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'There's a war for talent. Corporate India must compete for the heart and soul of people'

During his recent visit to India, management guru Professor Sumantra Ghoshal, the holder of the Robert P Bauman Chair in Strategic Leadership at the London Business School, interacted with a select five-member group of mediapersons that included rediff.com's Y Siva Sankar. This is the second and final tranche of extracts of his observations.

Part I: There's a lack of adequate supply of good general managers

On whether an emerging, hitherto Third World market like India should lay emphasis on the New Economy:

Emerging economy is a term that obscures more than it clarifies. Because, if I look at Tanzania, Nigeria, Indonesia, Brazil, Peru, Poland, China and India, by some standards, I can call all of them emerging economies.

But if you look at the industrial structure inside, if you look at the skill levels available, if you look at the institutional structures inside, they are all widely different.

But is India overemphasising the so-called New Economy? Absolutely not. We recognise that one of the greatest assets is the skill levels that, for one reason or another, India produces.

The world is moving more and more towards knowledge. The intellectual capital is one of the most important forms of capital. For once, suddenly, India is a capital-rich country!

For once, financial capital is becoming a commodity. A dollar bill is a dollar bill in excess supply. And the real scarce resource is intellectual capital... the whole ball game changes. This ball game now we can play.

So, if you are forced to play cricket, but if you are lousy at cricket, and there is a chance that the game now has become soccer, and if you are good in soccer, then everything you should do is to move to that game as rapidly as possible. Staying ahead of where the curve is to drive the transition. If anything, I say more so.

All right, let another ten Internet companies fail. Let another six software companies come up fighting amongst themselves, pushing down the prices, so far so good. Drive towards this. But also go beyond software, into the medical area, into the genetics area, these are all natural strengths of India.

Move rapidly beyond software, beyond the Internet, into genetics, molecular biology... all those new areas people are talking about. If intellectual capital is going to create wealth, then we are in play. And that's the game.

I can see Ranbaxy really trying to move on from purely producing pharmaceuticals to healthcare services, not hospitals perhaps, but around electronic medical information systems. It is beginning to make the investments, putting technology in place, at least positioning itself for the future, so that as the market unfolds, it would be in the right place.

There is a risk. In business, doing things too early is often just as bad as doing things too late. You have to time it, time is everything in business.

I see some companies build the internal capability to position themselves to be able to exploit the Big Opportunity as and when it arises. But it is not enough.

I see what ABB has done, from making transformers, electrical things and so on, going into total plant maintenance services. One trillion dollar business globally, making rapid progress, moving from asset-intensive manufacturing businesses to knowledge leverage and service businesses with full strength of top management behind it.

GE today, not just in GE Financial Services, but within their traditional businesses, has significantly enhanced the service component, which is the value engine of this profit growth.

I think Indian companies have not made that kind of progress. Yes, Bajaj Auto has got into financing. The low-lying fruits have been picked. But then to understand what are the true capabilities we have embedded within our manufacturing skills, picking them up, and transforming them into service products to be delivered... I think, that's an enormous opportunity area for Indian industry. But I at least do not know of companies exploiting this as effectively as I think it could be.

On whether Indian companies really recognise human resources as a valuable asset:

There is a confusion that is possible. Which is to say, does people-oriented mean being a soft, gooey, nice country club? That is the risk. That it becomes the responsibility for the feel-good factor. And very often in India, when I hear all the discussions at HR conferences, it seems all the discussions about people become, 'We must be very nice to people.'

That, I think, is where you are putting yourself on the wrong side of history. Being people-oriented is not being nice to people. Being people-oriented is to genuinely, truly, recognise that the most important source of competitive advantage is people. That's one.

Two -- and this is not for all sectors but for some key sectors -- at the same time to recognise your managerial population, your professional people... there is a big switch that is occurring.

Historically, there is paternalism built into companies. Even the best companies, even the Unilevers and Hindustan Levers of this world... 'You join Hindustan Lever, okay, we will take care of you. Now we will plan your training and development, we will plan your career path, we will take care of your lives.'

From that, what is now happening is, people are becoming mobile investors. 'I've my human capital. I'll now try to find where I can invest this human capital.' Just like you have some money, you will see where you can invest that money. How will you decide? Who will give the best return? And where your money can go the most.

