Preparing for the Upturn: Part III

The second implication for business leaders is planning. Vision helps stay focused on the big picture, so we don’t miss the woods for the trees. Planning ensures that the vision is articulated and the organization works towards achieving the vision.

Vision, by definition, is warm and fuzzy. It lacks structure, but provides purpose. It is all too easy to get lost in the swamplands of the downturn. Planning helps the organization to stay on track.

And this process begins during the downturn, concomitant with the vision.

Based on the vision, a long term plan needs to be drawn up. This plan should reflect not just short term measures to negotiate the downturn, but also long term strategies to capitalize on the recovery. And the short term measures should be evaluated in the perspective of the long term strategies. Each measure should be judged by the value it adds or subtracts from the achievement of the long term strategies. This ensures that short-sighted measures that dilute the resources of the firm are not chosen over actions that will silently reinforce the ability of the firm to accelerate its growth when the upturn begins.

Some of these short term measures that add value to the long term strategies have been discussed in earlier posts, and juxtaposed against those measures that detract from the firm’s long term abilities and resources.

I can hear howls of protest from certain quarters when I speak of long term strategies during a downturn.

The volatility and uncertainty engendered by the current global recession has given rise to a short term mindset.

Where is the ability, you may ask, to forecast sufficiently accurately in the long term, when short term visibility is low? To use the analogy of the ship again, this is like steering a ship through a dense fog, aiming for land thousands of miles away, when you cannot see three feet ahead in the mist.

There is certainly logic in this suggestion. But there is also a solution. And I will explore that solution in my next post.

Preparing for the Upturn: Part II

Following up from the last post, the first implication for business leaders is the need for consistency of vision. Vision is long term and by definition, cannot change irrespective of the change in the external business environment. If this sounds like a paradox, consider this.

Imagine the organization to be a ship that sets sail from Port A, with the destination as Port B. There are several routes across the ocean that can be followed to get from the port of origin to the final destination. There will be a direct route, but that may have challenges and dangers that lie in the path of the ship, which could endanger the ship and crew (read the business and its human capital). So, the ship will need to take a route that circumvents these ocean based perils, which may involve tortuous detours and the deployment of additional resources. Based on the knowledge of the ocean, a route is fixed (read strategy for business).

However, there will always be dangers that are unknown or that may come upon the ship unexpectedly. For example, the weather could change suddenly while at sea; storms can blow up and ocean currents can change without warning. These are changes in the external environment of the ship that cannot be predicted. At best, the ship’s captain and crew can anticipate the probability of encountering such unexpected challenges and prepare contingency plans to counter them.

Does this sound familiar? Can you relate this metaphor to business?

So how is this related to vision? The long term vision for the ship is not confined just to the ship’s journey. It relates to the big picture: the fact that the ship must make multiple journeys back and forth across the ocean and must remain sea worthy to do so.

What is true of the ship is equally true of the business enterprise. It is an animal that needs to endure the hardships and challenges of the business environment, weather all kinds of economic and financial storms and skillfully negotiate the adverse currents of risk.

It must do so to survive the short term and make it out of the downturn, much as the ship must emerged unscathed from the storm. But, as importantly, just as the ship needs to stay seaworthy to make all those future trips across the ocean, the enterprise must stay equipped to flourish in the long term.

This is the vision that must guide business leaders through the downturn. And this is the first step to prepare for the upturn.

Preparing for the Upturn: Part I

Strange as it may sound, preparing for the upturn actually begins in the downturn. Yes, that’s right! Most of the strategies that I’ve described in earlier posts, which help manage the downturn, are double edged strategies that also help organizations prepare for the recovery. And that is why I’ve been at pains to emphasise that while managing a downturn, it is imperative to keep a longer term focus and not resort to knee jerk reactions that may have short term benefits that are superficial in nature, but may simultaneously chip away at the long term competitiveness of the organization by depriving it of resources and competences that will be required once the recovery sets in.

Preparing for the upturn is all about ensuring that processes and resources within the organization are in place to exploit opportunities that will begin to present themselves once the recovery begins. And, as we all know, rigorous preparation can never be done in a day. It takes time, patience and planning. Which is why the downturn itself is a good enough time as any to start. If an organization decides to wait out the downturn, in order to conserve resources, reduce costs and manage profits during the downturn, it may find itself lagging behind competition once recovery sets in, and it may miss the bus when opportunities present themselves. And this will happen precisely for the reasons the organization has waited so long. Since it has conserved resources, it will not have the time to begin building up the resources in time to seize the advantage; its cost reduction measures would have become hardwired in the system and difficult (and costly, ironically!) to reverse, proving to be the proverbial millstone.

What does this mean for the leadership of the organization? The implications will be the subject of the next few posts.

Leadership in a start up

Here's another article I wrote for SHRM....


