Leadership of Dead Bodies, Stones and Flowers

In April, two Air India pilots handed over the controls in auto-pilot mode to two female cabin attendants to take a short nap. They decided that their sleep was more important at 33,000 feet while flying the 160-passenger flight from Bangkok to Delhi. They returned to the cockpit after 40 minutes when one of the cabin attendants accidently knocked off the auto-pilot mode.

The angry Twitterate asked for pilot’s license suspension, removal from job and legal charges for culpable homicide. Everyone questioned their work ethics and shock at their irresponsible behavior. Air India investigated the incident, suspended the pilots and sated that passengers’ safety was never compromised. Unbelievable, how can passengers be safe without any pilots at the helm?

1.     Double Standards in Evaluating Corporate Leaders

 The pilots were crucified for risking the lives of passengers. However, surprisingly the pilots of the corporate world do not suffer the same fate. The wizards and titans of the banking industry crash landed the world economy, but they didn’t lose their CXO seats.

Look from another lens. Did any senior in Supplier Company or the multinationals lose their job in the Bangladesh factory fire? In Foxconn, the Apple contractor, 11 employees committed suicide, four died in an accident and one collapsed after continuously working for 36 hours. However, Steve Jobs was rated as the second most popular leader by the CEOs in a survey conducted by Price Waterhouse Coopers. The first and third were Winston Churchill and Mahatma Gandhi respectively.

Now this is going to rattle my readers but let me say it. Steve Jobs was a great inventor, designer, strategist and marketer. However, when it came to people, his employees considered him rude and manipulative, and his competitors found him uncivil. Though Apple achieved great heights, he paid low salaries to the employees in the Apple stores, paid no dividends to the shareholders, pushed down suppliers to manufacture at lowest possible rate and didn’t believe in charity or corporate social responsibility. His behavior and actions weren’t people centric or humanity oriented. So my question is – do we consider him a great leader because he managed to put Apple on top? That makes him a great CEO, not necessarily a great leader.

2.     Misconceptions of Leadership

 The problem arises due to the definition of leadership. Read the dictionary meaning:

Leadership is “organizing a group of people to achieve a common goal”.

- We don’t focus on how the group of people were gathered; by inspiring them or arm-twisting them.

-  We don’t focus on the nobility of the goal; was it to exploit others or liberate them.

-  We don’t focus on the method adopted to achieve the goal; was it by breaking the rules or a journey of virtue.

In the present world we see leaders leaving dead bodies in their path, walking over people as if they were stones and sucking the life out of them. Great leaders create leaders not followers, they make others blossom like flowers.

Be it a corporate leader or political leader, we don’t wish to question the leadership methods. Our thinking is, how it matters to us, we have nothing to lose. We have everything to lose, and Martin-Niemöller-Foundation words at Hitler’s time still resonate:  

“First they came for the communists,
and I didn’t speak out because I wasn’t a communist.

Then they came for the socialists,
and I didn’t speak out because I wasn’t a socialist.

Then they came for the trade unionists,
and I didn’t speak out because I wasn’t a trade unionist.

Then they came for me,
and there was no one left to speak for me.”

Our own silence will kill us and the society we live in. When humanity is at stake, can we close our eyes and say nothing is at stake.

3.     Leadership Training

The Institute of Strategic Change reported that – “the stock price of ‘well-led‘ companies grew by over 900% over 10 years, compared with 74% for poorly led companies”. Warren Bennis in 1998 said – “The Truth is that no one factor makes a company admirable. But if you were forced to pick the one that makes the most difference, you’d pick leadership.” However, how many companies train on leadership or do a performance evaluation on leadership qualities?

Quite a few would be saying we do it. So let me clarify. In organizations bosses tell the juniors what to do and how to do it. They give rave reviews to the employee who completes the task as they had stated. They promote that employee and now he becomes a boss. At best, he will be a good manager, not a leader.

Corporate world determines success rate by title and salary.  Neither guarantees leadership skills. Employees aim to become a boss, not a leader. The terms are not synonyms.

According to Malcolm Gladwell,  all outliers practiced their talent for over 10,000 hours to achieve greatness.  In the corporate world, how many hours are dedicated by each employee to learn leadership? Learning leadership is a by-product of the main job, till CEO level. Then isn’t it surprising that we do not have many great leaders in the corporate world.

 Closing Thoughts

Maximum damage in the world was caused by people who got powerful positions without good leadership qualities, be it Hitler, Jeff Skilling, Bernie Madoff or Lance Armstrong. The biggest risks in the corporate world are leadership risks. It is the leaders who make the decisions, so unless we have a system of putting the right people in leadership positions we will continue to have these disasters. Hence, our job is to develop good leaders, select good leaders and continuously monitor the leaders.