I will do exactly the same. Where can I invest my human capital that will first give me my best return? But second, also allow me the opportunity to grow my human capital so my future returns also grow.

Then, you've really turned everything upside down. The company's responsibility is no longer to manage my life. My responsibility is to manage my life, my human capital. The company's responsibility is to help me do that as well as I can. That's a very different world.

This is what Infosys is facing, this is what Wipro is facing. At the end of the day, this is what even Reliance and Bajaj are also facing. If you are any good in any of these companies, you will get your rewards. There is a war for talent.

People are going to move. Any good employee in Bajaj also gets the headhunters' phone-calls. Now the challenge is, either you can look out for mercenaries -- 'Every time there is a headhunter phone-call, I give you ten thousand rupees more' -- No great organisations are built by mercenaries; or the alternative is, can I compete for the heart and soul of people?

And how do I compete? Which is to treat you as an adult, to allow you to think about what you want to do, how you want to build your human capital, how you want to leverage it, and create the context in which every employee feels he is doing the right thing. I can look at you in your eyes and say, 'I don't know if I have a job for you for life. I can't tell you if the company itself will be immortal. So what's the value of a promise anyway? But every day you work in this company, you will add more value to yourself, personally and professionally. I will help you become the best you can be.' That's the commitment. That's the world Indian companies need to be in.

The market is there, but the managers are still not there.

On whether India will lose its edge in inexpensive skilled workforce as the war for talent makes employees expensive:

India is not a low-cost labour country. If you take software, today, in the world league, there are at least eight credible countries where the costs are significantly lower than India. China fielded 25,000 software engineers last year. Much lower costs than India. Other places, even some parts of Europe, India is not a cheap labour country. You have to accept that.

Manufacturing, blue collar workers and so on, if you really adjust, for labour productivity -- I'm not blaming labour quality -- institutions, infrastructure, capital, machinery all of them are to blame...but overall, productivity-adjusted Indian labour is not cheap. It is not as expensive as the US or Germany, but it is not cheap.

And I think Indian companies that have traditionally built their strengths on cheap labour, including software companies, need to really, finally, accept this fact, and move on to the next step which is the value added. In some ways, like Korea did. That is the challenge that leading edge Indian companies face.

On businesses run by families / professionals:

I am very confused with the term 'professional'. Is Mukesh Ambani or Anil Ambani a professional? Or are they a 'family'? I don't understand it. As I see, from whatever interactions I've had with them, let me explain what a professional means. It means a body of knowledge that you can acquire through an academic programme and so on.

Anil Ambani has an MBA from Wharton which is not altogether unprepared for management. He could have done better, gone to the US, perhaps, but altogether. If I talk to him, I realise he is one of the most insightful, sharp, decisive, clear managers I've spoken to.

Is he a professional manager? By any answers I have, absolutely! Is he also the son of Dhirubhai Ambani? To the best of my knowledge, yes he is.

So this notion of family-run businesses, professionally managed companies seems misplaced. The simple idea is, give management to those who can do it. If your father happened to build a business, if you are competent, by all means run it. But if you are not competent, either step out or ensure you gear up to a governing structure where the board forces you to move out and get the right management in.

People say, 'Mr Amitabh Bachchan had professionals at the helm of ABCL but it had problems.' It is not a professional failure or anything else. Individual managers succeed, fail. Individual companies succeed, fail. This artificial division -- professional, non-professional -- is superfluous.

Is Bill Gates a professional? A dropout, an undergraduate. So does the word professional mean? I will tell you why I rile at this.

There is a historical process from where this word 'professional' came to the Indian lexicon. Which is, when we started, we started with big companies, with this big middle management, high bureaucracy and as professional men, you could manage in this bureaucracy. You could do planning, you could write great notes and write very wise comments, create great systems....

Much of what we call professional management is bureaucracy. That's the last thing that the companies need today. And I see that, you know, people in India with MBA degrees and so on, are bureaucrats. They add no value to the company.