As I sat down to write this article, I was wondering where I should begin. The topic of leadership in a start up is so interesting and has so many facets that, for a moment, I was undecided about which aspect I should start with.
Then, I realised that, in some respects, the dilemma I was facing while thinking about commencing the article was the same that a leader faces in a start up. There is one critical question that needs to be answered: Where do I start?
However, if you were expecting me to give you an answer to this question, I am sorry I must disappoint you. The answer is that there is no single place to start. And that is what makes the job of starting up a new company or business unit such an exciting and challenging assignment. There is a whole bunch of moving parts that need to be dealt with and managed, and sequential processing is either not possible or undesirable. Let me explain why.
Most start ups, whether entrepreneurial in nature or as subsidiaries of a large (multinational or Indian) corporation have specific timelines within which the operation has to be established, a high quality team recruited, systems and processes put in place, strategies put together and executed, and, most important, revenues to be generated in order to meet a predefined profit or loss target. If these activities are undertaken on a sequential basis and managed piecemeal, two outcomes are possible.
First, at best, the start up will be delayed vis a vis plans and targets, which will be achieved much later than timelines normally set for such operations. Whether it is a venture capitalist or private equity fund or a large parent corporation that is funding the operation, the investing entity expects the start up to take off and begin generating revenues as soon as possible. A reasonable amount of time is normally accepted as a gestation period, during which critical activities such as recruitment and engagement of a team, implementing processes and putting together strategies can be done. However, my experience is that this gestation period is almost always desperately short of what should be the ideal situation. There is always time pressure. Which is understandable.
Second, at worst, the start up may fail to take off at all.
So, the biggest challenge for a leader in a start up is to confront these circumstances and make the best of them. There is no point complaining about time constraints. They will not go away. So how does one tackle them?
The critical competence that supports a leader in this situation is the ability to manage chaos and build a structure out of nothing. Being able to multi-task is very important, as is the ability to run multiple projects simultaneously without taking the eye off any one of them. And since the environment is dynamic and things are constantly developing, it is a bit like a hunter trying to focus simultaneously on several moving targets and trying to hit each one of them all the time.
Sounds impossible? Actually, it’s not. But if you’re accustomed to working in a large organisation, with established systems and processes and a comfortable support system to fall back on (in terms of HR, finance, operations and administration etc), then it becomes very difficult to adjust to a fluid environment where nothing is certain and anything can happen. I know. I’ve been through this when I worked in my first start up, straight out of a large multinational company where I had an assistant, a large operations team, an established sales team and a strong HR and finance support system at head office. From this comfortable and safe environment I jumped straight into a start up where there was nothing. No office, no assistant, no team. Even financial and HR systems were to be established.
It wasn’t easy. But it wasn’t impossible either, and since then I’ve done it many times over again. The key is to be adaptable and change your mindset. If you are able to let go of the cushy perquisites of working in an established organisational structure, it becomes rather simple. Actually, it is extremely enjoyable and very satisfying once you get down to putting the start up together. You may well ask why? Because, instead of inheriting something that you may or may not like (as most managers do, and I’ve done on occasions), you start with a clean slate in a start up. You can build the organisation the way you want to. You can recruit the people you want. There is no inherited baggage of any kind. Who could ask for more?
So much for the challenge of starting up. The other key competence a leader needs in a start up is the ability to lead people. Notice that I didn’t say manage people. True leadership, of the transformational kind, is required. To begin with, the team in a start up is so small that it is extremely critical that everyone works together and at the same pace. Due to cost constraints, it is often possible that the start up begins by recruiting less people than it actually needs to run at an optimal level. Which means that, like the leader, others in the team need to be willing and able to multi-task. There is no room for development of silos or reluctance to go beyond the official job description. In some sense, the job description only provides a guide to the primary responsibilities of the team member. It does not describe the boundaries or limits to what may be required of the team member.
What does this mean for leadership?
First, the leader cannot afford to stay aloof of the operations and expect to delegate everything. The leader must lead by example and be willing to roll up his/her sleeves and get down to brass tacks. Others will follow. Second, the ability to build strong relationships based on mutual trust and respect is extremely important. In a start up, more than instruction, leadership and guidance are required. If the relationships are strong, people will follow the leader. Third, communication is critical. The leader should be able to articulate and communicate the broad vision to the team, which they will then implement. If a single member of a small team is out of synch with the broad vision and strategy or does not understand or agree with a direction or the need for an action, it becomes extremely difficult to build the business with any degree of success. This does not mean that unanimity is a pre-requisite. It simply means that everyone has to be on the same page where strategic direction is concerned. Getting all team members on board irrespective of their personal opinions is the responsibility of the leader. And communication plays a crucial role in this process.
This competence has important implications for motivation and satisfaction. In many cases, especially in start ups funded by venture capitalists, employees are often hired at lower than market levels of remuneration and compensated through stock options or share of profits. Even if employees are hired at normal levels of remunerations, the time pressures and challenges of putting together a start up are so immense that it is easy for people to get frustrated and for motivation to suffer. This is especially true when the start up is a small part of a much larger organisation. There could be any number of challenges in dealing with the parent organisation. Bureaucracy in decision making and financial or other approvals, political issues in dealing with different hierarchies in the parent organisation, clashes of culture between the start up and the parent organisation (yes, this can happen, especially when the leader consciously cultivates a culture in the start up that is different, because he/she feels that culture is better suited to achieve the objectives of the start up); these are just some of the issues that can stymie the efforts of team members in the start up and lead to dissatisfaction and can affect employee morale.
In such situations, the leader has to be able to handle the issues with the parent organisation in a non antagonistic manner, while simultaneously managing the motivation levels of his/her own team to ensure that they are buffered against any negative signals that may emanate as a result of the issues with the parent organisation. This can be quite a tightrope to walk and the leader’s personal credibility and relationships with his/her team members play a very important role in keeping the team morale high.
There is more to leading in a startup, and one could write a book on this, but for the purposes of this article I hope I have been able to provide a glimpse of what leadership in a start up is all about. It is exciting, fulfilling and challenging to build a business from scratch, but the issues that I have highlighted need to be kept in mind in order to succeed.

More on Corporate Social Responsibility

I recently wrote an article for SHRM on Corporate Social Responsibility, which took further the address at the Humane Capitalism Conclave and the SHRM event which I've already posted earlier. This one explains a bit more about my viewpoint on CSR.


CORPORATE SOCIAL RESPONSIBILITY: CHASING A CHIMERA?


This is not an article on economic theory. But, in order to understand why I believe that Corporate Social Responsibility (CSR) is an unsustainable concept in the context of the capitalist system within which business today operates, it is necessary to look at what economic theory says about capitalism itself. While the analysis of economic theory that follows is a bit simplistic, it will be sufficient to explain the factors that underpin the capitalist system.

Let us begin the journey with Adam Smith. In The Wealth of Nations (1776), Smith presented the capitalist system as the interplay of capital, labour and land (the factors of production) and profits, wages and rent (returns on the factors of production respectively), within a structure of market exchanges involving production, income and expenditure. Smith described an “invisible hand” at work, created by the market forces of supply and demand, which in turn are the result of the independent decisions of countless individuals. Smith posited that it is this invisible hand that drives markets to a state of equilibrium. Underlying these decisions is the pursuit of self interest (by consumers) and the pursuit of profit (by owners of capital). The point to note is that owners of capital will productively employ capital where it yields the maximum profit.