 Wishing my readers a Happy Mother’s Day. Being parents is the toughest job in the world,. They are responsible for raising the next generation of leaders.

References:

1. Air India Pilots Story  
2. Deaths in Foxconn
3. Price Waterhouse Coopers report on best leaders

 

Risk Management Version 3.0

The business world is changing so rapidly that companies are either not willing to publish growth predictions or they are getting it wrong. In this new world trends can’t be analysed from historical data. The best business analytic teams fail because the new business models have totally different risks. Moreover, now the risks are interconnected and can’t be addressed separately. An operations risk may have a huge impact on financial risks.  The old compasses are useless and most are walking on uncharted territory.

This is the ideal time for risk managers to shed their old avatars and  become new super heroes of business. First they have to get out of their comfort zone of addressing internal risks that are preventable. The compliance and control based approach leaves over 60% of the risks un-addressed. If we consider that Risk Management version 1.0, we need to rapidly move to Risk Management version 3.0.

So what does version 3.0 look like?

1. Focus on Strategic Risk Management

I consider Enterprise Risk Management frameworks approach as Risk Management version 2.0. Though they covered strategic risks the focus was on finance, processes and technology. Hence, in reality it has become a bottom-up approach though the initial purpose was to make it top down. Risk managers are still not involved at strategic level and it is the Chief Strategy Officers who are analyzing strategic risks.

My guess estimate is that we depute less than 10% of resources to strategic risk management. We need to put in processes and resources where approximately 25% of efforts are focused on strategic risk management. Strategy failure probability has increased in present business environment.  For managing strategic risks reduce  probability of occurrence of assumed risks and effectively manage them if they occur.

2. Focus on Human Behavioral Risks

Industrial age focused on mechanization and streamlining of processes. Products were produced on the assumption that human behavior can be straight jacketed. In the age of technology and social media, this assumption has proved false.  Social media and data analysis allows behavioral analysis of each individual.

Secondly, the bigger challenge the world is facing is of changing demographics. In the last few decades, the average age has changed from 60 years to 75-80 years. The older generation lives longer and works longer. The Gen Y is entering the workforce with different expectations. Women have not only broken ground in the corporate world, but have become main decision makers for household purchases. Emerging market customers and employees have different behavior patterns.  The leadership skill sets have changed drastically. Participative and consultative cultures are more successful now.

Therefore, whether an organization wishes to fight  war of talent or entice customers, understanding human behavior has become crucial. Each segment of employee, customer and other stakeholders present different risks which an organization needs to manage successfully. Without addressing these risks at strategic and operational level, an organization is unlikely to succeed.  Risk managers traditionally haven’t focused on people, leadership or culture risks. In this century they need to.

3. Integrate Risk Management Knowledge & Resources

The traditional approach of having different experts of financial, operational and other risks in separate departments and addressing each risk in a linear manner is redundant. Moreover, now businesses are significantly exposed to external risks, which was not the case before. The Vodafone and Nokia tax cases are prime examples of risks occurring due to change in government stance.

Risk Management version 3.0 requires integrated risk management where risk managers with diverse skills can assess inter-related risks – internal and external. Secondly, risk managers have to be available within the business and as a separate department. The risk managers operating as part of the business unit need to identify the business risks and update the risk management department. The department needs to devise holistic solutions.

The risk management tools, technology, processes and resources all need to restructured to operate in an integrated manner at all levels.

Closing Thoughts

I suspect, group think is prevailing among risk managers. No one wishes to be a bull in a china shop and say – “hey this isn’t working.” It is ironic that risk managers are not doing adequate risk management of their own role and function. Old habits die hard and getting out of the comfort zone is scary, but I think we need to do it. Else, business failures are going to increase at a high rate. In the current economic environment, we can’t afford those losses. Think about it and share your views.

Wishing all my readers a very Happy Holi.

5 Things CFOs Should Do In Planning Process

In December, senior management focuses on formulating strategies. Department heads prepare business plans and budgets. Risk management departments define the next year’s agenda and plans. Everyone works hard at planning and preparing for the coming year. However, most of the efforts are in vain and result in failure. The problem is that generally people do these activities independently and make no attempt to align them. The ideal integrated sequence is below.

However, this does not happen. For instance, department heads do capital expenditures while ignoring the strategy. Business teams define performance indicators and risk managers establish risk indicators, without syncing the two indicators. Situations occur where desired performance is achieved at very high-risk levels. Business teams ignore the risk levels until disaster occurs. With the multitude of unsynchronized management information, boards make incorrect decisions with information overload. Hence, at the end of the year only a few organizations can claim that they achieved the strategy and targets.

