Citizens at risk - not for long,not anymore

It is obvious that citizens are at risk in India. Rape & murder the foulest crimes happen in the capital city at regular intervals, then what would be the situation in the hinterlands? How much information goes unreported, God only knows. Ask any middle aged citizen and the reply would be that governance is nowhere as per the standard we had set for ourselves. In fact we are leaving behind a standard of governance for our children which are way lower than that we inherited. In 1978, the Geeta & Sanjay Chopra murder case rocked the nation. Many of us were students then. Today’s crime on similar lines has rocked the nation once again. Many are youth today. The youth 34 years ago and now middle aged have started realising that their approach of tacit tolerance of non-performance by those who should be resolving our problems but not doing so has resulted in passing the same problems to their children. We the middle aged could not ensure that such a barbaric lapse in civil society which we faced as youth  and for which we had zero tolerance should have been addressed by a firm hand, but instead tacitly allowed it to be passed on to our children. This is an inter-generation transfer of problem and reflects poorly on us.  All the time many of us did was talk, talk and talk. In short made the right sound bytes and no one class of society can be singled out. Collectively our generation did not have the guts to ensure that our elected representatives (whether in parliament, companies, societies, cooperatives, etc.) acted on stated lines. Instead there are debates on whom should the Delhi police be reporting to? The police, law ministry, home ministry, state govt have adequate resources to find a solution. They really don’t need our guidance. Instead we need to hold them accountable for their failures in performance and kudos for achievements. Instead during failure we become magnanimous and start giving them solutions or in other words tacitly condoning their failure. But can we honestly be so forgiving and remain a noble soul in spite of such action eating into our children’s future .  Our problem is that we lack courage to seek answers to our unaddressed basic requirements from those we put in power. What do you call such a generation?  We fail to take up matters on performance, which is what the citizens should be looking for. This is in all spheres and all levels. Take judiciary. As per newspaper articles there are over 3 crore cases pending in courts.  That is a huge, huge number in any sized population. The judiciary and the law ministry have adequate resources to find a solution within a reasonable time. What we need to be asking is the time bound program by when pending cases fall within normal limits? Are we talking about 2020 or 2050? Once the timeline is agreed then that is all that is to be focussed upon during discussions with our elected representatives. Instead we take pride that the Supreme Court will eventually take decisions and justice will finally prevail even though a simple and straight forward matter as a tenant eviction case could take 14 years and the parents who in their youth added rupee by rupee to build the house to eventually stay there in their old age could not do so. You pride that courts are forcing the executive to act and at times issuing what appear to common citizens as administrative directives.  This is indeed a relief; however that is not judiciary’s day job.  Other than the CAG who else is holding the executive accountable for performance?  Also who is asking similar questions to the private sector & social sector entities? Coming back to basics, how many kms of new roads were added last year? Is anyone questioning why so few and highlighting the difficulties and inconveniences the delayed implementation is causing us? Take large fiscal deficits. At each budget a promise is made to bring it down.  Has that happened? Missing targets should automatically lead to new leadership. Isn’t that common sense. During a weak monsoon is someone questioning the backup plan? Is there a  quarterly forward looking projection?  Now day’s even companies give such projections.  Are food grains rotting in FCI godowns while many go hungry?  Look at the FDI drama that ate away parliament’s time. Eventually they got the approval, but the real problem has not been addressed. For e.g. MNCs prefer to work with global contractors who further sub-contract to the locals. For e.g. An auto manufacturer may engage a MNC logistics company to move the vehicles from the production plant and this logistics company  would further engage local sub-contractors. The problem is that bulk of the profits gets kept with the contractor while the Indian sub-contractors only get small margins. How is then capital formation going to take place with Indian companies? Without that there is no money for skill development. Futhur with weak Balance Sheets how will they be able to compete with international players in the future? So a self-perpetuating capital deficiency circle starts falling into place.  This is a known risk but can be managed.  No MNC can afford to be seen objecting to equitable conditions to stake holders in their markets. However are policies being made to address this risk across sectors? If you keep loose ends then you lose the right to feel hurt when others take advantage of the situation. Also someone needs to keep a watch.  What are the trade associations doing in this regard? Who has the time for this? Take primary education which everyone is talking about. Again it’s alright for tens of thousands of primary schools not to have teachers, but it is not all right for citizens to question this and keep on taking this issue up till it is resolved? Everyone who is in power of some sort, whether in Govt or private seems to have misplaced priorities? Look at the health sector.  People die in govt hospitals because of such basic issues as mismanagement of oxygen supply. God knows how many similar cases get unreported. On the other hand some of the private hospitals are seen to be having sharp business practices which are becoming increasingly questionable and unacceptable. Mind you we are dealing with human lives over here. PSUs get privatised and within a span of 5-7 years some of them become highly profitable in their industry and that too globally. Who’s questioning such decisions?  On the other hand private sector enters into an industry where PSUs are leaders and soon the public sector companies become laggards. Is anyone questioning as to why this is happening? Look at sports. Firstly the way we held the Commonwealth games has not brought us laurels. Now we are no more part of the International sporting community. Is this situation all right even for a day? Why had this situation been allowed to exist?