Karl Marx believed that this theory was flawed. According to him, capitalism has inherent contradictions that are not explained by Smith’s theory. Marx postulated that capitalism promotes the production of commodities that have an “exchange value”, over the satisfaction of human needs through commodities that have a “use value”. This is the conflict that is inherent in capitalism and it is driven by the pursuit of profits. According to Marx, the biggest failure of capitalism is the inability to maximise collective welfare as a result of the pursuit of individual interest in the market.

Max Weber, in his work General Economic History, defines capitalism as a system in which enterprises engage in industrial production in the pursuit of “net profit” which is rationally calculated. By introducing the notion of net profit as an accounting concept, Weber further accentuates the profit motive inherent in an enterprise operating in a capitalist system.

Joseph Schumpeter introduced the concept of “creative destruction”, wherein an entrepreneur exists not to compete, but to change the nature of competition. Through innovation, either the productivity of the factors of production is enhanced or new goods are produced. This leads to profit. This process of creative destruction sweeps away old industries and methods of production, creating new markets or segments in the pursuit of profit. In this scheme of things, entrepreneurs innovate, not for the greater social good or to satisfy human needs, but to build a competitive advantage in the pursuit of greater profits.

Finally, John Maynard Keynes, whose thoughts have been resurrected in the wake of the global economic downturn, explained the role of money and the capital and labour markets in the capitalist system, in his seminal work, The General Theory of Employment, Interest and Money (1936). Without going into the details of this theory, which explained the role of money and interest rates in capitalism, one assertion stands out: capitalism is a monetary production economy which operates with the objective of realising profits.

What do we conclude after this quick look at economic theory over the last two hundred and thirty years? While we’ve just skimmed the surface, there are three inescapable conclusions.

First, capitalism is driven by a single minded obsession with profitability. Second, capitalism is not based on social or collective action, but on the pursuit of self interest. Third, the primary objective for the existence of an enterprise is generating profit for its shareholders, the owners of capital.

And that means that everyone in the system--whether it is enterprises or individuals like you and me—is driven by self interest.

Is it any surprise, then, that larger objectives like social and environmental issues and the quality of life have been subordinated to the pursuit of profit?

I can see some readers saying that this conclusion is not new. We’ve all known all along that the pursuit of profit lies at the heart of capitalism. We really didn’t have to study the theories of five famous economists to reach this conclusion.

True. But the point I am making is this: we’ve just seen how economic theory, irrespective of the ideology of the economist in question, supports the profit motive as the basis for an enterprise operating in the capitalist system.

But, where is the economic theory that supports the contention that pursuing social good or--as it is termed nowadays--social responsibility, is a key objective of an enterprise in the capitalist system?

And that brings me to the problem I have with the concept of CSR. It has an inherent conflict with the concept and operation of the capitalist system.

Don’t get me wrong. I have nothing against the objectives of CSR. Indeed, they are laudable. It is in the implementation of the concept that I see an inherent weakness that will prevent CSR from ever becoming a tool that will reshape the factors influencing social and environmental welfare.

This is not to say that CSR has not had or will never have any beneficial impact on social welfare or the environment. Far from that. However, I believe that this impact, however positive, will be limited in its scale and magnitude. From that perspective, the concept of CSR has been hyped beyond its limitations.

Moreover, quite apart from the limitation of the ability of CSR to impact social and environmental welfare on a large scale, there are drawbacks inherent in the concept, which dilute its effectiveness as a tool of welfare.

To begin with, take the words “social responsibility”. If, after the preceding discussion, anyone still believes that the words “social responsibility” have a place in capitalism, I will urge them to delve deeply into the economic theories I have referred to, before reading the rest of this piece. The only responsibility an enterprise has, in capitalism, is to deliver profitability to the owners of capital. I think that, too, has been conclusively established.

The problem with CSR is that it tries to modify the behaviour of a capitalist enterprise by imposing a social objective that is in conflict with its objective of profit. And this can never be as simple as it sounds. CSR is, in essence, an attempt to change the nature of the capitalist system. It espouses the philosophy that an enterprise exists in a community and therefore has a responsibility for the well being of the community. The philosophy is noble and I have no quarrel with it. However, capitalism is not a social or collective socio-economic system as I have demonstrated earlier. Depending on your perspective, you may view that as a serious flaw in the system or the critical factor that makes it the dominant system in the world today. But that doesn’t change the nature of the beast. Let’s face the truth: there is no place in capitalism for social objectives, unless they are profitable in themselves.

The second issue I have with CSR is that this philosophy of giving back to the community is linked closely to the reputation and image of the enterprise. I believe that this is rather a tenuous basis for the pursuit of socially responsible initiatives. While capitalist enterprises strive to be viewed as ethical in their pursuit for profits, that endeavour stems from the fact that their profitability would be adversely impacted if their ethical image were to suffer, since other enterprises would not do business with them for fear of the risk involved in dealing with a firm that is viewed as being less than ethical. There is nothing else in the concept of reputation and image, apart from this profit driven ethical orientation, which would motivate a capitalist enterprise to value reputation or image, especially when it is linked to social responsibility.

The third drawback of CSR is the fuzziness of definition. Ask a clutch of enterprises to define CSR and you will get a variety of definitions. In many cases, CSR really boils down to philanthropy, especially where the enterprise is driven by a promoter family with philanthropic beliefs. And, philanthropy is not a responsibility. It is a philosophy, a way of life.

It is this variability in the definition of CSR and the flexibility of interpretation that opens it up to misuse and affects its implementation. Misuse, because enterprises often pay lip service to CSR and ignore situations where there is a genuine human need, concentrating instead on situations that offer them the opportunity to enhance their reputation and image as a socially responsible organisation. What this means is that, in the pursuit of image and reputation, genuine social or environmental welfare is often neglected, and CSR fails to achieve its objective.