The Chief Financial Officers (CFOs) can play a pivotal role in bringing the different facets together. CFOs sit on the board and participate in the strategy formation process. Department heads submit their plans and budgets to CFOs for review and consolidation. Generally, Chief Audit Executives (CAE) administrative reporting is to the CFO. Quite frequently, CFOs act as defacto Chief Risk Officers (CRO). Hence, CFOs can put the jigsaw puzzle together. The key things they need to look into to revamp the process are as follows:

 1.     Strategy Formulation

 The common misperception is that organizations have a proper strategy formation process. In reality, the ideas supported by the CEO and politically strong CXOs are adopted without much constructive discussion since no one wishes to rock the boat. Secondly, a formal strategy process is not in place in most organizations. Moreover, at the time of strategy formation upside and downside risks remain unidentified, as CXOs do not invite CRO to the discussion. The CFOs can influence the other CXOs to implement a formal strategy development process and conduct a strategic risk assessment in each phase of strategy formation.

2.     Business Plans

While strategies are for 3-5 year period, business plans are drawn annually. However, the changing business landscape makes business plans redundant on formation. Reason being that business plans are prepared on a set of assumptions on customer behavior  engagement and market situation. Real interaction with customers and entry into the market prove most of the assumptions incorrect. Additionally, department heads make independent business plans to show one up man ship. Hence, performance objectives are missed and risks remain unidentified. The need of the hour is for businesses to react fast and give cohesive messages in response to market changes. Therefore, CFOs must make the business planning process dynamic and integrated.

3.     Budgets

More than 60% of the organizations are unsatisfied with their ability to link strategy to operating budgets. Additionally, organizations spend 4 to 6 months in preparing budgets with numerous iterations back and forth between departments. Meanwhile the business plans change due to the volatility in the market. Hence, organizations are feeling the need of speed in the budgeting and forecasting process. CFOs must adopt rolling forecasts rather than static budgets to improve planning and control. Rather than doing post facto variance analysis they can collaborate with business teams to give real-time analysis.

4.     Performance Indicators

Performance indicators measure the reward side of the strategy. Without the risk indicators, they give an incomplete picture of business status. Another aspect is that performance indicators and risk indicators for the same strategy or plan are not aligned together and are reported at different periods. Organizations sometimes continue to measure redundant parts and do not update the indicators with change in strategy and objectives. A prime example is the financial crises. A few banks achieved performance targets without understanding the risk levels. Hence, CFOs must use technology to create relevant dashboards to monitor indicators to keep a firm grasp on the business.

5.     Risk Indicators

 Risk managers fail to address the twin shortcomings in process of identifying key risk indicators. Firstly, risk managers do not ascertain strategic risk indicators. Secondly, a lot of meaningless indicators are created which do not really find out the overall business risks. Hence, CXOs fail to separate the noise from the inflection points. Moreover, Nassim Taleb’s point of view that most significant risks are unpredictable needs to be thought over. There might be too much data available and organizations might look at risk indicators they are comfortable with, until the bubble bursts. CFOs can identify key risk indicators for strategy and business plans, and synchronize them to performance indicators. That will close the loop and move the business in the right direction.

Closing Thoughts

Synchronizing multiple factors between strategy and indicators influences a company’s capacity to achieve goals. With predictions of recession and volatile business environment, dropping the ball is highly probable. Understanding which economic predictions to rely on, which market trends will impact long-term and what are the strategic inflection points, spells the difference between success and failure. Hence, CFOs must play the vital role of coordinating and aligning various steps between strategy formation and identifying indicators.

IBM CEO Survey Insights On Customer Focus

The 2012 CEO survey conducted by IBM gives some interesting insights. Seventy-three per cent CEOs are gearing their organizations to gain meaningful insights from customer data. This is the area of highest investment.  The traditional approach to segment customer data to calculate statistical averages has been replaced with understanding the attitudes and tastes of individual customers.

The main aim of gathering holistic customer information is to devise services and products targeted at the customers and improve the response time. As stated in the report – “The challenge for organizations is two-fold: can they pick up on these cues, especially if the information comes from outside? And can the appropriate parts of the organization act on the insights discovered?” The graph depicts the main reasons for capturing customer information.

Further, the report mentions, that though most of the CEOs focus on capturing information, out-performers excel at acting on insights. The difference is innovation and execution. A quarter of the CEOs reported that their organizations are unable to derive value from the data. Speed of action is required to capture data, analyse, prepare strategies and respond to customers. As one CEO stated the most crucial characteristic is to “organize a major wake-up call.” The customer obsessed CEOs are driving the organizations to more contextual customer insights.  The graph below highlights the marked difference in under-performers and out-performers.

Risk managers can play a pivotal role in helping CEO’s achieve these objectives. They can focus on the following.

1.     Organization Culture and Process Change

A customer oriented organization culture is required to leverage the opportunities. Secondly, the organization needs to align the processes towards customer relationship management. Risk managers can conduct organization culture survey to assess customer orientation. Moreover, they can review processes to determine risks and controls to mitigate risks.