What is the overall impact? Sometime ago India was looked upon as the new find. During that time going overseas was a joyful experience. Indians were said to have finally found their spot. And all this gets wiped out within a matter of few months?  What are our temperaments made out of?  India rubber?  We are all aware of these problems. There is a lot of sensationalising but we have yet to be sensitised to this and need to be brave enough to ask the people responsible to be accountable. 

 The next generation have started demonstrating their conscious awakening to issues which need to be addressed. They are asking the right questions to the right people and looking for the right answers. They are making people accountable and soon putting life into stone hearts. Their inheritance may be that of citizens at risk, but not for too long, soon not anymore. God bless all of you.

Risk Management in the Public Sector - Emerging strategies in India

What would be the competitive environment in the decade of 2010s?


In a rapidly growing market, well managed companies grow, some faster and some slower. However during the last 3-4 years, the pace of growth by certain Indian companies has been nothing short of dramatic. A few have had this growth on the back of global acquisitions as is the case of Tata Steel’s acquisition of Corus and now are in the Top 10 list of global steel companies. Most however grew through Greenfield expansion and taking its accompanying high level of risks. However whatever may be the mode of growth, this period seems to favour proactive companies with a larger than average risk appetite. Also as they progress ahead with their bold objectives and initiatives, their growth is also impacting the leadership status within their industry. There has been a reshuffle at the top in certain industries, which over the coming years is expected to be seen across various industries. The second observation regarding the shuffle at the top is that the displaced companies may end up coming down more than a few notches. For e.g. MTNL was till sometime back a monopoly in telecom. Its 2009-10 turnover of Rs 5,000 cr is small when compared to Rs 40,000 cr of Airtel. So is the case with Goodyear whose turnover has been static over the last few years at Rs 1,000 cr. and is small vis-à-vis Rs 5,000 cr of Apollo Tyres. This in spite of Goodyear having been an industry leader in India for half a century, has global level relationships with auto majors who themselves are doing extremely well in India. It is quite evident that the business environment of this decade will judge harshly. The slow growing companies would carry the risk of being marginalised and an inconsequential competitor. Hence in the coming years pace of growth will matter.

The next question that moots an answer on the business environment of the next decade is on the expected level of competition? Competition formally entered the Indian markets post 1991, and now after two decades it is entering a maturity phase wherein industries are exhibiting the classic three layer segments, viz. leaders, the middle segment & the marginal players. What does this mean? That marginal players would fade away fairly quickly, while the middle segment must have either a differentiation strategy (offering products with different features than competitors) or a focus strategy (concentrating on a particular group of customers, geographic markets, etc.) to exist. The Indian market will continue to remain price sensitive, leaders would continue using cost leadership strategies, viz. forward, horizontal, backward integration strategies to gain cost leadership benefits. The CPSEs are well versed with these strategies. But this is not going to be enough. Cost leadership which is a generic strategy would now need to be pursued in conjunction with differentiation. Large number of cost elements affecting the relative attractiveness of generic strategies would need to be zeroed down to and a differentiation strategy crafted into the generic one. Aspects to be studied could include economies or diseconomies of scale achieved, learning the experience of curve affects, impact of the percentage of capacity utilisation achieved, dynamics in linkages in the supply chain, etc. Also addressing the risks of pursuing cost leadership whereby competitors may imitate the strategy, thus driving overall price points down or that buyer interests may swing to differentiating feature other than price.

