidly evolving high-growth markets

sia’s emerging economies are leading the world out of recession, and the region’s consumers are taking the baton from their overextended counterparts in developed countries. Are the largest global consumer enterprises ready for this momentous shift? McKinsey’s experience suggests that even the most sophisticated multinational companies must change significantly to realise Asia’s growth potential. The region is as diverse as it is vast. Its markets come in a bewildering assortment of sizes and development stages, and its customers hail from a multitude of ethnic and cultural backgrounds. Their tastes and preferences evolve constantly. The speed and scale of change in Asian consumer markets can surprise even experienced executives. To meet the challenge, global companies will have to organise themselves regionally to coordinate strategy and use resources in the most efficient way while at the same time targeting the tastes of consumers on a very local level. In Asia’s high-growth markets, these companies face intense competition from low-cost local players; customers with modest incomes, disparate preferences, and minimal brand loyalties; and fragmented distribution channels. Some of the problems will recede as the region’s economies mature. For now, though, the savviest players are trading their old management practices—including largely independent country operations and centralised administrative structures—for leaner, faster, more flexible, and regionally

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BY TODD GUILD

collaborative ones. They are strengthening their in-country operations while creating small, fast, and entrepreneurial regional leadership teams, which at their most successful adeptly allocate resources across markets, leverage scarce executive talent, drive innovations from one market to another, and relentlessly cut costs. Four general principles sum up the changes needed to reach Asia’s new consumers through a strategy that’s both regional and local.

GO WHERE THE GROWTH IS Asia won’t replace the United States as the lead engine of global growth—at least not for five to ten years. At the end of 2008, the GDP of the whole of Asia was just under $14 trillion, roughly the same as the GDP of the United States alone. Private consumption accounted for only about half of Asia’s GDP, compared with 72% in the United States. Asia’s three billion people spent less than $7 trillion; America’s 300 million, upward of $10 trillion.1 If Asia fails to stoke internal consumption, the region may grow more slowly over the next decade than it did in the last (see “Japan’s Frustrations in China”). Yet some observers think private consumption in the region’s emerging economies could grow enough, as early as this year, to offset falling consumption in the United States and the European Union. Even under dour assumptions about the prospects for Asian economies, the region is likely to contribute more than half of all growth in global consumption by 2020. Such macroeconomic perspectives understate Asia’s significance for individual companies.

In dozens of product categories, the Asian consumer is already global king. China is the world’s biggest market for many household products, including TVs, refrigerators, and air conditioners. This year, for the first time ever, China will probably top the United States and Japan as the world’s largest automobile market by number of vehicles sold. China’s rank may slip back again as sales in those two advanced economies recover. Even so, with China’s car ownership at fewer than 14 vehicles per thousand citizens, compared with more than 400 per thousand in the United States, the longterm trend is clear. For manufacturers such as GM and Volkswagen, which made big bets in China early, booming sales there help offset home market losses. Later arrivals like Ford and the big Japanese carmakers are scrambling to catch up. No company illustrates Asia’s potential better than Yum! Brands, the proprietor of KFC and Pizza Hut. KFC opened its first restaurant on China’s mainland in 1987, now operates 2,497 in the coun-

The past decade was a time of market entry and gradual increase in scale. In the coming decade, overseas players will push for market leadership. India’s consumer market lags behind China’s by five to ten years, but similar stories of booming growth are unfolding there. Already, India is the world’s fastestgrowing mobile-phone market, adding more than ten million new subscribers a month. Its top consumer companies, including Hindustan Unilever, Nestlé India, Godrej Consumer Products, and Colgate Palmolive, have posted cumulative annual growth rates of 14 to 19% over the past five years while sales at the country’s leading retailer, Pantaloon Retail, soared by 68%. Throughout Asia, products and market segments are growing explosively, in sudden waves of 70 to 100% expansion that could run for years. Global businesses that can’t ride those waves may drown in them.

insight

Global companies must revamp their corporate structures so that operations in Asia enjoy a high status commensurate with its long-term profit potential and have the autonomy needed for significant results. They have to focus on growth opportunities in urban clusters. Their products and prices must be tailored to local preferences. Finally, they must learn how to market, sell, and distribute products through a variety of channels and retail formats. For global consumer companies, building this kind of regional–local structure can be an enormous challenge—but it can’t be ignored. Instead of treating Asia as a sideshow, they must act on the assumption that success in Asian markets is necessary for survival.

Companies must revamp their corporate structures so that operations in Asia enjoy a high status commensurate with its profit potential. try (compared with 5,253 in the United States), and counts on it for nearly 30 percent of global revenue. Yum!’s total sales there, which soared 31% last year, helped the company shrug off the US recession. Chief executive officer David Novak, who tells investors that Yum!’s business in China is merely “in the first inning of a nine-inning ball game,” vows the company will eventually have more than 20,000 restaurants in the country. He says KFC in China “can be every bit as big as McDonald’s in the US.” But for many global companies with operations in China, a new phase is about to begin.