Even where enterprises are genuine about their CSR initiatives, they often focus on areas that are far removed from their core business. This leads to problems of consistency and sustainability of the initiatives. If the CSR activity is not integrated with the business, it becomes difficult to sustain in the long term, unless there is a strong philanthropic motive driving it. Moreover, in such cases, the CSR activity is often driven by the vision of the CEO. It is quite common to find that the nature of the activity and the beneficiaries change when the CEO changes. And, in the long term, no one really benefits.

In summary, therefore, CSR has great objectives, but the concept itself is open to misuse, and because of the variability of interpretation inherent in its definition, it can often be poorly implemented. Finally, as a concept that is imposed on an enterprise, it conflicts with its core business objective, and ends up being a poor tool for driving social and environmental welfare.

Managing in a downturn: Strategies for Success Part II

The second area for CEOs to focus on to manage a downturn, is marketing and communication. Again, I have put down some thoughts in an earlier post, so will not go into too much detail now. But I would like to emphasise that a well planned marketing and communication campaign can be carried out at a reasonable cost with a high impact.

The third area relates to new initiatives. I have mentioned earlier that investments dry up and new initiatives are ignored in a downturn. So what is the solution?

Let me emphasise that, by no stretch of the imagination am I recommending that investments continue to be made in the same manner as during good times. Far from that. It is good to be circumspect about investment and new initiatives in a downturn. But the tap should not run dry.

Let me take the example of a manufacturing business. Until the downturn, the factories of this business would have been busily engaged in churning out products for a specific industry, which they had been set up to cater to in the first place. Nothing wrong with that. And the good times witnessed over the last few years would have ensured that the factories performed at 100% levels, delivering a solid return on investment and ensuring growth.

Then, came the bust. And the industry the business supplied to would have been severely affected by the downturn. As a result, output would have dropped, the load at the factories reduced and idle time would have increased.

What are the options in such a scenario? One is the list of mistakes I have outlined since I began this blog. What would those initiatives result in? Definitely not an increase in revenue, or a growth in profitability. All that would be achieved would be consolidation of some amount of revenue and profit or perhaps maintaining a steady loss that does not grow further. And the factories would continue to have idle capacity. Not a great situation to be in.

A second option could be to go for volumes. Take in any business that comes in or that can be grabbed, irrespective of the price or profit margins. After all, in a downturn, all companies are interested in increasing their margins or, at the very least, reducing costs. There would be plenty of takers, beginning with existing customers and going on to customers of competition, who would be happy to give additional business at lower prices. But what would this strategy result in? Sure, the factories would not be idle any more and fixed costs would be spread across a larger output. But what about profit margins? They would be unlikely to increase significantly. In fact, there would be greater chances of profit margins not just dipping, but also sinking into the red, chalking up losses. For the additional high volume low margin (or even loss making) business would not just counterbalance the existing business, but perhaps also cannibalise existing margins since current customers would clamour to shift all their business to the lower prices.

Is there a strategy that could help fuel growth? Perhaps even increase profitability? I am sure you can think of some and I’d like to hear them.

But let me suggest one for now. Suppose the organization were to remove its blinkers that blinded it to new opportunities. Suppose it went out into the market and proactively looked at new industries that it never looked at before, for lack of time and/or inclination. You may be surprised (or not!), but for businesses that have done this, there are innumerable new opportunities just waiting to be discovered. New industries that can be tapped, either with existing assets and resources or with a minor investment. But these new initiatives can result in exponential growth even in a downturn. I’ve seen this happen. I’ve spoken to CEOs who have growth their revenue and profitability by upto 30% over the last eight months, which have been the worst months of the downturn.

The fourth area pertains to efficiencies. In all areas of the organization. Just as managerial inadequacies get glossed over during the good times, inefficiencies within the organization are overlooked and sometimes even swept under the carpet during a boom. The organization can afford to turn a blind eye to these inefficiencies, since the peak of the business cycle provides opportunities for growth and profitability that more than compensate for any negative impact these inefficiencies may have. But when a downturn begins, there are no buffers, and the inefficiencies stand exposed, with their impact on the bottomline a damning indictment of the excesses of the good times.

The downturn, then, is a great opportunity to weed these inefficiencies out of the system and trim the flab. This will create a leaner and nimbler organization which will be well prepared to grow rapidly when the upturn begins.

And that brings me to the topic that is extremely relevant as the downturn bottoms out and the upturn beckons.

How should organizations prepare for the upturn?

Managing in a downturn: Strategies for Success Part I

The first thing to remember: treat the downturn as an opportunity not a threat; attitude makes all the difference!

As may be apparent from my earlier posts on common mistakes made by CEOs in the downturn, there are a few key areas that CEOs can focus on, as a means to navigate any downturn.

The first relates to talent management.

This area can be managed in four ways. I have dwelt on the first method in some detail while discussing the reduction of headcount as a knee jerk reaction to a downturn. A planned, structured and analytical approach to the rationalization of headcount can help organizations manage the downturn successfully. So, I will not repeat myself here.

The second method pertains to the retention and motivation of the talent that the company chooses to retain after a well structured rationalization of headcount. Closely associated with this is the issue of enhancing productivity, since a rationalized headcount is expected, justifiably, to contribute in a greater measure, especially since the basis of the rationalization is to retain the best talent in the key areas of growth, both present and future.

This can be tricky, but not impossible. Any reduction in headcount causes discomfort, at best; and anxiety, at worst, among the workforce that survives the exercise, no matter how sensitively it is handled or how reasonable the logic behind the decisions. Morale dips. Motivation sags. In such a climate, simply maintaining employee morale is a herculean task.

So how does one go about the added objective of enhancing productivity?

There are several ways of doing this, beginning with the basic task of tackling employee morale and motivation issues. Transparency is critical at this point in time. Employees must know where they stand. Any uncertainty can lead to speculation and guessing games, which not only affects productivity, since employees spend more time in speculation than working; but it also affects morale further, when no clear answers are forthcoming. Honesty and transparency can go a long way in improving morale, by simply settling apprehensions and anxieties.