Another aspect that may need to be mastered are the three grand strategies which are the classic moves that companies use in a competitive environment, viz. Expansion, Stability & Divestment strategies

The above would be the standard strategic management approach followed in an environment maturing to competition and market forces. However the situation here is far more dynamic. The African market still has to have depth and the Chinese market has domestic companies who are global cost leaders. With Indian economy growing at one of the fastest rates on a year-on-year basis, global players want to be here and have demonstrated their willingness to compete fiercely for market share. So in this fiercely competitive environment what are the main challenges & opportunities for CPSEs and what should the responses be? Fierce competition is the big threat but along with it goes the opportunity in the form of business cooperation. Already the Public Private Partnership (PPP) as a way of business collaboration is showing very good progress. This is taking many different shapes. For e.g. PSUs are in JV mode setting up ash based & slag based cement plants with Private Sector to unlock value from what has so far been treated as waste. CPSEs could quickly start looking at cooperative network of business as the Kieretsus model e.g. the cooperation between say BHEL & SAIL where BHEL sells turbines using steel made from SAIL. The Kieretsus model could be extended to partner with private sector players, cooperation between similar business enterprises as Tata Motors is doing by selling FIAT cars through its dealer distribution network.etc.

If a Strength, Weakness, Opportunities, Threat (SWOT) analysis is done for the Public Sector then two observations come out clearly. A sizable number of CPSEs are leaders in their industry. Also Government policies are moving towards giving them more autonomy and through selective divestment mainstreaming CPSEs by increasing public participation. Although there still exists multiple oversight boards along with duplicity of accountability & reporting, however the Government policy is moving in the right direction for unshackling CPSEs for competition.

What are the strategies that the CPSEs should adopt?

If Business Cooperation is the strategic intent to competition, then the CPSEs need to bring strengths to the relationship of a quality whereby it is seen as the strong partner. Looking at the 5 factors of production viz. land, labour, capital, entrepreneurship & knowledge, the CPSE has the ability to turn each one of 8them as a competitive strength and should frame strategies to do so. Some thoughts in this direction are as under

1. Land: Land acquisition is the biggest bottleneck being faced by new entrants and is a show stopper in mineral based industries. There have been many cases in the recent past where projects have been delayed or shelved in these industries as the companies including new entrants MNCs have not been able to acquire the requisite land. On the other hand many of the CPSEs hold sizable land banks and this could be one of the set of valuable resources they can put on the table while entering into JVs with such new entrants especially those who have innovative/critical technologies. For e.g. POSCO has been trying to set up a Steel Plant since long and has been relatively unsuccessful in land acquisition. As per recent press reports BHEL was reportedly in talks with SAIL & Vizag Steel to tie up for making high grade steel while POSCO may join the proposed JV as a technology partner. More of such cases would happen in this decade. Hence CPSEs would need to look at its land base as a critical resource. In their portfolio there could be some land which is under dispute, encroached upon or has been offered by the concerned authorities for a project but not acted upon. Such cases should be looked into and suitable action taken to make available clear title and unencumbered access. Also it may help at times for CPSEs to exchange land and related resources and as such an exchange mechanism could be created to facilitate this.