CHANGE THE GAME Asia’s emerging markets are a hypercompetitive free-for-all. Local rivals offer products with incremental innovations in ever-shorter product cycles—typically, at prices global companies find hard to match. Consumers don’t know established global brands and show little loyalty to the brands they do know. Marketing strategies are complicated by the uneven development of Asia’s telecom networks. The predominance of small, familyowned retail outlets thwarts efforts to control the distribution and display of products. For global consumer giants,

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fidelity to methods that work back home can be futile.

LEVERAGE INNOVATION AND TALENT THROUGH REGIONAL TEAMS One key to success is rethinking organisational models. Many global companies try to use an international division run from the global home office to supervise their operations in Asia. Companies with large operations there may well have a regional headquarters, but often it oversees an assortment of country-specific fiefdoms that don’t collaborate and sometimes operate in their own languages, frustrating communication. For Asia, that’s often the worst model, leaving C-level executives at headquarters two layers from the most important growth markets, oblivious to the speed of change and the scale of the opportunity.So global consumer companies are experimenting with alternative management practices and organisational models to ensure that Asian operations get the capital, talent, and C-level attention they need to compete. Some companies organise Asian operations as independent business units, with their own capital budgets, partnerships, and P&Ls. Yum! Brands, for instance, has three divisions: the United States, China, and elsewhere. In 2008, after years of running retail operations in China and Japan separately, WalMart Stores established an Asia office in Hong Kong to spread best practices across the region. Often, successful Asian organisational models involve teams of senior executives with diverse cultural and market experiences, who work together to improve performance throughout the region. These regional teams set priorities, as well as mobilise expertise and resources to achieve scale advantages that can’t be realised at the level of any single Asian market. They plan strategically; drive supply chain and cost-cutting initiatives; oversee recruitment, product development, and strategic alliances; 40

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and make crucial decisions about distribution channels, formats, and categories. Collaboration and a sense of entrepreneurial pace characterise these regional teams. Top executives and specialists hop around markets, encouraging product designers in China, for example, to learn from innovations in Japan or a supply chain leader in India or to investigate techniques that simplified operations and lowered costs in

Malaysia. According to many executives, getting managers throughout the region to speak a common language is essential for spreading such best practices.

THINK CITIES, NOT REGIONS OR COUNTRIES To be effective in Asia, consumer companies must think regionally but sell locally: they do better by focusing on

Japan’s frustrations in China Japanese companies were among the earliest to enter China when it opened its doors to foreigners, three decades ago. The leading Japanese brewer Suntory, for example, was the first foreign company to form a joint venture in China’s beer market. Lawson, Japan’s second-largest convenience store chain, was the first overseas retailer to get a franchise in Shanghai. But discouraging experiences in the early years created a sense of skepticism about the prospects for long-term success. Today, Japan’s consumer companies lag far behind their global rivals in China, despite that early market entry, geographic proximity, and the Chinese consumer’s high regard for the quality of Japanese brands. A McKinsey analysis of 12 consumer-facing industries found that, except for a few standouts in areas such as automotive and skincare, Japan’s leading consumer companies struggle in China. Some have abandoned hope of building successful businesses there and are focusing on other areas, such as Southeast Asia. Sectors where Japanese companies have had particular difficulty include packaged foods, personal care, household care, PCs, and mobile handsets. A McKinsey survey of senior executives at more than 30 leading Japanese companies (primarily in the consumer sector) found that the respondents generally saw China as an essential market. Yet many acknowledged that their companies had experienced only limited success there and expressed feelings of frustration, even futility, about the possibilities for improvement. A surprising number thought it was too late to establish a significant presence. Almost all the respondents expected less than 10% of their companies’ revenues to come from China over the next three to five years; more than half said less than 5%. More than 70% of the respondents thought that now is the right time for further investments in China; 21% said that it’s already too late or that they felt unsure whether investments make sense now. Sixty per cent reported that Chinese nationals accounted for less than a tenth of the executives their companies employ in China. Only 25% said that they have programmes to let Chinese executives spend time in Japan. Respondents at just two companies characterised their Chinese operations as “highly independent” from headquarters. Many respondents expressed frustration with China’s weak legal and regulatory systems, but they acknowledged the problems their companies have in managing government relations, attracting capable Chinese employees, and tailoring products to the needs and budgets of local consumers. Those difficulties are all the more striking given China’s strategic importance to companies based in Japan, whose home market is mature and shrinking. For many Japanese consumer companies, success in China could prove the key to global competitiveness—or even survival. —By Brian Salsberg. He is a principal in McKinsey’s Tokyo office.

where they lived predicted their spending habits reliably. People who lived in Beijing, Shanghai, and other first-tier cities, for example, tended to buy similar products. Over the next three years, as the number of China’s middle- and high-income households tripled, geography became more important. By 2008, city of residence predicted 9 out of 12 of these attitudes. Thus, in recent years, the market for premium refrigerators has grown by 20% in Shanghai but by only 8% in neighboring Nanjing. Consumers in Guangzhou are much more likely to buy cameras with sophisticated LCD screens than those in Shenzhen, another first-tier city only 100 kilometers away, who demand portable, thin models. Global companies must think carefully about where and how to play in Asia’s urban markets.

