L U V the W Recovery – Talk by Mr. Arjun Malhotra – Chairman, Headstrong
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After a round of king-sized breakfast hosted by Karan Bajwa of Microsoft at their Infinity Tower Building in Gurgaon, it was time for yet another riveting session for the CXO community in Gurgaon. In the past, we’ve seen the likes of Pramod Bhasin, Krishnakumar Natarajan, Kiran Karnik address on various topics of strategic interest to a roomful of CEOs, completely mesmerized by the quality of delivery. Naturally, the expectations were set very high. Mr Pavan Vaish, who runs IBM Daksh and the Chair for NRC Gurgaon, delivered the welcome address and introduced yet another illustrious speaker – Mr Arjun Malhotra of Headstrong and spoke highly of the latter’s achievements in setting up immensely successful entrepreneurial ventures, going right back to the 80’s and the emergence of HCL. Mr Vaish also touched upon briefly, the crux of the discussion for the day – Year 2009, being largely characterized by downturn, but would growth eventually return in 2010? If so, how does one strike a vital balance between caution and spotting an opportunity. The ambience was created and the stage set for Mr Arjun Malhotra’s address to NRC Gurgaon.
He started his talk on a rather humorous note, saying that he was not an economist, but these days one wasn’t quite sure if that was reason enough to be apologetic. Nevertheless, the underlying reality being that we do depend on economists for views, on which, we base some of our decisions – both at a personal and corporate level. It is another matter of course that a room full of 200 economists would throw at you 200 differing views, to add to the complexity. The recovery presently being witnessed world over, was seemingly a different one, from what has been seen in the past. It is, what is being termed as the “W recovery”.
The “W” Recovery:
It has been opined in some pockets, that we are yet to witness the total effect of global slowdown which has the potential to shake up the system in a very big way as more “skeletons” come tumbling out of the closet. Mr Arjun Malhotra, voiced his concern on the reality sector and the credit card market. In his opinion, as long as the interests were being paid by borrowers, Banks were not taking enough cognizance of the principal loan account, not being repaid, but a society ridden by debt would eventually default on the principal amount too, giving rise to NPAs which would cripple the entire system. He was also wary of the Dubai meltdown – is this the rumble of a major earthquake ?
Leaner approach – go off full fat milk. He spoke on this by touching upon the Headstrong experience. Headstrong was a result of merger between TechSpan and James Martin run by approximately 3000 people. Out of the 1500 core professionals, who understood technology and business, a healthy one-third were recruits with IIT/IIM background. Extremely smart people. Over the years, the organisation had been able to build domain expertise in all its Global Delivery Centres (GDCs). This had enabled Headstrong to function in a niche segment. Before the slowdown, 75 % of the clientele were from Wall Street, of which, the top 20 were all Investment Bankers. The meltdown has changed some of that. Instead of only concentrating on the Goldmans and the Morgan Stanleys of the world, Headstrong was now focussed on Tier 2 / 3 clients also – such as Jeffery CSC. While a Morgan Stanley would let you do only part of the project, with the Tier 2 players, you could get the entire project – thereby leading to improved margins, and also eke out a global presence outside of the US market. In other words, the entire model of doing business is set to change. This naturally will have a positive effect on staffing requirements also.
Costs under Control:
He advised to go aggressively on the cost cutting exercise and rationalise each head of cost. In Headstrong, he said, variable costs have been slashed this year, and the reduced costs would be the standard for next year. There is also a cap on discretionary spends which is being reviewed on a quarterly basis. For instance, if a profit centre is able to meet revenue and cost targets for one quarter, then discretionary spends will be allowed for the next quarter only, till review is done for the subsequent quarter. The focus was on improving the profit rather than on only increasing revenue. If this meant, sacrificing revenue by about 3 – 5 %, then so be it. However, it must not be misconstrued that he was advocating giving up viable business opportunities, rather maintain a strict control on costs and map it against revenue. Mr Arjun Malhotra warned the participants not to take the economist’s view blindly but keep your ear to the ground and take stock of the situation periodically. Be agile and flexible in approach. Economists, like analysts should not be decision makers, but should only aid the process of decision making. He also said that each one of us must find out what is the best and the worst case scenario for the organisation and then plug the costs accordingly to chart your presence in the range.
L U V Recovery:
Rahul Sehgal of Annik Systems shared an interesting piece of information. “L” shaped recovery in US markets, characterised by a certain flatness in growth, vis-a- vis “U” shaped growth in Europe and the all promising “V” for Chinese and Indian markets.
Mr Malhotra was wary of the fact that though US was showing early signs of growth, but unemployment was still worrisome. Jobs were not being created proportionately. Even those employees who were being taken back, were only being hired at a salary lower than what they had left with, at the time of downsizing. In his opinion, it would take a while for Real wages of 2007 (before the crash) to make a comeback. He also said that what really caused the crisis was GREED with a capital G and mankind, in times to come, should not make the same mistakes.
Conservative Approach to the Growth Trajectory:
Senior management must be prepared to strike that fine balance from being overly conservative and yet be able to spot an opportunity by keeping their ears to the ground. Hands-off approach might not help under such circumstances.
Attrition:
It is an oft repeated adage – people are not your assets really, but only the competent ones are. Some amount of attrition is necessary. This was the time to let go of people who were not performing. If your management has not been able to show profits for 3 -4 years in a row, then perhaps, it was time to let go. Over the years, most systems tend to build flab and this was the time to go lean. However, it was imperative to keep the communication channels open and transparency maintained. At no point in time, should employees be made to feel alienated from top management. For top 5 % of the employees, it was important to maintain a differential structure of rewarding, so as to convey a sense of due recognition. Those organisations which have taken care of their workforce during tough times, will experience lesser attrition and be able to retain their nimble and flexible approach, even during times of flux.
Mr Malhotra, cited an example where at the end of every month, he sent out a note to all employees, giving them a sense of what was really happening. Considering his experience and profile, it was also like a “paternalistic” advise and went down well with the employees. The approach being “personal to global” gained a more rational footing.
Conservative but agile and alert – with domain differentiation: Domain differentiation was not a static thing, as other guys would not sit still. They would strive to catch up. Quest for constant value add, with an eye to cost control should be a winning strategy in these times. It is very important to add value in the services domain, otherwise you run the risk of being commoditised. He reiterated that contacts and price alone cannot remain a differentiation strategy for long. He advised the group to first identify that DIFFERENTIATION in their businesses and then invest on building it further. Look upon it as an INVESTMENT, Mr Malhotra stressed.
This was also a good time to acquire companies as henceforth, valuations would only go up. Keep an eye on companies who have a distinct USP, but have not been able to manage their costs. He also talked about the “Knowledge to cockroach” a new area. When entering newer markets, it makes sense to identify and sell through the channel, rather than to sell directly.
Finally, Mr Arjun Malhotra ended his address by touching upon Zero based budgeting, the importance of not going back to the times of profligacy and the emergence of a specialist role from a generalist one, to emerge as a winner in these times.
Over a thundering round of applause from the leaders present in the room, Mr Pavan Vaish thanked the speaker on delivering such a brilliant address, which made so much of practical sense. He also thanked Mr Malhotra and appreciated the candour with which he spoke and shared his views at a conceptual level.
Right! Another great session got over. The bar is now raised by a few notches more…keeps rising, watch out for the next session, soon.
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Martin Sorrell, WPP’s CEO has been crying himself hoarse with the “LUV recovery” phrase for months now. So its neither a new phrase, nor one which Mr.Sehgal coined.
http://industry.bnet.com/advertising/10004295/wpps-sorrell-eyes-luv-recovery-does-u-turn-on-paid-content/