2. Labour: With the current rate of growth in GDP it is now well established that the coming years would see a sizable skill deficit whether in the form of availability of professionals or skilled tradesmen. The Government is also trying to address this problem as part of the five year plan agenda. In recent times we have seen a very sharp rise in demand and salaries of civil engineers, metallurgists, doctors, fitters, mechanics, nurses, etc. as and when activities in that particular sector are increased rapidly. One of the common pools where the Private Sector taps into is employees/ex-employees of Public Sector. Some CPSEs on the other hand are in the downsizing mode and also at times pay very large compensations under the voluntary retirements schemes. The Public Sector through a network may want to formulate strategies to deploy these resources. At times the same people perform exceptionally well in a different environment. In the past staff has been seconded /sent on deputation to overseas locations by CPSEs. There is also an opportunity for providing skilling &training facilities for the industry at large. Industry specific courses can be looked into. NTPC has a Power Management Institute at Noida, where it offers various training programs mainly to cater to the Power sector. Participants are from all over including the Private Sector. Hence a new look towards the HR at CPSEs is in order. In some organisations which have a well-established & structured activity, HR can over time become a profit centre.

3. Capital: With India’s capital & asset market expected to offer consistently better returns during this decade, Foreign Direct Investments (FDI) and Foreign Institutional Investments (FII) into India are reaching record levels every year, and this trend is expected to continue. Interestingly availability of capital to Indian companies is not expected to be a bottleneck in this decade but what could be a problem may be an over supply in the form of excessive capital flows thereby strengthening the Indian rupee or making Indian exports expensive . To get the full benefits in terms of lower cost of capital the shares need to be listed across global stock exchanges. CPSEs owing to their size are ideal candidates for such listings. Hence they should have such a strategy to aim at lower cost of capital.

4. Entrepreneurship: Indian Entrepreneurs & Global mangers of Indian origin are at the forefront of creating/managing global businesses. Many are keen to associate with the Government to help find solutions. A recent example is of Nandan Nilkeni at the UID program. As a strategy it would be useful to invite such Entrepreneurs on the Board of CPSEs

5. Knowledge: PSUs are operating in the Indian market for decades and have a good knowledge of customers, suppliers, distribution networks. Also in the area of Corporate Social Responsibility &Corporate Governance they have in-depth knowledge and experience. They have a structured way to imbibe ethical behaviour and model code of conduct. CPSEs do not have a trust deficit in areas where they operate as they have demonstrated time and again their ability to balance the various interests of the different stakeholders. Hence it can be said that they are practitioners of the Indian style of Corporate Governance and hence should make model strategies which then become synonymous with the India Brand on Corporate Governance.

In summary:

1. The pace of growth matters. Growth levels has been different for different companies which is having a significant impact on the companies and their stakeholders

2. This decade will see fierce competition in the Indian market, with products and services being flooded from all types of players

3. Public Sector the globe over, is not particularly known for their proficiency in handling severe competition and hence should look at opportunities for business cooperation through PPP and JVs.

4. For this they would need to have a competitive advantage in one of the factors of production which they would bring to the collaboration

5. An in-depth study of the factors of production, viz. land, labour, capital, entrepreneurship, knowledge should be done to see where a competitive advantage can be drawn upon and strategies formulated to develop these strengths.

The Billion dollar class of 2013-14

Corporate aspirants to this class of 2013-14 are already in the range of Rs 1,000 to Rs 2,000 cr in turnover and in fast growing businesses with an ever filling order book and many sources of finance open to them. So where is there catch? Their Internal Governance. Can they sort it out fast enough so that the next 40 odd months their batting average is in line with the turnover of Rs 5,000 cr in 2013-14 ? Lots will fall by the way side and it is not because of lack of entrepreneurship, bit ironically maybe an overose of it.

The Global demand for Enterprise Risk managers and the emergence of the Risk Intelligent entity

Since the last decade, legislation in various countries requires listed entities to have a risk management framework within them. By 2003 over 50 countries have implemented legislation in the form of governance codes including India, viz. Clause 49 of the listing agreement. Hence the initial phase defining the requirement & role of risk managers has been well established. Post the global financial meltdown of 2008 affected government and regulators mainly in the developed world have so far got their tax payers to write down roughly $3 trillion in return that their economies get spared, of a collapse in payment systems and credit flows that would probably have caused a depression. Tax payer money comes with strings attached in the form of a heavy dose of regulatory and compliance requirements. The coming years would hence see the next phase where risk management should become established as part of the management of entities covering the methods and processes used by them to identify, evaluate, manage and monitor risks within their business. Hence risk managers should be in great demand and one of the important sources of the talent pool would be India.