CUSTOMISE LOCALLY, DON’T TWEAK Long gone are the days when global companies could charge Asians a pre-

speakers and, to keep prices competitive, less costly displays. The company marketed many other original products, including appliances with programming menus in local languages, refrigerators with brighter colours and smaller freezers, large washing machines for India’s big families, and microwaves with one-touch “Indian menu” functions. Those innovations were possible because LG invested heavily in local R&D and staffed its operations with thousands of top-notch Indian designers and engineers. LG’s product innovation centre in Bangalore is the company’s largest outside South Korea. The company is India’s market leader in TVs, refrigerators, air conditioners, and washing machines. Local design is all the more important in Asia because customers in many of its markets expect a very wide variety of offerings and short innovation cycles. Yum! Brands’ Pizza Hut restaurants in China sell as much Chinese food as pizza, and in 2004 the company launched a new chain, East Dawning, that serves only Chinese food. KFC tai-

insight

urban clusters than by conceiving of an entire country as one market. In recent years, many multinationals have tried to understand Asian markets more precisely by dividing them into subnational megaregions or attempting to craft multitier urban strategies based on population size or household income. Because these approaches miss crucial variations in consumer preferences and behaviour, resources are invested less than optimally. McKinsey’s experience suggests that in Asia, urban clusters are the most appropriate strategic and marketing unit for consumer businesses. Often, we advise clients to forget the forest and see the trees. In developed and emerging Asia alike, cities are by far the dominant nodes of mass consumption, and their importance will surely grow. In Japan, more than half of all consumers live in Tokyo or Osaka. A fifth of South Korea’s live in Seoul. In China, the McKinsey Global Institute estimates, more than 350 million people will leave the countryside by 2025, creating more than 23 megacities with populations upward of 5 million. In India, more than 700 million people will make the same journey by 2050, creating as many as 36 megacities. The scale of these migrations has no precedent. They will create huge opportunities for global consumer companies—but also huge headaches. After pouring into the cities of China and India, the migrants will assume new social identities. They will be open to new foods, fashions, forms of entertainment, and ways of living, but they will be fickle customers unfamiliar with established brands. Asked to identify the top contenders in apparel, Asia’s new urbanites are as apt to name local upstarts as, say, Louis Vuitton or Gucci. As they prosper, their preferences will probably grow more diverse. In 2005, when McKinsey initiated extensive surveys of Chinese consumers, we found that the size and GDP of the cities

To be effective in Asia, consumer companies must think regionally but sell locally: they do better by focusing on urban clusters. mium to buy products designed for consumers in developed markets. It’s not enough even to tweak existing product lines for Asian sensibilities. Success now requires the ability not only to understand regional and local tastes and preferences but also to design products and services in Asia. South Korea’s LG Electronics struggled when it came to India in the 1990s until a change in foreign-investment rules enabled the company to invest in local design and manufacturing facilities.3 Noting, for example, that many Indians use their TVs to listen to music, LG introduced new models with better

lors menus to local palates and launches new items every month. Tingyi, the Taiwanese company that is the mainland’s leading instant-noodle vendor, used local designers to reshape a whole product category, creating separate premium and low-cost brands. In Asia, price is a crucial part of customization. For all but a few categories, volume—not a high profit margin—is the key to sustainable success. Products in categories such as apparel, automotive, and consumer electronics are sinking to price points that were unthinkable only a few years ago. What’s more, sophisticated consumer companies like

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insight

P&G and Hindustan Lever have repeatedly found that compelling entry-level products and brands are essential for attracting consumers to higher-priced ones, often by “de-engineering” premium products to focus on the features and attributes that Asian customers value most. P&G, for example, cut the price of Crest toothpaste more than 50 percent in China by reducing the cost of packaging, which is less important to consumers than being able to choose from a variety of flavours. Financing can play a role too. Levi Strauss recently announced that it would let customers in India pay in three monthly installments for jeans costing more than $33. A pilot version of the programme, in Bangalore, showed the company that consumers who took advantage of this option spent an average of 50% more. In pushing prices lower, supply chain management matters no less than financing and design. Asia’s savviest consumer businesses have embraced the techniques pioneered by fast-fashion retailers and Japanese automakers in picking up the pace and lowering the costs of the entire supply chain. LG, for instance, has shortened order-fulfillment cycles in Asia from months to just weeks. Retailers and consumer product companies are learning that fast supply chains for some categories assure fresher products and a quicker response to trends in everything from fashion to consumer electronics.