Avoiding negative pressure is another way of enhancing productivity. No one--including you and me--likes to work under negative pressure. It is easy, in a downturn, to be negative. Criticism, doubts about performance and commitment, fault finding and passing the buck are common occurrences when things start going wrong. And all of these have an immediate and perceptible impact on employee morale and motivation. What is required at this time is the ability for senior managers to be calm and composed. The downturn cannot be wished away. But it can be managed. The recognition of this simple truth can help. Managers should consciously steer away from negative communication. Positive feedback, encouragement, proactive support and appreciation, all go a long way in enhancing morale and motivation.

And the best thing is, if managers are honest and positive with their teams, the natural corollary is that employees will reciprocate. This creates an all round climate of transparency and positivity within the organization.

In fact, involving employees in the decision making and planning process while strategizing for the downturn is a great way of not only improving productivity, but also of getting new ideas. First, employees feel great about being involved. It gives them immense satisfaction in contributing to the organization when it is facing difficulties and also gives them a sense of value. Second, it gives them ownership of the final strategy, which always enhances productivity and performance. Third, you’ll be surprised at the ideas employees can come up with when asked…all you need to do is involve them! One great way of doing this is through coaching and I’ll dwell on that in a bit.

Increments is yet another way of managing morale and productivity. Most organizations freeze increments across the board in a downturn. What if organizations were to be creative about this. For example, the hardest hit by an increment freeze are the staff at the lower levels of the hierarchy. Suppose the organization were to give them nominal increments, but freeze increments at the managerial levels, where the pinch is felt less? How do you think that would go down with employees?

Stop here for a moment, and go back to the methods I’ve just described. Do you see a pattern emerging? Put yourself in the shoes of an employee who is managed thus. Do you see your morale and motivation improving? And I hope that by now you would see how this has a direct and tangible impact on productivity.

There are many methods to improve productivity. But I would I like to spend some time on yet another very powerful method of enhancing productivity, albeit one that comes at a cost. And that is: coaching employees. Coaching is not about giving advice. It is not about counseling them on their performance. It is about helping employees find their own solutions to enhance their performance or achieve specific job related goals. It is also not meant so much to fix problem behaviours. It is more to help valued employees find solutions to enhance their own performance and contribution to the organisation. Coaching believes in the potential of each employee to deliver the goods on their own; and the coach simply facilitates the way, invisibly and silently. Coaching employees, especially key team members who have a significant impact on the business, can go a long way to improve performance and productivity.

The third method of talent management relates to the training and development of existing talent. This is also a method that enhances productivity. A downturn, where employees may not be fully occupied, is a great time to enhance skills and learning, along with self development. I will dwell upon this in a bit more detail when I write about preparing for the upturn.

The point about training and development I would like to highlight here pertains to managers, especially senior managers. The present downturn is unprecedented. A synchronized downturn of this nature has not been seen since the Great Depression. However skilled, competent and experienced a manager may be, and irrespective of his/her level within the hierarchy, there is no manager in the world today who has experienced a downturn of this nature. Which means that the skills to manage the present downturn are woefully inadequate. But this blog is about any downturn, and hopefully in the future there will be fewer downturns like the present one.

Some managers ride high with the good times, during which time their strengths are highlighted and, indeed, put to good use for the growth and gain of the organization. But along comes the downturn and their weaknesses are exposed. This is not to say that they are incompetent or that their usefulness to the organization has been outlived. It is simply that their skill sets do not include skills to manage the downturn. It is critical to identify such managers and equip them with the skills necessary to successfully navigate the storm. It is not such a difficult task. And coaching, as I have mentioned earlier, is a great way to create self realization about the way forward.

The fourth method of talent management is the redeployment of skills. This is also closely linked to enhanced productivity. With employees being more productive, they may have time to look at other areas that they may be able to manage, but have not had the time or the inclination to focus on earlier. Profitable redeployment of skills is possible and has been successfully implemented by many organizations.

Building the Sustainable Organisation

I spoke on Saturday, July 25th, at an event organised by SHRM India and MTHR, on the topic of sustainability.

As usual, my session centred around my pet theme of humane capitalism. I spoke about my theory about the evolution of capitalism to a state where business enterprises will embrace sustainability as a strategic initiative which is part of their business model, rather than having corporate social responsibility and triple bottomlines imposed on them from outside.

I had a very engaging audience this time, and I was delighted to find myself challenged at various points of the address, which led to animated discussions on my thoughts and beliefs vis-a-vis the reality in business.

One of the thoughts that generated a lot of heat was my assertion that corporate social responsibility is imposed, necessarily, from the outside on a capitalist enterprise. The basic nature of capitalism is the pursuit of profitability and increase in shareholder wealth. Social and environmental responsibilities, if they fit into the strategy to increase profits, are embraced willingly; however, if they don't, they fall by the wayside. I believe that CSR has been more abused than used as a tool to improve social and environmental welfare, and am a willing sceptic of most CSR iniatives with respect to their intention and ability to improve social and environmental conditions.

The biggest objection to this position of mine was the fact that there are several business houses in India, notably the Tatas, who have been engaging in corporate social responsibility for years. This was the key challenge to my point about CSR. It made me think about my position and evaluate my arguments.

The conclusion, however, is that my views remain unchanged. I believe that the actions of the Tatas resemble those of, say, Bill Gates. The Tatas are philanthropists; giving is in their blood, in a manner of speaking. And they have not given because they believe it is a responsibility. They have been giving of their free will. Because they believe, genuinely, that by giving back to society, they will make some difference to the lives of the people who are touched by their generosity.

Is that Corporate Social Responsibility? Or is that individual philanthropy? I believe it is the latter. And that is because it rests on the philosophies of the Tatas as a family of businesspeople, rather than the enterprises they run.

Perhaps the fault lies in the nomenclature of CSR. From what I have seen through my research on CSR, I continue to believe that it is imposed from the outside on organisations. Some are willing and others unwilling, but that doesnt change the nature of CSR.

Managing in a downturn: Mistakes CEOs Make - Investment

Here's another trap most CEOs fall into when confronted by a downturn. The investment tap is promptly switched off. The justification, of course, is logical and perfectly reasonable.