2.     Security of Data

The activity requires accumulation of extensive customer personal information. Generally, companies use separate data centres to collect and analyse the data. However, the risks of loss and theft of data is huge. As in the recent case of Facebook 1.1 million users’ data was sold for US $5. Therefore, it is a good idea to review security polices and test data centre security.

3.     Return on Investment

Data collection requires huge investments in technology and resources. As the CEOs are saying the failure rate is quite high. A review of projects, plans and strategy would identify the pain points and misdirected activity. Calculating return on investment on various programs might steer the investments in the right direction. Timely identifying failing projects and reasons for failure is critical to maintain cost effectiveness.

Closing thoughts

Technology and social media has brought customers closure to companies. The face-to-face customer interaction is gradually shifting towards social media. The companies that are able to navigate this transition successfully will outperform their peers in the industry. Hence, risk managers should support this CEO initiative to enable the organization to leverage upside risks.

What is your organization doing in this respect? How do you think risk managers should facilitate CEOs in this initiative?

References:

Leading Through Connections – IBM CEO Survey

Is Doing Nothing A Reputation Risk?

Tim Cook, CEO of Apple, recently issued an open letter on Apple website, publicly apologizing for the shortcomings in the Apple maps. The first paragraph reads:

“To our customers,

At Apple, we strive to make world-class products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better.”

The purpose was to pacify the angry customers who found inaccuracies in the Apple maps. The words of the CEO mattered.

Now let us assume that none of the customers knew who the CEO of Apple is. They have not heard of the CEO before. The CEO visibility was zilch in media, social networks, business conferences etc. Would the words have mattered then? Wouldn’t the customers say – “Who is this guy? We never heard from him before and now he is giving excuses for horrid products?”

Managing an organization’s reputation is part of CEO/CXO job. When reputation risks occur, their communication is part of the risk mitigation plan. Hence, the effectiveness of risk mitigation plan is dependent on the CEO/CXO profile. Until here, I think you will agree with me.

Now let me ask you the difficult question. If the senior management of the organization does nothing to add to the brand or reputation of the organization, is it a risk?

Here is my argument. Normally, we take the following criteria for reputation risks.

Source- ICAI ERM Training Material

This measures only the negative impact. We talk about negative coverage in the media, but what about no coverage in media. In India, most of the CEO/CXOs have no media visibility and unlike the west, 90% do not give interviews etc. in the media. They even don’t have a social media presence and one can hardly find them directly interacting with customers. That is, except for traditional advertising of products in newspapers, magazines and television, there is no coverage of the organization and the senior management in the media.

Now let us see from risk management perspective. One of the strategic objectives of the organization is to build brand and reputation of the organization. The purpose of enterprise risk management is to give an assurance to the board that the entity is moving in the right direction to achieve its objectives. As risk managers, we focus if something goes wrong, but what if, the company is not moving at all in any direction – positive or negative – in meeting its objectives. Should we capture that as a risk?

Closing thoughts

Negative viral messages in social media tarnish a reputation in a span of few hours. It takes just one tweet to go viral. It will be very difficult for a company to defend itself if a company does not have a twitter account and reputation management plan. The same applies to executives. Now the thought process is either develop a brand or get branded. Silence gives an opportunity to others to put labels and develop negative perceptions. Continuous positive messages at a personal level need to go out about the brand for customers to have a favorable opinion. Doing nothing may become a huge risk.

Industry Disruption Risks

The biggest risk of all is industry disruption risks. One fine day the competitive landscape of the industry transformed and it caught us by surprise. Ouch, the world changed while we were sleeping. It is a CEO’s recurring nightmare, and the risk managers do not focus on it much. Reason as I mentioned in my recent posts is that risk managers assume they do not have the right or duty to question the strategy or strategic objectives. Let us discuss this in detail.

Andrew Grove in his book “Only the Paranoid Survive” described the strategic inflection point. He said – “An inflection point occurs where the old strategic picture dissolves and gives way to the new, allowing the business to ascend to new heights. However, if you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines.” The strategic inflection point disrupts the industry completely and can wipe out old companies in a few years.

1.      The Intel Story

Fascinatingly, Intel itself missed the strategic inflection point of mobile computing. Intel controls 80% of the world’s PCs chip market. It failed to make a timely dent in the handheld devices. Nvidia, Texas Instruments, Qualcomm and Samsung rule the ARM chips market for smartphones and tablets. Intel is now positioning itself in this market with its x86 chips. With the shrinking in the PC, laptop and server market, let us see whether Intel can re-position itself as the smartphone and tablet chipmaker. IPhones and IPads disrupted the technology industry; and surprisingly the giants of the industry – Intel and Microsoft – both missed the boat.