Formal risk management is an outcome of corporate disasters and it has gained greater prominence through legislation, and its inclusion in ratings agencies’ credit assessments. Apart from being a matter of compliance, it also offers competitive advantage to entities practicing it by enabling them to manage not just their capital, but their entire business, more effectively.As elsewhere, also in India a structured approach to managing risks, started in early 2000s as a compliance activity of Clause 49 of the listing agreement, but now many organizations including the Navratna PSUs are going in for full blown ERM systems engaging consultants to draw up policy & practice document, defining the organization structure for the risk management department, etc. which is then to be implemented by management.

Proper implementation of ERM initiative within a company can improve performance and produce results from risk elimination, to preparation for possible problems, to preparedness for seizing opportunity. Coordination of efforts concerning risk management will also improve general communication within the organization, help in defining company strategy, align resources, and drive performance. These early movers who have set up ERM systems as Infosys, started off with a well defined organization chart and in this particular case set up the Risk council in the late 1990s. There is a recognition for the role of risk management consultants for advice and assistance in implementing an effective ERM strategy. As a result, risk management consulting is on the growth path over the past three to four years, and in the coming years large consulting revenue is expected to accrue even in the Indian market.

Given this background of the growing importance of ERM within India , and its increasing adoption by various types of industries, it is felt that the product life cycle of ERM & the need for consulting services will be similar to the way ERP consulting services has grown over the last decade both internationally and domestically. While the ERP market in India was slow in the first decade but the subsequent growth took many of us by some surprise There is a growing global demand for ERM professionals who can understand business requirements and actualise the risk management systems to meet company’s needs. These industries range from manufacturing to banking to asset management, and to any firm that is exposed to the vagaries of risk. As mentioned earlier the fall out of the global 2008 financial crisis would boost the requirement of ERM & ERM professionals.

ERM positions are available at all levels of an entity, be it the back office or the middle levels or the senior levels. To occupy these positions, ERM professionals not only need to possess strong functional skills, but they must also possess strong personal, interpersonal and business skills in order to play a value added role in the organization. Towards this end, ERM certification course would help in filling the gap .

For ERM professionals, certification can help provide a clear, motivating path for career growth, as well as equip them with a set of credentials that will be recognized and with the current trend should over time be accepted globally. Certification also provides them with membership in a community of peers that share the same skills and background, values and standards within the profession.

At the outset, let us understand the definition of ERM as this is something which we will keep on referring to through out the course

1.As the word enterprise connotes, ERM is a continuous activity across the entity.

2.This activity is undertaken at all levels, all functions, all processes including in strategy formulation

3. The activity is to identify events which could impact the objectives, assess the risks, address the risks appropriately, so that risk is contained within the risk appetite of the Board

4. By undertaking this activity, the management would be in a position to give a reasonable assurance to the Board that the Business objectives will be met.
The role & participation of the directors especially those on the Audit committee are key to a successful ERM. For e.g. one of the fundamental concept is the risk appetite of the Board, wherein against significant risks the Board is required to express their risk appetite. This is a starting point. In other words the Board is part of the ERM system, both as a user of assurance and also as a provider of key inputs.

Hence, the Audit committee needs to be aware of the process of risk management in their respective organizations and have the ability to evaluate how effective the organization is in managing its risks. As a result, they need sufficient knowledge and skill of this integrated practice of risk management. ERM calls upon organizations to manage their risks on an enteprise-wide basis, rather than by function or organizational unit.