In times of great uncertainty, like a downturn, the return on existing investment is hard to forecast with any degreee of accuracy. So how does one justify new investments, which may be even riskier from the perspective of ROI?

The solution, therefore: stop new investments.

The unfortunate part about this conclusion is that it is indiscriminately applied to all new investment decisions. In the process, some perfectly good opportunities to grow in the downturn can be missed.

What this also does is to stifle creativity and innovation, whether it relates to process, product or service. People begin to look at consolidation of existing business, existing investments and existing operations -- which by itself is not a bad or wrong thing to do -- and ignore new initiatives which could open up new opportunities.

I think the best way to illustrate what I am saying is to show how companies do it right. It is all too easy to give examples of companies stifling investment. Look around you and you'll spot them; look within your own organisation and you'll probably see it happening there as well. But an example of how successful companies use wisely assessed investment decisions to grow their business in a downturn will illustrate the point I am trying to make.

More on this in a later post, when I talk of how successful companies manage the downturn, I'll show you how this can be done.

Managing in a downturn : Mistakes CEOs make - Marketing Budgets

The other area that CEOs seem to find convenient to axe in difficult times is the marketing budget. I find this a bit of a paradox. Why, you may ask?

The answer is simple. Everyone knows and agrees that marketing is essential to build brands, establish positioning, create differentiation, influence perceptions and preferences and build consumer loyalty. But aren't these the very things that are critical to focus on in a downturn?

When the environment goes downhill and consumers become selective about the products and brands they purchase, it becomes even more important to ensure that the brand is visible and the consumer's purchasing behaviour is influenced in its favour. Surely no one believes that in such a situation, cutting marketing expenses will help in increasing brand visibility and brand preferences?

Then why slash marketing budgets in a downturn?

Perhaps, because it is an easy way out. Operating costs cannot be slashed without serious implications for productivity, quality and revenue. Payroll costs can be reduced and I've dwelt on that already. Real estate and administration costs cannot be reduced quickly in the short term without a negative impact on the business. So it is marketing which is the only significant cost that can be reduced without a perceptible short term impact.

Which gives rise to the question: if there is no significant or tangible short term impact, what's wrong with slashing the marketing budget?

The answer lies in the objective of marketing as I have defined it earlier. Marketing shows results over a period of time. Mid term to long term. The only situation where marketing shows results in the short term is when there is a tactical promotion like a limited period discount. Brand building, positioning, creating differentiation, influencing consumer behaviour and preferences and building brand loyalty are all results of marketing that are perceptible over a period of time.

Which means that cutting marketing budgets can have serious mid term to long term implications.

Another factor to consider is the lead time for marketing to have an impact. The results of marketing always show up over a period of time after the money is spent (this is also one of the reasons why the effects of marketing are only felt over a prolonged period of time). The best effect of marketing is felt in a consistent marketing campaign. Breaks in a campaign may be strategic, when they are used to reinforce the campaign and strengthen the brand. But this applies by exception.

What this means is that a break in marketing, especially in a downturn, sets the product and brand back a bit. When the marketing budgets are restored, it will take time to re-establish the results that had been achieved at the point of the break.

So, what's the answer?

One way an organisation may tackle this conundrum is by being highly selective about the deployment of marketing funds. Marketing strategy has to be highly focused on the most effective means of achieving results without a break. Metrics to assess the ROI on marketing campaigns must be stringently enforced. A good marketing department should, in any case, be tracking the ROIs on different marketing options, even in good times. So, when it is time to reassess the marketing strategy, it becomes a fairly straightforward exercise to look at the various options, analyse the metrics and then zero in on those marketing actions that are most successful with the least expenditure.

This process of weeding out the least effective options will help organisations in a downturn to optimise their marketing expenditures without compromising on results. Also remember that while everyone else is cutting their marketing budgets, there is much less clutter in a downturn. Which means that if you are sensible about how to optimise your marketing spend, you automatically become more visible.

Now, isn't that a great situation to be in?

Managing in a Downturn :Mistakes CEOs make - Headcount Part 2

There's one more point which I forgot to mention in my earlier post regarding cost cutting through headcount reduction.

And that is, quite simply, that a downturn is actually a good time to hire. While I have earlier discussed the rationale for careful, calculated headcount reduction based on skills and performance, there is also a very strong case for careful, calculated hiring based on long term needs, skill gaps within the organisation and growth strategy.

Let's not forget that most companies recklessly cut headcount without the kind of skill/talent based analysis I've advocated earlier. This results in a sudden availability of talent, which may help resolve two problems of talent acquisition in the good times:

a) the sheer unavailability of suitable and good talent due to competition between employers for the best and the brightest

b) even if suitable talent is available, it may be costly; the dynamics of supply and demand in a growth situation leads to salary increases which may not be affordable in the short or long term

However, in a downturn, good talent is suddenly affordable, especially if the recruitment is carefully tailored to strategy. This kind of hiring is also good because it shows a new hire a solid growth path within the organisation, which can lead to high retention levels if the organisation is careful. More on that later.

Therefore, it is imperative that cost reduction is done carefully; you dont want your best talent working for your competition simply because they've been more careful than you about how to reduce headcount!

Reflections on Humane Capitalism

I was invited as a keynote speaker at the Humane Capitalism conclave in Gurgaon on 24th January 2009. I thought I'd reproduce my address to the conclave.

REFLECTIONS ON HUMANE CAPITALISM


When I was asked to speak at this conclave, I began thinking about the topic. I reflected on the meaning of Humane Capitalism. On Corporate Social Responsibility (CSR). And on what this means for society. I would like to present today, my reflections on Humane Capitalism, and some of the conclusions I drew from those reflections. I don’t believe that I will be saying anything new today. But I think that it is important to have a perspective on the topic of Humane Capitalism, if our discussion during the day is to lead to any useful conclusions.

To start with, I am going to strike a discordant note. I have a problem with the concept of CSR. For 4 reasons:

a) It is difficult to define
b) It includes the word responsibility
c) It includes the word social
d) It is associated with philanthropy and commitment to a cause or causes

Any concept that is difficult to define is open to interpretation and we see CSR being used variously as an image building, media targeted, empty tool by most organizations. There are a few who genuinely undertake CSR activities that are truly beneficial to society, but they are few and far between.