LEARN TO MARKET AND SELL ACROSS A VARIETY OF CHANNELS Penetration rates for traditional and online media are lower in developing Asia than in developed markets, so efforts to influence purchase decisions are more complex. Consumer companies must be adept at shaping the consumers’ view of brands across a number of channels and through a variety of media—not only TV, radio, print, and the Internet, but also events, outdoor ads, mobile messaging, in-store promo42

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tions, and educational campaigns. Managing this shift to multichannel retailing and sales calls for new approaches to marketing and brand building. Modern retail chains account for only about a third of all consumer goods sales in China and for less than a fifth in India; small, family-run shops are much more important. In all formats, consumer product companies must somehow influence access to shelf space and display, since point-of-sale factors have an ever greater impact on purchase decisions. For now, key-account management is less important in Asia than it is in developed markets. Many global companies get things wrong because they attempt to rely on the sales teams

its products door-to-door through a network of 300,000 sales representatives. As Asia’s economies evolve and mature, today’s frenetic, hypercompetitive, fragmented marketplace will inevitably give way to a more settled one, with fewer players enjoying larger market shares and better margins. The penetration of modern retail formats will increase. But the journey will be long and filled with twists and turns. As the winners learn to make decisions quickly to meet the demand for speed, scale, localisation, and low costs, they will test and adopt new and more entrepreneurial management practices. These companies will probably share four characteristics.

Long gone are the days when global companies could charge Asians a premium to buy products designed for consumers in developed markets. of third-party distributors and the keyaccount-management routines that worked at home or in the past. Adapting quickly to capture growth from direct-to-consumer channels will also probably become more important in Asia, as it already is elsewhere. In some urban clusters, for categories such as consumer electronics and apparel, online sales growth is beginning to overtake traditional channels. In Japan, sales in direct channels have exceeded those in department stores so far this year. Sales at TaoBao, China’s largest online retailer, have soared to more than $14 billion annually since it was launched, in 2003. Lancôme reports that its partnership with Baidu, China’s largest search engine, helped lift online sales in China by 30%. And AmWay has become one of China’s largest consumer packaged-goods companies by selling >>For more articles on this topic, see www.cfo-india.in

Their fast, adaptive business models will leverage scale and innovation throughout Asia, and regional organisational structures and operating practices will reflect this shift. But resources will be focused locally, on the development of category, format, and brand strategies targeting the explosive growth opportunities of sharply defined urban clusters, not countries. Products tailored and priced to meet cluster-level tastes and needs will be supported by faster, lowercost supply chains. Finally, brand marketing skills will be used to market and sell across a variety of channels. For global consumer businesses, the struggle for Asia has now been joined—cluster by cluster, city by city. ABOUT THE AUTHORS

Todd Guild is a director in McKinsey’s Tokyo office. The author wishes to acknowledge the contributions of Yuval Atsmon, Tiffany Lee, Jennifer Li, Evelyn Lu, Max Magni, Ireena Vittal, and Ming Zhang to this article. This article is first published in The McKinsey Quarterly 2009 Number 4 and is also available on the McKinsey Quarterly website, www.mckinseyquarterly.com. Copyright © 2009 McKinsey & Company. All rights reserved. Reprinted by permission.

big picture

Questions that every CFOshould ask the CIO A survey reveals a huge lack of coordination between CFOs and CIOs. It is time they develop a joint focus to forge ahead, it concludes. ULLEKH N P

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big picture

“If the finance team isn’t working with IT people in every step, the application ends aren’t quite as useful as they’re otherwise.” —Nancy Cooper

IF ONE STOPS AND THINKS ABOUT IT, INFORMATION Technology (IT) is not only a business in itself, but is also very crucial for every business. It supports business processes such as book-keeping, forecasting sales, specialised sectorspecific needs, ordering, banking, shipping, customer-relationship management—its role is much more than what we could have imagined a decade ago or more. While it is quite true that information and information systems help boost a company’s efficiencies in a big way, a lot of that depends on how good its business functions are at tapping IT’s vast potential. Let’s pick one, the finance function, to get the hang of things. It is common knowledge that finance departments across sectors—and across geographies—have become highly dependent on IT for everyday operations and for ensuring data security, among others. And finance professionals, good that they are at the art of speaking, could go on and on about the role that IT and business intelligence play in their operations with admirable skill. Now, let’s ask them a blunt question smoothly to get the truth: do they really sit across the table for a dialogue with their counterparts in the IT department? Do CFOs discuss with chief information officers (CIOs) strategies for improving corporate performance? The answer should have been a clear yes, considering that turbulent times such as these call for smart measures and cohesive moves to respond rapidly to constantly changing market conditions. A recent survey among India’s finance professionals by 9.9 Media, based on CA’s CFO Nancy Cooper’s observations on global technology trends, reveals that though CFOs are aware of the finance function’s dependence on information and information systems, they don’t spend enough time in working together with CIOs to take stock of IT-related failures or vulnerabilities. The survey, which examined the dependencies and apprehensions that Indian CFOs have on their companies’ IT infrastructure, was aimed at formulating some key questions every CFO must ask the CIO.

Questions from NANCY COOPER, CFO, CA

1. How is your IT investment aligned to business strategy? 2. How does it give the business competitive edge? a) Does it provide the quality of information that helps an organisation make better decisions? b) How does this investment improve corporate governance, lower risk and ensure compliance? 3. What are the long-term benefits of outsourcing and what value does it bring to the company’s operational and financial efficiencies? 4. Have you considered the total cost of ownership of your investment beyond capital cost? 5. Are we leveraging IT to reduce our carbon footprint?