2.      The India FDI Retail Story

Closer home, the opening up of foreign direct investment in retail industry has shaken the complacent industry from its roots. Expected entry of Wal-Mart is causing havoc in the minds of established players. Most of the food retail sector in India comprises of Mom-Pop local stores that supply at low costs. Some organized chains as Reliance, Bharti, Nilgiri’s etc. have started catering to the upper middle class requirements; however have not wiped out the smaller stores. The opening of the retail sector to foreign investment is indicative of industry disruption. The industry is gearing itself to deal with the new risks to retain the competitive advantage.

3.      The ERM Perspective

COSO ERM –Integrated Framework, 2004 defines ERM as:

Enterprise Risk Management is a process, effected by an entity’s Board of Directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide a reasonable assurance regarding the achievement of entity objectives.

 Going by the definition, identifying industry disruption risks comes under risk managers’ purview. However, we tend to take strategy as given and don’t challenge the strategy and strategic objectives. We need to change our perspective. Building and retaining competitive advantage is a strategic objective. The industry disruption events can wipe that out. Hence, include identifying disruption risks as part of risk assessment.

Closing thoughts

Industry disruptions occur due to external forces – regulators, competitors, suppliers, customers and society. To identify strategic inflections points risk managers must meticulously track the external environment. Understanding external environment is difficult and requires extensive industry knowledge. Therefore, I know, some of you would be wondering whether it is part of our job. Let us check with the readers.

Misunderstanding of Risks Between Business Teams and Auditors

PWC Internal Audit survey highlighted one critical shortcoming of Chief Audit Executives and Internal Audit Department. The risks that business teams consider critical are being ignored. I have been covering some of the risks on the blog, namely – people risks, competitive advantage, innovation and creativity, marketing, country risks, etc. According to the survey, more than 20% of the stakeholders reported that internal audit paid too little attention on these risks. Hence, the question is why are internal auditors and risk managers not looking at them. Take a look at this chart first.

PWC Internal Audit Survey 2012

From the survey results, two assumptions can be made. First, the internal audit function is still focused on auditing the processes that link to the financial numbers. Second, they are not understanding the business aspects of the organization. As given below, three things need to be done.

1. Understand business requirements

The situation reminds me of an Archie-Veronica joke. Veronica is trying out a new pair of jeans in a store. She looks in the mirror and says – “The jeans are tight, I wonder what could be the problem.” Archie promptly replies – “You might have gained a few pounds”. Veronica gives one whack on Archie’s head and again makes the same statement. This time Archie replies – “The store may have marked a wrong size on the jeans”. If the internal audit reports were hard hitting, business teams may give the internal auditors a rosy picture. They may not be sharing the true concerns in respect to various business risks. Hence, internal auditors would focus their energies on some unsubstantial risks.  Improve the communication with business teams to understand the risk environment. Create an environment where truthful interactions occur.

2. Add in next year business plan

Last quarter of the year has started today, and most of the organizations will prepare 2013 plans in this quarter. This is a good time to understand the business risks and prepare the 2013 annual audit plan and budgets accordingly. Coordinate with the business teams to understand their annual plans. Identify the risks relating to the plans. Discuss with the teams on how internal audit function can help them. Attempt using collective intelligence and crowd sourcing techniques to develop your plan. Where required, take a call to provide advisory services rather than assurance services. Business managers expect much more from the internal audit function. Hence, gear yourself to meet if not exceed those expectations.

3. Develop talent and skills

In the 20th century internal auditors audited the same financial numbers as external auditors. In the 21st century, the function requires revamping. In my previous article – “New Risks and Uncertainties in 21st Century” – I had conducted a poll. I had asked respondents whether they thought present day risk managers were equipped to deal with 21st century risks. Out of 17 total votes, 15 had responded that less than 50% of the risk managers can manage the new business risks. The verdict was by the risk managers about risk managers. Don’t be a dinosaur and learn new skills to survive in the market. In another 5 years when Gen Y become middle managers, Gen X may become redundant.

Closing Thoughts

With the turmoil in various economies, the 2013 risk landscape will be drastically different. Organizations that are well geared in risk management, have a higher probability of sailing through. Internal auditors and risk managers need to incorporate the impact of globalization, technology and social media in their annual plans. There is no purpose in serving stale bread and expecting business teams to swallow it. Rejuvenate in the new business age.

Wishing all my readers a Happy Gandhi Jayanti. Let us pray that each person believes a little more in non-violence and work towards a peaceful world.

References: 

PWC Internal Audit Survey 2012

Impact of Roubini’s Perfect Storm Predictions on India

Indian economy is not doing well. It grew at just 5.5 percent in the June quarter. The slow growth continues from last quarter, and the rapid economic growth of the last decade can no longer be taken for granted. The political paralysis, frequent corruption and scam charges, and inability to pursue  reforms has all led to this sorry state of affairs. This week with much fanfare reform guidelines for foreign direct investment in retail and aviation were released. Let us see whether they make a difference in the long run.