They occupy great big chambers, they think they are very intelligent, they talk very wisely. There is always a sign of this group: they say, 'it could be argued that'. They never say, 'I do not agree' or 'I agree'. No. It's always, 'It could be argued that'. Anybody who says, 'It could be argued that' should be immediately moved out of the company.

That's almost what a professional became in India, right? You might say, 'Well, that's how it was also in GE.' Exactly! This is the way the world has moved in the last 20 or 25 years.

And all I say is, let us not, in the garb of professional management, create here today what the bureaucracy did elsewhere. Again, you must understand this in the historical sense. The bureaucracy or the bureaucrat entered the last century as a conquering hero. It was a rational form of organising, it took away the old feudalism, adhocism, it was a wonderful form. That is why Webber wrote wisdom was sufficient the way it was.

The bureaucracy exited the last century as a spent force. And it's not just entrepreneurship in the sense of new companies. It is entrepreneurship as a set of values in replacement of bureaucracy -- that was the transition that took place over the last 20-30 years.

Let us understand this transition in its historical context rather than going back to that old bureaucratic model.

On Indian firms' attitude towards corporate governance:

If you take somebody like Narayana Murthy (chairman and CEO of Infosys Technologies), he was, right from the beginning, practical, for him effective governance was a very powerful means of strategy. It was just not a moral issue. It made absolute sense.

One of the reasons Infosys's stock price is what it is, is because you recognise that good governance is good for your stock price, because then investors notice transparency in the company. Besides, as an individual where he came from, his own style, yes he is at one level a significant equity holder, but he is never the proprietor or the family or anything of Infosys.

So for Infosys, right from the very beginning, the transparency of governance, the role of the board and all that is natural. And it makes sense. And it is good for strategy. And, of course, it is good for the company, for the country, for the world.

In contrast, if your great grandfather built a company, and if you work for it....I take the case of Rahul Bajaj. You have given your life to the company, you did not spend time in London or New York, or even in lovely flats and houses in Bombay. You lived in this little village called Akurdis, spent your youth there, have sent your children to the local school along with the factory employees, you believe you have sacrificed. You believed, when you kept counting your every rupee... from a little thing, you gradually built up this giant (Bajaj Auto Limited)....

At that point, to tell you, 'Well, you know, some of your stock is in the market, so your equity is nothing other than mine.' When I have one share, you have not just owned the equity but given your life to it, and now I am going to tell you, 'Well, if you have given this, this is....' It is emotionally a very different proposition.

So, that distinction still haunts. Given that distinction, I think, more and more people are moving towards effective corporate governance primarily because of the discipline of the capital markets.

They are beginning to realise that 'If I don't do it, my price earnings ratio will be where it is. I am really low.' So it's just becoming just like I produce defective products. The market forces are exercising their own will. And gradually people are moving.

But don't expect a switch button that I switch on the light, and the light goes on. That's not how things work. These are emotional issues.

We forget today all the battles that took place at Ford. As Ford gradually evolved from family ownership, family control to a public corporation, it took 25 years. Now, to expect what took 25 years in other societies to happen in two months in India is not right.

But overall the market this capital market is doing its thing. I think the SEBI guidelines are great. The CII guidelines are great. They are better than any other country in Asia, certainly including China, Indonesia or any place.

I think corporate governance is an area where India is beginning to make real, substantive progress.

On Mukesh Ambani's reported view that there is no such thing as core competence, that competence is what you build around people:

If you take a totally doctrinaire approach that says, 'This is what I do. So my core competency must lie within it. And that's what I should be doing', basically I'm saying I should never pursue anything new. 'Any opportunity new that is opening up I should never pursue' -- that is an absurd situation.

And one person in the world who will never say that is (fellow management guru) C K Prahlad. The notion of core competence -- CK and Gary developed looking at Canon.

Canon was a camera company. Because of being in camera business, they had certain competencies such as optics, technology, brand building. Then they say, 'Okay, how do I take these competencies and move into photo-copiers?' Very different business. New opportunity. That was the notion of core competency.

Here, there is a notion of core competency which means, 'Go back to your original core business. That is not what the notion of core competency meant.