Audit committee directors should understand the ERM principles, framework and process in an integrated way so that they will be able exercise their role in overseeing risk management procedures, including the review and monitoring of key risk policies, risk authorities, and risk tolerances. They will also be able to explore the methods for evaluating risk management’s infrastructure, including personnel competencies, technologies and communications, and ensure that the risk information they receive provides them with appropriate top-down enterprise view of risks.

To perform their role effectively, Audit committee directors need to understand some references of ERM framework and methodology such as the existing widely-known COSO ERM framework.

Time may be right to know and understand a new international standard of risk management called ISO 31000 (still in its draft version), which is being developed to bring a much more integrated perspective, and yet allow high degree of flexibility to the organization.

ISO 31000 suggests eleven principles as the foundation of its framework and process for managing risks across the organization. Although they are not expected to become a risk management practitioner on their own, Audit committee’s full understanding and knowledge of the whole principles, framework, and its process are very crucial. Through ERM process, Audit committee can produce deeper risk insights to the Board by identifying events that might create risk opportunities as well as risk threats to accomplishing organization’s objectives. As a result, the Board can be better informed about areas requiring greater attention and governance oversight, which in turn strengthens their ability to protect and enhance stakeholder value.

Getting Audit committee participation is a challenge in India. This will be the first significant risk the Risk Manager will be faced with.

One of the important constituents of any enterprise wide roll out whether ERP is the VISIBILITY and POSITIONING it has within the organisation. In the case of ERM, fortunately it has been an Audit committee agenda. The challenge is the understanding of ERM the benifits that it can bring and the active paticipation by the directors.

The usual way ERM has come up is in phases. In the first phase, the Board of Directors constitute a committee as per clause 49 where key risks are discussed and a system to obtain risk data gets introduced. But this may not by itself give business value.

Take the case of an export oriented textile mill.

1 Around 5 yrs ago, a risk committee of the Board was constituted

2 Key risks as export sale price points, import prices of oil & lubricants, electricity generating costs, cotton prices, interest costs, FE rates, HR issues, etc.were discussed.

3 The risk data was tracked religiously at every meeting. Soon it was found that there was a disconnect as there was no signicant change in the risk profile of the entity.

4 So after a couple of years a steering committee on risk was set up under the CFO, with senior managers from projects, legal & secretarial, materials mgmt, operations, marketing, etc as its members.

5 There was a good cross functional participation. The steering commitee discussed significant risks, but soon discussions on operational problems took precedence as people started taking advantage of the cross functional presence to resolve outstanding issues. So the Risk committee moved in substance to that of a PPC committee where day to day problems were discussed and solutions found. This served everyone’s purpose.

6 Also discussions on risk did not move down to process teams. Nor was risk documentation as risk registers maintained apart from a 4 page note listing the risks and regular minutes of meetings.

7 Now around 2 years ago as the textile industry was not part of the then economic boom and not doing well, finding other sources of revenue became a hot topic of discussion. The bankers were pushing for a newish product viz. FE derivates. These were hotly debated at the Board and Audit committee but not at the two Risk committees. Consultations with the FE experts and bankers took place on continuous basis. Eventually a well considered decison was taken to use FE derivates.

8 As we all know Indian companies have lost heavily in this area. Some put a collective loss in the range of Rs 20 to Rs 40 thousand crores.The entity in question lost half its paid up share capital in these two years.

9 Is this a simple case of business risk going bad? What more could have been done. There were two Risk committee and a collective transparent & well studied decison. It is unfortunate that the foreign currencey chose to behave out of trend for the first time in two decades and that also in a radical way.

10 If you look at this objectively, this is speculation and the management were collectively caught in the greed / fear cycle. Also by being a collector of risk data the Risk committee was only ornamental as it did not execute the remaining steps, viz periodically reviewing the residual exposure and bringing it within the risk exposure as per the risk appetite.This is the end-to-end process of managing risks and when done by all accross the enterprise it is ERM.

11 The Risk committee should have defined the risk appetite of all the significant risks and got periodic assurance on whether the FE derivative risk was within their defined risk appetite. Not doing this step made their management action as speculative grade.