The area of concern is that economist Nouriel Roubini dubbed ‘Dr Doom” for predicting 2008 financial crises, recently predicted a global perfect storm in 2013. He highlighted five factors that will derail the global economy.

If India’s internal problems continue and Roubini’s predictions become real, the dream of India becoming a super power by 2020, may just remain wishful thinking.  As there are divergent views on India’s growth story, let us take a look on the impact of these factors on Indian economy and growth.

1) Worsening debt crises in Europe

The European crises is more than a spanner in the wheels, it has the capacity to bring the global economy to its knees. With Greece, Ireland and Spain in doldrums and economist predicting a breakdown of Eurozone in near future, things couldn’t be worse. London and other euro cities are home to the biggest financial institutions and extensively interconnected with the rest of the world. The combined economies of Eurozone is the second largest in the world, hence anything going wrong here will impact the rest of the world.

A recently released FICCI report states that – “Indian companies doing business or which have invested in Europe have been adversely impacted. About 75% respondents said they have reported decline in their business prospects and also a loss of over 20% in business generation from the European region.” If a full-blown breakdown occurs, then Indian economy will definitely suffer. Though, a lot has been said about European institutions working together to bring financial stability and governments having the political will to take corrective measures, it seems doubtful. Good economies, Germany for one, may back out as its citizens may not wish to carry the burden of other countries.  Hence, Indian companies are spreading their business in Africa and Middle-East to counter the downturn of Europe.

2) Tax increases and spending cuts in US that may push the country in recession

Barack Obama inherited an economy in crises. Though the financial crises is over, the economy will take a few years to recover. Last six months economic indicators show progress . The annualized growth rate is ranging between 1-2% in 2012, a major improvement from -7% in 2009. The unemployment rate is around 8%, and property prices have risen in the last six months after 5 years.

As neither Barack Obama nor Mitt Romney has a magic wand, the possibility of US going in recession is high, specially as it is highly linked and dependent on Europe. For India, a US recession is firstly bad news for the outsourcing industry. Obama and Romney, both in their election campaigns have targeted Indian outsourcing business as the source of all problems prevailing in US job market.

Though Indian software industry exports were US $ 101 billion in revenues in the year ended March 2012, NASSCOM has stated difficulty in predicting Indian software exports for more than two quarters in uncertain conditions. India exported  merchandise goods to US for $57.8 billion in 2011 and is growing. Since majority contributions are of textiles, stones etc., the impact of recession  isn’t significant.

In respect to FDI’s, receives investments through Mauritius, Singapore etc and “According to the latest data released by the Department of Industrial Policy and Promotion (DIPP), India received foreign direct investment (FDI) worth US$ 1.33 billion in May 2012 while cumulative inflows for April-May 2012-13 stood at US$ 3.18 billion”. Hence, the impact of US recession on Indian FDI will not be significant.

India in all likelihood can survive a US recession without much impact on a stand alone basis. With Europe also spinning out of control, the scenario changes.

3) A hard landing for China’s economy

Chinese economy over the last two decades flourished with high investment in infrastructure projects and low manufacturing costs. It imported capital goods, though not consumer goods, and domestic consumption didn’t increase much. Now growth forecasts are in single digits, and focus has to shift internally due to the Eurozone crises and US recession.

As Satyajit Das mentioned in a recent blog post, the world is divided into two groups with respect to China – Sino-philia and Sino-phobia. Some pro-China model believers think China is set to become a super power. On the other hand Sino-phobic believe China is out to control the world. Hence, the perpetual predictions of China succeeding and failing. However, Das has pointed out rightly in the following words -

“Nothing illustrates this better than Chinese income levels. Despite its status as the world’s second largest economy, China ranks 98 out of 181 nations in the World Bank’s ranking of GDP per capita. Based on forecasts, wealth per capita in 2016 will be only equivalent to US$13,700 against $57,300 for the US and US$48,000 for Germany. This does not take into account the massive income inequalities in China, where a large portion of the population lives on less than US$1.25 a day.“

China and India suffer from the same problems of huge income disparity, over-population and poverty. The corruption in the government further distorts the situation. If Chinese economy slows down, the disparities will continue and China will have to focus internally. It does give an opportunity for India to takeover but it depends on India straightening out its internal act.

4) Further slowing down of emerging markets

The BRICS – Brazil, Russia, India, China and lately South Africa – in the last decade showed tremendous growth. They were the torch bearers of developing world. However, now it is envisaged that BRICS will be growing in single figures. With it competition from other emerging markets is heightening - Indonesia, Philippines  Vietnam etc. . On both sides India is in trouble.