Reliance has one of the world's outstanding project management skills, large financing skills. Now, telecom makes great sense for it purely from the core competency argument. So I do not see this wide gulf between the concept of core competency as argued by CK and the argument that Mukesh Ambani made. I think it is gross simplification that does not recognise what the topic really means, and confuses core competency as saying, 'If you are in petrochemicals business, just stick there, don't do anything else.'

Neither CK nor Mukesh Ambani said that.

On Rahul Bajaj's optimism that the so-called 'Old Economy' sectors would regain their lost glory:

Will the world need steel in the foreseeable future? Yes, the world will need steel. Will, therefore, be steel companies? Yes, there will be steel companies. Will some of them do better than others? Yes, some of them will do better than others. And those better-performing companies will be seen as doing well.

However, if you look at the capital market, price- earnings ratios, then there is a critical issue. Which is, the asset intensity of your profits and revenues. If you are in steel, for every dollar of asset, you may get a dollar of revenue and maybe ten cents of profit.

On the other hand, if you are in software services, for every dollar of asset, you might get 100 dollars of revenue, and, say, 22 dollars of profits. Those differences will remain.

Also, the growth potential of different industries over significant periods of time will be different. So, if you take price-earnings ratios, there will be some in the three, four, five category; there will some in the 15, 20, 25 category; and there will some which will be in the 40, 45, 50 category.

Nowhere in the world will they come up, those in the 40, 50 category. Why do we talk about Infosys? Because of its price-earnings ratio. Not because of its revenue because it's a small little company. We don't talk about it because of its revenue or profits. We talk about it because of its market-capitalisation.

Somehow, managements, media, academics, for 30-40 years, all we focused on was earnings and profits. What is happening today is, the correlation between current profit and market-cap is declining right across all industries. And the world as well as the managements are realigning themselves to market capitalisation as the focal point rather than profitability and revenue.

If market capitalisation is going to be the focal point, there will be some industries. We know market capitalisation. No. The present value of all future profits. Growth plays an important role in market capitalisation. Industries and companies with significant market-cap are bound to be noticed by investors. Infosys is growing at 70 per cent per year. No matter what Rahul Bajaj does, if he is in the 2-wheeler business, he can't grow at 70 per cent per year. So he is not going to get that multiplies in price-earnings.

To that extent, the distinction between these two kinds of businesses will remain. But what is new economy today will become old economy tomorrow as the new economy of tomorrow arises. That's the process. That's capital market, that's creative destruction, that's evolution, that's progress. This is an ongoing saga.

On Corporate India's awareness of the 'Euro market' (European Union):

If you take the information technology sector, which has been the darling and the driving engine, there is a portfolio imbalance. Whether you take Infosys or Wipro or any of the IT companies, their portfolio currently is very heavily weighed to North America with relatively lesser balance in terms of both Europe and Asia.

I think all the companies are very aware. If you look at what Premji is doing at Wipro, or what Infosys is really trying to do, is to rebalance the portfolio and they have of course initiatives in building up their various strengths in Europe, Asia and so on.

Historically, Europe has been not as effectively marketed too as it could. I live in Europe. I work in Europe. I've done so for the last 15 years. I do think Europe does offer an enormous opportunity for Indian products and services though there are barriers.

In the US, the biggest advantage is the English language. You can't penetrate continental Europe, Germany, France, Italy and so on, unless you truly become more multi-cultural, unless you truly develop local language skills. Japan is the same, Korea is the same.

I think the leading edge companies now need to go to the next step of building that pluralism inside them. Infosys has said its next challenge is to become truly multi-cultural, to go beyond India and the US, to a global organisation.

If I take those at a lower end, there are some old firms which, for historical reasons, have a reasonable presence so near. If you take traditional industries such as tea, their challenge is not to make a breakthrough in the US market, to make the breakthrough in other parts of Asia. They historically had strengths in Europe.

Overall, I think Europe represents the unexploited potential for a large number of Indian companies.

SEE ALSO:

Oct 18, 2000: 'ISB will help shape the visions of aspiring management students'

Oct 17, 2000: Bombay Dyeing episode is a good incident, says guru Ghoshal

Sep 29, 2000: Sumantra Ghoshal is founding dean of Indian School of Business

December 20, 1999: AP begins work on dream b-school

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