ANATOMY OF THE SURVEY The questions that were put to CFOs—to arrive at questions that they in turn should ask CIOs—included: A) Whether CFOs believed that the quality of their output and timeliness of its delivery are influenced by the quality of hardware/software, controls, etc. B) Do they rely on IT controls to perform their duties? C) Do they think that an IT-related failure can severely impact their ability to provide reliable data? D) Are they satisfied with their team’s ability to execute co finance activities such as constantly tracking return on investment (RoI)? E) Do their companies’ processes and technologies support the following management reporting objectives?

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big picture

Are you satisfied with your finance team’s ability to execute your core finance activities? (1= strongly disagree 7=strongly agree)

4.9

Tracking RoI Ad-hoc analysis and decision support

5.1

Planning, budgeting and forecasting

5.5

External reporting

5.7

Regulatory compliance

5.7

Transaction processing

5.8

Management reporting

5.8

Financial consolidation

5.8 0

Finance professionals continue to face problems while forecasting, planning and tracking RoI.

Which of the following problems inhibit your company’s ability to change its financial analysis and reporting systems? (in percentage)

Overly complex, disparate IT systems

Organisational resistance to change

End-user resistance to new technology

Lack of time, budget and resources

Other initiatives are top on the agenda

47 0

NANCY COOPER AND OTHER DELEGATES AT A MEETING HELD TO DISCUSS THE RESULTS OF THE SURVEY

F) Which are the problems that inhibit a company’s ability to change its financial analysis and reporting systems? G) Are they able to perform certain finance functions in a timely manner? CFOs surveyed did say that their work is highly dependent on their companies’ IT infrastructure, but they often don’t bother to work together with their IT departments to ensure what Cooper calls the crucial “adequacy of reporting financial information” in time. According to Cooper, “IT people are very excellent at installing the code and bringing it up, but if the business people aren’t working with them every step of the way, the application ends are not quite as useful as it 46

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One major hurdle in the efforts to improve systems within an organisation is that CFOs don’t place financial analysis and reporting systems high on their priority list.

would be if you have finance people involved.” Cooper was speaking at a meeting held to discuss the results of the survey. The participants of the survey also agree that any inefficiency in IT output has a multiplier effect, a point that is raised by the likes of Rajendra Prasad, president and CFO, SRF Ltd. He says there’s “too much at risk if the IT systems come down”. The first question Prasad wants to ask his CIO is whether his “collective systems” provide CIA. Here C stands for confidentiality, I for integrity (which ensures that no one can alter data without authorisation) and A for availability, which encompasses backup, security and protection. The participants state that they are acutely aware of the

Are you able to perform the following finance functions in a timely manner?

big picture

Do your processes and technologies support the following management reporting objectives?

(1= strongly disagree 7=strongly agree)

Allow what-if/ scenario analysis

Adjusting hiring budgets to reflect changing work requirements

3.8

Give end-users flexible desktop access to additional information

Providing metrics needed to track and reward employee performance

4.5

Prepare unimpeachable reports on actual business performance

4.4

4.5

Obtaining company-wide agreement on definitions and approaches related to risk management

4.7

Provide end-users with line-item detail on budgets and results

4.8

Setting authorisation levels to allow more distributed decision-making

5.1

Prepare reports useful for decision-making

4.9

Working with business units to make budgeting more flexible

5.3

Allow managers to control access

5.1

Using automated systems to consolidate financial results

Prepare timely reports on actual business performance

5.3

Maintain data security

5.3 0

5.4

Providing information needed by lenders, investors and strategic partners

5.9 0

Forecasting and analysing multiple scenarios are other areas of concern for CFOs.

effects of IT-related failures and the need for an IT recovery plan. So, one crucial question by a CFO to a CIO is: is there such a mechanism in place? If the CIO has no such mechanism in place, the continuity of the organisation is at risk in case there’s a massive systems failure.

ANALYSING RETURN ON INVESTMENT While most CFOs concede that improving access to realtime information is crucial for tracking return on investment (RoI), they aren’t satisfied with their own team’s ability to analyse RoI which has become crucial in these bad times when every penny counts in a company’s efforts to weather the storm. Therefore, another question to the CIO can be on the quality and timeliness of information which ensures near-perfect financial analysis—for charting out future strategies. Most CFOs also say the processes and technologies at their companies don’t support efforts to handle uncertainty and in giving end-users access to detailed information about their products. In that context, a question that CFOs ought to ask CIOs is how they envisage bringing in more scalability and flexibility in their functioning.

There is definitely a need for further integration among various departments to enable greater flexibility and quicker response to issues.

The CFOs surveyed also contend that financial analysis and reporting systems aren’t high on their priority list—and that is hurting their companies’ ability to change financial analysis systems. How can CFOs help CIOs in establishing a better connect and generate better results is a pertinent question that is certain to crop up.

CONCLUSION In these times of market failures, fears of many more corporate disasters and other economic complexities around the world, including in India, it is crucial that finance professionals work hand in hand with various other departments in their companies, especially the one that provides real-time information, to tide over or prepare to confront crises. There has to be a joint focus, without getting lost in jargons—both CFOs and CIOs have to change the metrics they use to run their departments to make their companies more efficient and competitive. In fact, this study makes a compelling argument that CFOs should ask the right questions to CIOs. And that is, beyond any doubt, the first step in the right direction to meet, and perhaps beat, each other’s expectations.