By talking about responsibility, the concept of CSR becomes forced. It becomes an obligation. Which is at variance with the concept of capitalism, as I will shortly explain. I have a similar problem with the inclusion of the word “social”. That term, too, is at odds with the nature of capitalism.

Finally, philanthropy and commitment to a cause are also concepts that go against the grain of capitalism. Because of these issues, I believe--and this is a personal belief--that CSR is doomed as a tool for promoting Humane Capitalism.

In order to understand the need for, and the meaning of Humane Capitalism, we need to first review what capitalism itself is all about. In The Wealth of Nations, Adam Smith stated that, by acting only in their self interest, individuals will create the greatest good for the greatest number. These atomistic decisions of countless individuals, each aimed at fulfilling their own self interests, come together to create the market forces of supply and demand, which drive the capitalist system.

Capitalism, then, is based not on social or collective action, but on individual interest and profit seeking.

By definition, capitalism implies a distinction between classes. Ownership of capital is limited. There is a class division between owners of capital and workers who provide their physical or intellectual labour or services, in return for wages. Recent innovations in capitalism, like shares for employees, do not change the basic nature of the beast. And even in cases where employees own large shareholdings, due to their part ownership of capital, their interests align with the owners of capital.

Now let us look at decision making in the capitalist system. The owners of capital decide the productive purposes for which capital is employed. The objective: maximizing profits for the owners of capital.

This brings us back to the point I made earlier: at the heart of capitalism lies individual interest and profit seeking; whether it is the individual decisions made by consumers of goods and services or the owners of capital who decide where capital should be employed.

In fact, Milton Friedman says, in The Social Responsibility of Business Is to Increase Profits, published in 1970:

“The only responsibility of individual corporations is to engage in activities designed to increase...profits.”

Now, what does this mean for society?

First, economic growth, and consequently, social welfare (at least to some extent), depends on how well the owners of capital do. If they do well, then there is, or at least should be, according to classical theories of capitalism, prosperity, employment and other benefits to society, to the other class that works for the owners of capital. If it does not, then, as we can see today, there is an adverse impact on society in general.

What this also means is, that government stimulus is, therefore, aimed at the owners of capital, though the intention is to benefit society at large.

The other conclusion which follows from this discussion is that capitalism essentially involves a very delicate balancing act. There is a natural instinct in capitalists, due to the profit maximization objective, to control costs, which includes wages, since that impacts profits. However, there is an inherent interest to ensure that wages do not drop to sub optimal levels as well. Because, if this happens, the wage earners reduce consumption, as can be seen around us today, and this also has an impact on profits.

Second, the conflicts and contradictions of the traditional capitalist system arise from the profit imperative. Conflicts such as the exploitation of the working classes, issues of ecological sustainability and social welfare, the trend towards automation which leads to fewer jobs and the fear of increasing unemployment; these are all driven by the need to maximize profits. In some sense, we could conclude that conflict is inherent in the traditional system of capitalism.

Third, profit contradicts need. Goods and services are not produced only on the basis of needs. They are produced for the benefit of those who can pay for them, since only then can the profit imperative be fulfilled. This naturally excludes a large portion of the world’s population, whose needs go unfulfilled simply because they do not have the purchasing power to back their needs.

Fourth, there is an implication for geographical development, since those locations are encouraged for development, which contribute to the maximization of profits. This has led to lopsided development.

Fifth, the competitiveness inherent in the capitalist system encourages innovation as a source of increased profits. However, this innovation is aimed at fulfilling the needs of that section of society which can pay for the innovation.

Finally, growth is critical for capitalism. Organizations need to grow constantly, to continue increasing revenue and profits. The pursuit of globalization and new markets, new products and increasing market share, all stem from the growth imperative, which is closely linked to the profit imperative. Of course, all growth has to be profitable, otherwise it is not worth pursuing. Again, this has an implication for markets, and consumers who may not be seen to be profitable and are therefore excluded from sharing the benefits of capitalism, either through satisfaction of their needs or through providing them with employment.

The basic issue, therefore, with the traditional concept of capitalism, is the fact that no one in the system looks at the big picture. Of course, government does, but the government is not strictly a player in classical capitalist theory. Governments have flirted with the concept of the welfare state; the USA in the ‘60s and ‘70s for example; but even that concept seems to have been abandoned now.

Clearly, there is a need for a holistic view. Quality of life, the environment and social welfare should be the key drivers that determine what is produced and developed and how it is distributed. But how is that to happen when the intrinsic nature of capitalism is individualistic and not collective or social? Market forces will never consider these drivers while seeking economic equilibrium. Is the answer, then, regulation? But doesn’t that begin treading the territory of socialism?

How, then does one implement Humane Capitalism? While I hope that this series of conclaves can throw up an answer, I’d like to venture some ideas.

Let me begin by quoting Bill Gates, at an address to Harvard graduates in June 2007:

“We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities. We also can press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes. If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world.”

I believe this quote addresses the key issues that lie at the core of the need for Humane Capitalism. These key issues should determine the scope of and method for implementing the concept of Humane Capitalism.

Humane Capitalism is necessarily social in nature, and is, therefore, at odds with traditional capitalism. So how do we go about guiding the evolution of capitalism to this higher state?

I see opportunities within the traditional capitalist system, which can be developed further to create a system that is more humane.

First, I have mentioned the contradiction between profit and need and the resultant focus on those with purchasing power. However, in the world we live in today, there are opportunities for owners of capital to successfully and profitably pursue consumers who would not have been included in the traditional definition of consumers with purchasing power. I am talking here about the “bottom of the pyramid” concept, which has been advocated by Prof C K Prahlad and others. There are organizations today who have profitably produced and distributed goods and services to the poorer sections of society. In India itself, rural marketing for traditional goods has begun to gain traction; the concept of micro finance has proved that the bottom of the pyramid is profitable. I see this as evidence of an opportunity that can be pursued further.