12 The second aspect that management had missed out was the finer points of the business environment. Uncertainity has moved to instability. Since the past couple of years, every six to nine months, the global and local environment is oscillating for most industry segments as if the current has changed from DC to AC. One of the unique aspects of the financial meltdown is not fraudulent corporates, which also happened in the late 1990s ( Asian crisis) and again in early 2000s ( precursor to SOX) but the speed of collapse. This has made the impact of the risk catastrophic and has moved the crisis from corporate disasters to country disasters. Being an export unit tracking all type of commodity prices over three decades, thereby experts on global & local environment, the entity should have had a sophisticated view of the unstable global environment and its possible local impact.

In the globalised age, instability in the business environment is a constant. Some risks which start off as low in impact take no time to assume catastrophic implications with the turn of a few events. Mergers and acquisitions are now a constant. The entities of the future will be risk managing entities.

Any management system when it gains importance is measured regularly for its maturity in the organisation. Just as the IT industy has its CMM level & the BPO industry has its PCMM, the emerging risk managed entities will be measuring themselves against their risk maturity level. Different stakeholders as customers, employees, rating agencies, government may start asking entities, as to how risk matured they are?

Since the time business started, those indivituals who knew which risks & oppurtunities to take created growth entities. These risk intelligent indivituals have existed in all ages and accross all human endeavour and history has chronociled them as leaders and super achievers. Just being smart in managing commodity risks, treasury risks, customer risks,etc. by itself will not be sufficient anymore as these address only one part of the business objectives. Times have changed and the measuring unit has moved from indivituals and given way to proceeses, entities, community, nations, geographies. Being smart in managing entity objectives as a whole is what will bring sustainable business success. Hence Enterprise Risk Managers are a new breed of risk managers who help ensure that risks accross an entitity are being managed within the risk appetite of the Board. While these indivituals may have specific risk domain expertise, but their real value would be seeing that risks are managed accross the enterprise. With an overall unstable environment where risks can change their intensity & move up or down the probabaility & impact scale not in megacycles but in teracycles, a risk management department would be worth its weight in gold and an enterprise, community, nation whatever the entity may be, that would make the the top listings would typically be a risk intelligent one. Welcome to seizing and converting oppurtunities in the future

THANK YOU

Deepak Wadhawan
Mobile: +91 9313701213
New Delhi: June 6, 2009

The emerging Indian BPO landscape (2007-2010)

Class of 1997 saw the MBA’s from prominent business schools heading for the BPO industry. It was then the done thing. IT/ITES companies took the lion share of the placements. Now a decade later, fresher’s head for financial services and probably after a few years retail, health care, infrastructure would be the choice of the season. This is in spite of the fact that almost all the global IT/ITES majors as IBM, GE, EDS, Deloitte, Cap Gemini, CSC, Accenture, etc. have since 2000 been pumping up BPO volumes in India by adding tens of thousands to their teams. Top quality fresh Indian management talent is coming to this industry at a slower pace than earlier, as they perceive other choices more valuable. Interestingly undergraduates / graduates from well known international universities are applying for jobs as an India stint on their resume is valuable for future career prospects.

Lately another problem has cropped up in the form of attracting & retaining middle and senior management teams. There is significant movement at this level between jobs. A year at the middle management level in any large IT/ITES major is a recipe to be part of the senior team elsewhere. This is a key risk as it has the potential to derail growth and stability of any BPO business. This demand-supply gap at the top level and also the skill set required for handling scalability and multicultural integration of operations is an opportunity for experienced expat managers to move into India operations as has been the case in the airline industry. Also Indians who are senior managers and have done stints overseas are heading back. Devesh Bahl joining Zenta at Chennai is a case in point.