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LEADERâ&#x20AC;&#x2122;S WORLD WINNING MINDSE T S

Think Talk well,

in style

You may be a walking encyclopedia, but it is your negotiation skills that give you an edge in business

ABOUT THE AUTHOR David Lim, founder, Everest Motivation Team, is a leadership and negotiation coach, best-selling author and two-time Mt Everest expedition leader.

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DECEMBER 2009

WHILE BUYING (OR SELLING), KNOWING SOME OF THE MOST common 30-odd negotiation tactics and strategies will help you win at work. They represent the single-most powerful force behind driving up the bottom line, or impacting your budget. Here are some negotiating principles and tips to help you surf your way to a better conclusion. This article is aimed at helping you look holistically at what great negotiators doâ&#x20AC;&#x201D;and how you can use that information to improve your skills or staff processes.

DEAL WITH PEOPLE AS THOUGH THE TIES WILL BE FOR LIFE Where there is a gap (I call this the agreement gap) between what you want and what another party wants, approach the negotiation from a perspective that the relationship is for life. Adopting this principle changes your entire approach in the areas of respect, cordiality and rapport-building processes.

STRATEGIES AND TACTICS

PRINCIPLE 2 RECOGNISE FEELINGS AS FACTS Take no personal offence if your initial offer is turned down. As long as both of you are still talking, it means the other party still wants a solution, but maybe not yours. While negotiating with your staff, appreciate that certain feelings held by them may be so strong. Do not discount these feelings.

PRINCIPLE 3

While negotiating, be absolutely clear about the strategy you want to adopt. Some work better than others, depending on the other side’s negotiation style, and interests. SOME CULTURAL ASPECTS The Indian style of negotiation may be at odds with a more Western approach. For example, a less patient American counterpart may not like the Indian style of taking time to analyse a proposal in detail. In addition, if evidence from a 2004 study is anything to go by, the Indian negotiator ranks last in being sensitive to time considerations. Here are a few of the 30 strategies we use to help people improve their efficacy in closing the agreement gap: REPEAT THE OFFER AGAIN, FOLLOWED BY A PAUSE: “You’re offering Rs 10 lakh?” Resist saying anything after the pause. Many parties will often improve their offer. CHANGE THE SHAPE OF MONEY: A payment can often look more attractive if the terms of the payment can be adjusted in other ways—like payment in instalments, staggered payments, using monies from the tail-end of a financial year and combining it with funds from the following financial year. TAKE A BREAK: A good break to reassess the situation can lend some clarity of thinking. OFFER MORE THAN ONE OPTION: An impasse on one set of terms can be broken if you have already prepared a number of other options, each with different trade-offs. MAKE A COMMENT ON THE OFFER: Imagine a staff member requesting a week’s leave when you can only afford to have him take two days’ off. I would say, “A week? A week? Hmmmm ... that’s a long time”. I haven’t rejected the application for leave, but have just made a comment. WRITE THINGS DOWN: As negotiations get more heated, writing things down can lend clarity, especially which areas in which you are already in agreement. Good luck and remember: in business, it’s not what you know, it’s what you negotiate that matters.

“Take no personal offence if your offer is turned down. As long as both of you are talking, the other party wants a solution.”

BE PREPARED TO ADJUST —David Lim If you consider the basic five styles of negotiating agreement gaps (win-win, win-lose, lose-win, loselose, compromise), understand that your preferred style may place you at a disadvantage in a negotiation if the underlying value of the transaction is at odds with your style. For example, you adopt a win-win stance when you are clearly in a stronger position, and that the product being negotiated for is a commodity. Adopting a win-lose style “may” be more beneficial in the short term. Adopting a win-lose style may seriously impact your progress if your partner on the other side of the table holds a proprietary software tool that is key to your organisation’s success.

PRINCIPLE 4 DISCOVER WHAT TYPE OF POWER IS AFFECTING THE NEGOTIATION You are negotiating for a software package created by an Indian company, and you begin to talk about price when a news-break announces that the firm that makes the software has been bought by Microsoft Inc. Overnight, the anticipated price changes upwards. The other side now has legitimacy power. Are you willing to walk away? If you can, you have

FOR MORE INFORMATION AND FREE ARTICLES ON LEADERSHIP,VISIT: www.everestmotivation.com

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leader’s world

more risk power, and thus a stronger position.