Second, the global economy has evolved in the last 200 years. From being an industrial economy, we have now become a knowledge economy. Innovation and intellectual capital are the keystones of this new economy. And, as I have said before, capitalism encourages, and thrives, on innovation. This is another opportunity for Humane Capitalism to establish itself. With new and innovative channels of distribution being created, it is now possible to reach larger populations at lower costs. What this means, therefore, is that there is an opportunity to cater to consumers who would have been neglected earlier; either because the cost of distribution was too high to be economically feasible, or because the profitability from these consumers was too low to justify the cost of distribution. With communication and distribution costs reducing, the profit imperative should drive customer acquisition strategies, which will increasingly encompass less privileged consumers, and, over time, help in equitable distribution of goods and services.

Finally, boardroom strategies have also evolved over the years. The keywords in past decades were: results and financial targets. Today, when I interact with CEOs, I hear more about process development, cooperation, knowledge sharing. While financial targets will always remain the mainstay of strategy, and indeed, capitalism, strategy today combines the softer aspects of business with hard economic reality. This, then, is another opportunity for humane capitalism. The importance of the environment and the opportunities to profit from environmentally friendly business operations with the technologies available or being developed today will reinforce this opportunity.

In conclusion, I believe that Humane Capitalism is an end that can be achieved, if business recognizes the opportunities available and pursues them. With technological developments and greater process efficiencies, there is no reason why the conflicts built into the traditional capitalist system, should endure. Quality of life, the environment and social welfare should, over time, become integrated into the system as drivers of business growth. All that is needed today, is for business to become aware of the opportunities, and utilize the resources available to pursue the objective of Humane Capitalism.

Managing in a downturn: Mistakes CEOs make- Headcount

Lets start with one of the most common actions taken by CEOs when faced with a downturn or with unfavourable market conditions or with a need to simply cut costs: slashing headcount.

It is probably one of the easiest measures to take, with a considerable impact on the bottomline (apart from slashing marketing budgets, which I will dwell on shortly). Alas, it is also a step that can have far reaching consequences, if not managed properly.

Let me explain what I mean. There are two methodologies that can be used to reduce headcount. The first is by examining processes and functions to determine which ones have excess headcount, thereby identifying redundancies which can be eliminated. So far, so good.

The danger arises when the decision to eliminate jobs is taken on the basis of numbers rather than talent or skills. If a certain function is determined to be redundant, the easy decision is to remove that function or a position/s within the function, thereby eliminating one or several jobs. The impact on the bottomline is immediate, significant and measurable.

But the gain may be short term. What if some of the best and brightest talent of the the organisation is lost in this process? Diehard supporters of this method of headcount reduction will argue that if the function is not required, neither is the talent.

Quite true. But that is true only in the short term. The mid term and long term are more difficult to predict both, from a business environment as well as from a resource requirement point of view. By getting rid of talent in the short term, is it not possible that the organisation ends up compromising its opportunities in the long term, when that talent may actually help in boosting the bottomline?

This kind of short term thinking with a disregard for consequences that are seen to have a minimal probability of occurring is one of the key reasons for the financial crisis that has dragged down global economic growth over the last few months. And it is this thinking that can put brakes on an organisation's growth as well.

Let's not forget; "talent" is an anagram of "latent". Not all talent shines all the time. Talent and skills are need and opportunity based. They need to be employed when the time is right for best results.

So, what is the option?

The second method of reducing headcount. Not by numbers, but by talent management and assessment. It is relatively easy, given the tools available to HR managers today, to identify talent that needs to be retained, as well as tag employees whose contribution to the organisation is either sub optimal or minimal. Organisations need to have in place processes that continually identify, tabulate and rank employees on the basis of their positive contributions. If this process is followed meticulously and consistently, then, when the organisation needs to reduce headcount, it has a ready reckoner which enables it to quickly identify employees at the bottom of the barrel. By making these employees redundant, it is obvious that the performance of the organisation will not be affected either way; however, their elimination will have a significant impact on the bottomline.

And, it will ensure that the right talent is retained for the long term, to exploit the relevant opportunities for growth, as and when they arise. More on talent management and retention in a later blog.

Managing in a downturn: Mistakes CEOs make

I've never understood this. Whenever there is an economic downturn, organisations go into "survival mode". They begin slashing costs, retrenching employees, restructuring the organisation, cutting marketing budgets...in sum, a host of "priorities" take over. I can't help comparing it to a kind of preparation for hibernation, where the metabolism begins to slow, the body tries to conserve energy and in general, the organism becomes sluggish and sleepy.

Does this analogy extend to the world of business? In today's competitive scenario, I believe it does. The impact of all these strategies for survival is to stifle opportunities which the organisation would have otherwise aggressively pursued in its endeavour to grow profitably. It reduces the inclination to be innovative and experiment with new business strategies, especially those that are the most innovative and, therefore, appear to carry the greatest risk. The net result of these measures may well turn out to be the equivalent of commercial hibernation; stagnation or even reduction of revenues and profits, and it may be difficult to recover in the long term.

While I do not for a minute believe that organisations should not attempt to protect their bottomlines when the market for their products or services is shrinking--and I would not like to generalise, since there are organisations who have genuine cashflow problems which can only be tackled through drastic measures--I would like to argue that organisations should not adopt a blinkered approach or ignore opportunities for growth.

The purpose for the existence of any firm is to grow through acquisition of new customers, increasing the business, profitably, from existing customers and retaining their existing customer base. I believe that organisations would be better served if their managements were to focus on these three key areas in a downturn; strategies to achieve these objectives would be more effective in at least maintaining revenues and profits in a downturn, as well as ensure that the organisation is well prepared for the upturn when it happens.

The next few blogs will dwell on some of the issues I have outlined in this blog, and explain:
a) how an organisation in survival mode can harm its long term prospects and weaken itself when the upturn arrives
b) what are the strategies organisations can and should adopt in order to protect themselves from the downturn, without any adverse side effects
c) how these strategies will benefit organisations during the downturn and when the upturn finally arrives