With the industry moving into the matured phase, there is a certain industry sophistication that has come in thereby removing or decreasing many transaction hurdles and speeding the pace of growth. The key given being that the India brand consistently connotes quality, lower cost & timeliness. Hence we are seeing reverse mergers with Indian firms attempting to acquire/ acquiring many folds larger global players. Business control is moving from customer facing to delivery capability geographies. Developed countries are seeing a down turn in this industry just as in textiles, steel, etc and we are in the midst of the global integration & consolidation phase. Hopefully by 2010 as the Commonwealth games commence in Delhi there would be a couple of truly global MNCs in the BPO space with either Head Office or their origins from India. This has to happen given the changing business control & Nasscom’s well researched projections of a massive IT/ITES export jump from the present $40 billion to $60 billion in three years. Also any new business or capacity addition will be large as the hurdle level has gone up to a 1000 seater for a BPO doing voice/data and100 seater for a KPO focused on specific services that require inputs from professionally qualified teams. Below that the start up & ramp up risks are above the residual risk cut off point for a serious player. BPO has become a big ticket game. A number of large to mid sized Indian IT and ITeS providers are looking for acquisitions aggressively. Market gossip is that Tier -1 firms have full time teams sitting in the US/Europe scanning for acquisitions with a mine sweeper type mindset. All of them sit on a war chest of cash. Additional cash is easily available for such acquisitions. PE cos have ready cash for such acquisitions. The larger the deal sizes the better. In the US, blank cheque type of funds (SPAC) is back in fashion. These funds raise money from investors purely on the stated intent of acquiring an unidentified acquisition target and on the strength of their Board & business advisors. Since 2003 around 100 such SPAC companies have been formed in the US with around $5 billion of funds in trust ready for deployment. Global integration and India facing funds in the IT/ITES space include Phoenix, Millennium, Transtech, etc. Also UK’s Alternative Investment Market (AIM) could see similar companies being set up. Within India we also saw one of the first and large sized Management Buy out (MBO) at Intelenet and this seems to be the beginning of the trend. Indian entrepreneurs are in the process of exploring acquisitions in other strong delivery markets including Sri Lanka, Philippines, Vietnam, and Hungary.

The domestic market grew at 35 -40% last year signaling an increased acceptance of outsourcing as a business model. Presently there are around 15 -20 lakh people working for local call centres. Telecom, railways, banks, insurance, consumer durable businesses are driving outsourcing to BPOs. This industry list and the companies within is expected to increase as India Inc is itself scaling up and adding more number of $1 billion businesses every year. Strong domestic business helps in adding size and maintains strong delivery capabilities. Within the domestic space, Govt business can give a big push. Central & State Govt departments are increasing outsourcing. Interestingly a recent news item mentioned that soon BPOs will deliver a passport in three days. Also domestic call centres are going multi lingual showing market penetration. A case in point is Aegis India which offers work in 14 languages from nine centres.

Businesses whose customers use the newer media as the internet & mobile phone have outsourcing as a strategic part of the business model. As e-commerce and m-commerce gains momentum on these medias managing the back end will mean an increased outsourced business. Already BPOs managing SMS messages are receiving PE investment making their two year old entrepreneurs the newer breed of millionaires.

On the supply side, trained human resource is a well known constraint. It is also widely understood that while the Government is giving a thrust to education but the problem at the primary education level will take a while to overcome. The separation rate is high and probably at this level any other industry would have faced a major shake out. But in the IT/ITES industry this separation rate has been taken as a given and factored in the business strategies. Also best talent is being deployed on this risk. The mindset shift is from risk managed to risk enabled whereby the risk is also seen as a potential opportunity. Leaders in IT/ITES companies are relinquishing their present portfolio and moving into HR, training & education. Interesting models as partnering with third party trainers and education companies are being considered.

The Indian BPO industry is poised to seize the opportunity it has created for itself coming out of global integration and consolidation and also a domestic market which is becoming significant in the coming years. As mentioned above there is a heightened level of changing variables and business dynamics. Brand building & maintenance of the India brand probably has the immediate attention of trade associations. Industry leader, Rajendra Pawar’s views on Brand building as an increased residual value after the transaction is over sets the tone. Delivering more value than promised. What is residual value perceived by customers while dealing with the India BPO brand during 2007-2010 will determine if these were the years of the wasted big opportunity or the years of solid brand building and creating a bigger distance between the next competition.