PRINCIPLE 1

cfo lounge

NEW LAUNCHES

Nikon D3000

GIZMOS

Nokia E63 Here’re some must-haves if you’re looking for a good blend of beauty and utility. NOKIA’S E63 IS a cheap alternative to the E71 business phone. One of the biggest differences between the two phones is the standard plastic body on the E63. Thanks to the slightly wider body, the keys are larger and thus typing on it is easier. It fits in easily into pretty much any pocket. PRICE: Rs. 12,699

Intended as a replacement for the D60, Nikon’s new D3000 comes with the same standard 18-55 mm VR, 3x optical zoom lens found on other entry-level models. Its controls are simple and it gives very good results. Price: Rs. 39,990

Inspire T6160

THIS IS THE latest 5.1 channel speaker offering from Creative’s stable. It is definitely a worthy contender if you’re shopping for an entry-level 5.1 system. PRICE: RS. 4,999

Kingston Data Traveler 150 THIS ONE HAS an odd colour, but it is clearly one of the betterlooking plastic drives. It is a consisistent performer. And, it is good value for money!

LED Cinema Display APPLE’S 24-INCH CINEMA Display is built around the same design ethos as its latest Macbooks — slick, sleek and tough. The movie quality is pretty good, too. PRICE: Rs. 60,900

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DECEMBER 2009

ad Re Y st OG Mo OLZINE N ia’sCH GA d In TE MA

Quick recipe for Turkish delight Teresa Cline checks into a cave hotel and falls in love with the Love Valley in Cappadocia

AN INSIDE VIEW OF A CAVE HOTEL, ONE OF THE MANY TOURIST ATTRACTIONS IN CAPPADOCIA, TURKEY

I HAVE TRAVELLED extensively in many parts of the world and one of my favourite places is the region of Cappadocia in Turkey. Famous for its cave hotels and lunar-looking landscapes, this little-known part of the world offers visitors a multitude of unique experiences. After checking into your “cave room” at one of the many cave hotels, visit the Goreme Open Air Museum, Cappadocia’s most famous attraction. It is a complex of medieval cave churches, rectories and dwellings carved out of the mountain rock by Orthodox monks between 900 and 1200 AD. Most of the churches have beautiful frescos painted on the walls depicting different biblical scenes. Next, go for a hike in the nearby Love Valley—one of nature’s truly magnificent creations. Volcanic activity from thousands of years ago has left behind a valley full of unique “rocket-shaped” formations. Relax at the end of the day with a visit to a Turkish bath where you will enjoy a steamy soak on a slab of marble followed by a soapy rub down by a bath attendant. Many of the baths have lap pools where visitors can enjoy a swim before getting dried off and relaxing on a lounge chair and enjoying some traditional Turkish or apple tea. You may want to go on a tour of the Ilhara Valley and see the ancient underground city of Derinkuyu. Turkey has a

very well-organised tourism industry with many tour companies offering guided tours of the area by professionally trained English-speaking tour guides. In the days before Christianity became an accepted religion, Christians hid from the Romans in underground cities. Derinkuyu is the largest such city found in Cappadocia consisting of seven excavated floors and 11 floors in total. Narrow staircases and passages open into huge rooms used for stables and living quarters. The Ilhara Valley is a 16-km-long gorge cut out of the volcanic rock produced from the eruptions of Mount Erciyes —the crowning glory of the gorge is the serene Melendiz stream. The availability of water and the ability to create hidden cave churches and cave homes made it the perfect settlement for the first Christians escaping persecution by Roman soldiers during the Byzantine period. Tours include a hike through the valley with lunch at a creek side restaurant located at the end of the trail. Many tours end with a stop at a nearby factory where local artisans provide tourists an array of souvenir items such as pottery, jewellery, leather jackets, Turkish lamps and, of course, Turkish carpets. For those looking for a more adventurous way to explore the bizarre landscape of Cappadocia, I recommend taking a horseback tour or a hot air balloon ride. There is nothing like riding a horse through the rugged mountains or flying atop the fairy chimneys and cave houses in a balloon. But be aware, once you’ve experienced the wonderful hospitality of Cappadocia, you may never want to leave.

cfo lounge

TRAVEL

There is nothing like riding a horse through the rugged mountains or flying atop the fairy chimneys and cave houses in a balloon.

TERESA CLINE IS a Canadian travel photog-

rapher who has a travel channel on YouTube called TeresaTheTraveler. She has travelled extensively in the Middle East, Europe, North America and Central America.

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art review

ARTIST OF THE MONTH

Bihar Dateline For Art Subodh Gupta is simply the hottest Indian artist of his generation By Ullekh NP

CRITICS SAY GUPTA’S WORKS EASILY STRIKE A CHORD EVEN WITH PEOPLE WHO AREN’T INITIATED INTO ART

DESPITE THE ECONOMIC slowdown, Indian art continues to dazzle the art palates of aficionados in the West the same way the curry spices up restaurant menus in those parts of the world. The artists whose works are hot out there are mostly icons such as FN Souza, SH Raza, MF Husain, Gaitonde and Tyeb Mehta. Exclude them, and you have a much younger artist who is all the rage in most art shows abroad. He is from Bihar, a state where crime, not art, makes frequent news headlines. Subodh Gupta, 45, is simply the hottest Indian artist of his generation in terms of the money his works earn at auctions and the interest they generate in art circles abroad. Says Delhi-based businessman and art collector Anupam Poddar: “It is the visual appeal of his art-objects that seems 52