Firstly, with the slower growth in emerging countries, India will lose its advantageous position. As business heads start looking at other countries for investment, the FDI will slow down. Moroever, the emerging markets provide a good cost arbitrage. For example, Philippines have taken over the call center market specially that of US, as the cultures are similar and it is cheaper than India.

As each emerging country comes up with its own unique selling proposition, the Indian industries will be impacted unless they position themselves differently. As in the BPO business, India is now attempting to position itself as knowledge managers.

Emerging markets will increase competition for India, hence gazing at the crystal ball is not going to help. India will have to tackle its poor reputation on governance, public finances, scams and democratic setup.

 5) A military confrontation with Iran.

Political pundits predict that Israel to maintain its supremacy in Middle East will bomb Iran soon. Another view is that Iran will misuse its nuclear power to foster radical Islamic activities. Iran is rapidly building stronger ties with Russia, China and Latin America. In this situation, the target is US and Europe. The crucial question is, what does a war or attack by Iran means to India.

Besides ancient cultural ties, presently Iran is the major supplier of oil to India.  India has invested in the Oil & Gas industry in Iran to ensure its export. India imports 80% of crude oil to meet its energy needs from around 30 countries. Iran caters to 11% of the total requirement.

Hence, from cultural, political and trade perspective, India is not in Iran’s first list of country targets. However, if war does break out,  India is located between Pakistan and China. China would support Iran. On the other hand, Pakistan will face the tough choice of supporting the Islamic group or US. India is far to near the epicenter of the problem to avoid the war, as it has tense relationships with both its neighbors – Pakistan and China. On the whole, India loses out if there is a war in the Middle East. Tensions in Middle East will spell trouble for Indian companies having high energy consumption as crude oil price may increase.

Closing thoughts

Risk managers need to re-evaluate country risk of India and the rest of the countries they are doing business with. Credit rating agencies are threatening to further downgrade India’s rating. With the political risks of various countries changing, some impact on import-export, supply chain, customer relationships and investor participation can be expected. Even in the recent risk reports respondents have rated geo-political risks among the highest. This is a good time to take a close look at the risk scorecard to assess changes in strategic, financial and operational risks. Strategies should be developed for the country risks identified during the country risk assessment.

References:

1. A Global Perfect Storm – By Nouriel Roubini 
2. Roubini sticks to 2013 ‘perfect storm’ prediction
3. 7 economic indicators that could decide the election - By Market Watch
4. Foreign Direct Investment
5. Indian companies facing losses in Europe: Ficci
6. BRIC Countries Hit A Wall – Forbes India

Reflections on Reputation Risks

Indians think more highly of themselves than they are. I am not making this up, it is a factually correct statement according to the Country report of Reputation Institute. Respondents ranked India 25th with 51.93 RepTrak score. According to its own evaluation, India deserved a score of 75.67 with 11th ranking. It is ranked 5th for having perception differences between internal and external reputation. A 25th rank among 50 countries ranked isn’t anything to talk about.

In the Companies Reputation report, there was no Indian company in the top 100. Yes, my ex-company Intel was ranked 16th, though its ranking has fallen from previous years.  BMW, Sony and Walt Disney are the top three. Though reputation has a huge impact, most companies do not focus on it. Below is a chart from the Reputation Institute report on the impact of good and negative reputation of various factors.

Reputation Institute Company Report 2012

Customers, society, employees and investors – all are influenced by the reputation of the company. While companies may enjoy a good local reputation, as is the case for many Indian companies, maintaining a global reputation is a different ball game altogether. From the above chart it is clear, investing in a good reputation pays off and adds to the profit margin. Question is what all is required to build a good reputation. Another chart from the report highlights the main aspects:

Seven factors - leadership, performance, products/services, innovation, workplace, governance and citizenship are required to build a global reputation. For instance, Intel was among the top ten for – governance, workplace, performance, and products and services.

On the other hand, in respect of reputation damage, risk managers mostly focus on reputation damage due to misstatement of financial statements and governance. That accounts to just 28% of reputation.  The impact on reputation of other aspects are generally ignored. The question is how can these be built into a risk assessment framework? Besides reducing downside risks, this gives a good option to leverage upside risks. Here are a few things that risk managers can look into:

1. Reputation map – Does the company have a reputation map covering these parameters and defining its progress through the years?

2. Integration level – Is reputation aspects integrated into all the functions of the organization, or is it left to the advertising and communications department?

3. External perceptions – Is the organization depending on advertisements to build its reputation or is it undertaking CSR and other activities also?

4. Participation in industry competitions - Does the organization participate and win industry competitions, for instance “great place to work”, “most innovative company” etc. ?

5. Social Media – How is the company using social media to build its reputation and manage the negative feedback?

6. Risk assessment - Is a risk assessment for reputation conducted to highlight the risks in all the seven areas and mitigation plans prepared?