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DECEMBER 2009

ABOUT THE ARTIST Subodh Gupta was born in 1964 in Khagaul, Bihar. He studied art at the College of Art, Patna. One of India’s most successful contemporary artists, Gupta has exhibited his works in some of the world’s best art galleries. His works encompass sculpture, installation, painting, video, photography, performance, etc. He generously uses symbols of rural India such as milk cans, dried cow-dung cakes, country-made guns and kitchen utensils in his works that explore subjects such as migration, semi-urban and urban dilemmas, political indifference and so on. Gupta lives and works in Gurgaon, near Delhi. He is married to artist Bharti Kher.

to have captured the imagination of the art world and of the public.” Poddar’s favourite work by Gupta is the “Cowdung House”. In 2008, Gupta’s Vehicle for the Seven Seas (2004) fetched €502,330 ($785,243), more than triple its €140,000180,000 estimate, under the gavel of Francis Briest in Paris. Meet Gupta at lunch-break on a hard day in his Gurgaon studio, and he would sit back at his desk and smile, displaying his readiness to answer questions. He has many reasons to smile—from the badlands of Bihar to the world’s best galleries, life has come full circle for Gupta. In fact, he had to first become a star-artist overseas to get recognition in India. Says Peter Nagy, who was, to an extent, instrumental in pitching him in overseas art markets: “Still there’s skepticism among Indian buyers because Subodh Gupta is basically a sculptor … the Indian buyers of sculptures are very very conservative.” For an incisive take on Gupta’s oeuvre, listen to Delhibased art critic and curator Johny ML: “While his paintings talked about the issue of ‘migration’ within and without the country..., the sculptures brought forth a different image of rural India ... the usual rural exotica of Bihar, when it passed through Subodh’s hand became tangential statements on growing globalisation and the positives and negatives that it had facilitated.” Gupta is, with no iota of doubt, the poster boy of contemporary Indian art in markets abroad, but one thing you can be sure about him—and this could be what you like about him—is that he mocks at himself through his works. Sometimes Gupta calls himself “an idol thief”. “You see, everything is there for you to see (milk cans, ambassador cars, bikes, silver plates, plates, suitcases, etc). You just have to pick them up.” There’s, of course, a rebel in him, a big one.

books PICK OF THE MONTH

Rogues Return The sequel to Freakonomics ignores the economic meltdown, looks elsewhere for inspiration THIS BOOK STARTS with its authors admitting that they had lied in its prequel, Freakonomics, not once, but twice. Nothing startling, though. The first lie is that the book, published four years ago, had no “unifying theme”. They argue there was indeed one: people respond to incentives. The second lie is that the book explored “the hidden side of everything”. And that is why there’s a sequel, they note. But there’s a caveat from “rogue” economist Steven D Levitt and journalist Stephen J Dubner: this book doesn’t explore the hidden side of everything either. Levitt and Dubner continue to fall back on anecdotes and personal experiences to answer economic issues, especially in examining how people respond to incentives. They draw generously from a study by Indian-origin sociologist Sudhir Venkatesh on prostitutes in Chicago to conclude that both the street prostitute and Santa take advantage of short-term opportunities brought about by holiday spikes in demand. What does that mean to us, you may want to ask. But don’t, because, after all, all this is about out-of-the-box thinking! The book is a good read, and it makes you familiar with strangeness. Read it, to know why the authors think Indian men’s genitals weaken population control measures in the absence of “optimised” condoms! —BY ULLEKH NP Publisher: HarperCollins Publishing Price: Rs 399

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DECEMBER 2009

NEW RELEASE

Growing exponentially WE ALL KNOW about the spread and popularity of word-of-mouth endorsements, but Viral Loop: The Power of Pass-it On takes stories of entrepreneurial pursuit much ahead—it brings in as many case studies as possible to take us on some sort of a magical mystery tour of the web age—from a simple idea to a fortune. Most companies that Adam Penenberg writes about are household names—Hotmail, Netscape, eBay, Facebook, MySpace, LinkedIn, YouTube, Flickr, etc. The book can be summed up by a line from the author: “At our essence, we are all viral creatures. Creating viral-loop businesses is just a small part of what we do and who we are.” Publisher: Hachette India Price: Rs 350

OTHER RELEASES

Hugs that work JACK MITCHELL IS slowly becoming synonymous with the word “hug”. First he explained to us the power of hugging through the book, Hug your Customers: The Proven Way to Personalize Sales and Achieve Astounding Results. Well, he knows only too well, as the CEO of Mitchells/Richards/Marshs, a family business that operates three upper-end brand men’s and women’s specialty stores in Westport and Greenwich, Connecticut, and Huntington, New York, that you ought to hug your people, too, to forge ahead. Hug Your People: The Proven Way to Hire, Inspire and Recognize Your Team and Achieve Remarkable Results will make an impact on the reader, especially the ones from the corporate world, because motivation, as pundits say, is always in short supply. Publisher: Bantam Books Price: $8.99

The art of pricing A MUST-READ FOR all art lovers. Don Thompson’s The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art explores a world where branding can substitute for critical judgement. Publisher: Palgrave Macmillan, 272 pages Price: Available at Amazon