Closing thoughts

Reputation damage is difficult to quantify and often the risks are not categorically listed. In social media environment, it is far easier to lose the reputation and more difficult to build a good one. In the present environment, they old age thinking  - no news is good news - has become redundant. Just because the organization name hasn’t made headlines for the wrong reasons, it doesn’t mean all is well. The negative under currents slowly erode the good name of the organization. Hence, risk managers need to actively address reputation risks on all seven parameters.

References:

Reputation Institute reports

PS: I changed the background and added a little color to the blog. How is it looking? Please give feedback.

Risk Assessment of Marketing Function

The global economy is facing turbulent times with US in recession, Europe in economic crises and emerging markets growth slowing down. Frequently organizations panic on hearing forecasts of looming recession. They cut down marketing budgets, innovation of products and capital investments. The reaction further adds to the woes, and accelerates the downward trend in sales. Risk managers normally do not focus on marketing department activities and generally are not called upon to share their views on marketing strategies. A look on these areas may prevent the company from going in red and thrive in chaotic times. Here are a few suggestions for risk managers.

1. Bench-mark Marketing Function

The complexities of business world are escalating marketing risks. For survival and growth organizations need resilient marketing and sales functions. They have to identify strategic inflection points in the market and adapt accordingly. In recession customers interest, values and budgets change. With new competition and changing regulations, organizations need to reinvent business models. Hence, as a first step risk managers  need to bench-mark the organization’s marketing function.

Philip Kotler and Johan A. Caslione in their book “Chaotics - The business of managing and marketing in the age of turbulence” have presented a table on marketing function attributes. Out of the 14 attributes, below are 5 critical ones distinguishing between poor, good  and great marketing functions.

Srl    Poor                                        Good                                              Great

1. Product driven                    Market driven                                    Market driving

2. Product offer                       Augmented product offer                 Customer solutions offer

3. Price driven                        Quality driven                                     Value driven

4. Reacting to competitors    Bench-marking competitors             Leapfrogging competitors

5. Function oriented               Process oriented                                Outcome oriented

McDonalds marketing strategies reflect these attributes. In India, McDonalds is opening a purely vegetarian restaurant near Vaishu Devi ( a renowned Hindu temple) and Golden Temple (Sikh’s foremost gurdwara). It is catering to the Indian sentiments; in most religions Indians do not eat non-vegetarian food in a place of worship. Near the temples, generally local vegetarian eating joints thrive and there are no global food chains. The huge number of devotees provide a large market.

A few years back, McDonalds customized its menu according to Indian tastes and introduced vegetarian burgers. The McAloo Tikki (a potato burger) contributes to 25% of the total sales.  It may shock the Americans, but no beef burgers are served in India.

2. Evaluate Cost-cutting Measures

The attitude frequently is to cut costs across board. For instance, if marketing budget is XXX dollars, the total budget will be reduced by 25% without assessing the details and profitable products. Here risk managers need to assess the soundness of decisions taken to reduce costs. Below are a few examples to look for:

a) Advertising : Is the total advertising budget reduced? This would be a wrong move. During recession, the core products that contribute to revenue need aggressive advertisement. The advertising budget spent non-core products and loss making products can be dropped. Moreover, explore cheaper advertising models – social media, internet etc. and reduce budgets on paper and television media.

b) Discounts : Another option adopted to increase sales is to discount all products by a certain percentage. This is a self-destructive strategy as discounts on core premium products would damage the revenue stream in the long-run. If customers require cheaper products, cut the frills in the premium products and introduce a bare minimum model. This will maintain the brand and revenue.

3. Assess Strategy and Systems

Risk managers must assess the marketing strategy and systems to ensure that the risks are systematically identified in a timely manner. Here are a few examples of the same:

a) Core products: Does the strategy focus on core products? Are there systems in place to show the winners and losers? If the systems are inadequate profitability, market spend and customer behavior cannot be captured accurately. Hence, the organization will be unable to adapt strategy to the changing marketing trends and customer behavior. Moreover, companies cannot  reduce costs without identifying inefficient spending.

b) New products : Has the organization delayed the launch of new products during recession? The customers require cheaper products during hard times. Hence, the strategy should be to delay expensive products but focus on products that cater to the new customer requirements and changes in behavior.

Closing thoughts

With economies slowing down, the marketing functions are facing many challenges. Customers are better informed through social media and internet, competitors copy products faster, and price of the product is a driving factor. Risk managers can contribute by conducting risk assessments of the marketing function and helping the teams in identifying the upside and downside risks to their strategies. This is a good place to add to  profitability.

References:

1. Chaotics - The business of managing and marketing in the age of turbulence - Philip Kotler and Johan A. Caslione
2. Beefy McDonald’s to Open Veg-Only Outlet in Katra – Economic Times