Salary raise for faculty members at IIM

This issue has been talked about in the media. One of the factors for better salary for IIM faculty relates to maintaining the differential with the pay of university faculty members. This relates to hypothesis that in money matters people feel happy when neighbours are financially worse than them.

Election results

The election results of 2009 have given new hope for the citizens. The country felt relief on the following developments:

a) Win for a stable government.

b) Concern for performance among the electorates. 

c) Defeat of candidates with criminal record.

d) Defeat of opportunists.

I wish the leaders of UPA a grand success in leading the country to the leadership position in the world and economic, social and political well being of all the citizens of out great nation.

I also wish good luck to BJP next time. If its Chief Ministers perform well and it plays the role of constructive opposition well, party will be able to fight well with Congress next time.

Credibility of Management Education

Lehman Brothers episode has generated a debate that was over-due. Most of the top level managers in this and other financial institutions belonged to the top business schools of the world. Were they taught right things? Business schools in the world are undergoing the worst credibility crisis today.

My take on this:

a) The graduates of top business schools are highly capable. They can analyse the situations well for organizations and themselves. 

b) We have always respected capability and rightly so. However, for organizations, capability is a double edged sword. Unless the energy of capable people is channelised through proper governance and systems, these people can easily compromise organizational interests for their personal gains.

c) The business schools have not paid adequate attention to these issues in their curriculum. Many courses are offered on mathematical modeling and language skills.

d) Unlike science, management education continues with undefined scope of learning. The courses are altered/changed with ease. 

e) I always wondered why do people spend huge sums of money on such management education? A fee of more than 10 Lakh for two years and Rs. 20 lakh for one year programmes make me sit and worry. Is it worth?

f) Today management schools {including almost all the Indian Institute of Management (IIMs) in India} are crying about crisis of funds despite such huge fee. Are they managed well and efficiently? 

g) I hope that slowdown of economy forces the business schools to reflect deep on these issues. Harvard Business School has already started such a process. 

Signals, we all like to avoid

In the current environment, I am reproducing some of the signals that indicate possible decline of organizations from my book - "Turnaround Excellence". I am amazed to observe them in virtually all the declining organizations irrespective of the industry in which they operate.

The signals are:

a) Increasing customer complaints

b) Customer mix drifting towards less preferred ones

c) Slow growth (often negative growth)

d) Autocratic one-man rule

e) Unbalanced top team

f) Sudden increase in the turnover of key personnel (especially the high performers)

g) Tolerance of incompetence

h) Inhuman treatment of people

i) Creative accounting

j) Liquidity problems

k) Scarcity of goals

l) Inferior technology

m) Cumbersome administrative procedures

n) Outdated organizational structure.

My studies suggest that we are likely to witness all the above signals in declining organizations. However, if we witness more than 9 out of above stated 14 signals, there is definite need to undertake concrete actions for the revival of organizations. 

Owing to loss of credibility under declining conditions, stakeholders turn hostile. The revival process requires changes at the top. 

Recession: What to do

Deflation: Managerial Implications for Companies

By Prof. Ramesh Bhat and Sunil Maheshwari

The recent announcement of drop of inflation rate to 0.44% should be a cause of alarm to all of us. We are at the verge of deflation. We all know, deflation is essentially just the opposite of inflation. Like inflation, deflation is also very costly for organizations.

 

Deflation adds complexity to decision making. Let us understand this complexity by using a simple example.  Suppose a company sells 10 units @ Rs. 20 per unit during normal times.  As deflation happens the quantity demand goes down to say 6 units and also there is pressure on prices and prices go down to Rs. 15. This deflation has affected both sides of your revenue – price and demand.  Deflation works on three sides: demand, price and joint impact of demand and price.  These effects can be segregated to examine the implications. 

 

Many times the impacts on input prices side such as raw material and salaries and output price side i.e., prices we charge from customers are not symmetrical.  This can lead to distorted margins and various financial implications.  For example, if during normal time salary was 10% of total revenues (in above example it would be 10% of 200 = 20), the same salary during recession time becomes about 22% significantly affecting the margins.  Therefore actions on many fronts are required to keep things under control and not allow it to worsen further.   

 

In times like this a prolonged recession with deflation is likely to worsen the situation further.  Currently, the government is also likely to face increasing burden of servicing the debts owing to high fiscal deficit (In one of the estimates it is estimated to be 14% of GDP). This may have serious implications for the developmental projects of the Government. This may prolong the deflation.

 

Deflation (or very low inflation) and RBI policy actions (like lowering of interest rates) to stimulate the economy may eventually push interest rates very low. However interest rates in India cannot be reduced beyond a point. This will actually raise the real interest rate in deflationary economy. It will discourage consumption and investment. It will further reduce aggregate demand and the general price level. The downward spiral will continue. Literature describes this situation as a "deflation trap."

During a recession, unemployment is typically high, as the demand for workers is weak. In order to boost employment, nominal wages need to fall. But employees and managers are typically very resistant to accepting wage reductions in nominal terms. Therefore real wages actually rise.

The rise in real wages result the job losses. This may prolong the recession on several counts. It could affect factors like consumer confidence, thereby weakening aggregate demand. It also could discourage firms from increasing employment, given that product prices and profit margins are shrinking.

These developments have some significant implications for companies in sectors that are severely hit by recession. The prices and demand in both these sectors are likely to go further down. These sectors are likely to witness rise in unemployment owing to reasons, explained above. Firms are likely to find it difficult to bear all the expenses. The balance sheet of the firms is likely to remain uncertain. Under these conditions, we suggest the following:

1.  Keep close watch on all discretionary expenses.  All expenses that could be avoided should be avoided or delayed by all means.
2. Find out ways to keep % of various expenses in balance with total revenues.  Renegotiate all contracts.  Ensure all incremental costs are variable in nature.
3. Real wages of people will rise even if nominal wages remain the same. Hence, we should restrain from giving annual raise to employees.
4. Inventories in every firm should be minimised as the prices will fall and the value of inventory will become lower with time.
5. Every customer will be important in deflationary economy. We will have to be extremely customer sensitive.
6.  All investments should be postponed, unless absolutely essential.

A fun in the class

A question to the class to make them understand the importance of extreme values in certain context: You are told that the average depth of the river is one meter. You know that you cannot swim. Will you cross the river?

A student: No, sir.

Me: Why?

The student: I will get wet.

I could not stop my laugh at this.

Managing Service Organizations

Service organizations including academic institutions are confronted with unprecedented challenge of attracting and retaining capable people for past many years. The people who excel in serving are hard to find and harder to retain. My latest research in India Organization (Paper is yet to finalized), I found that managers look for:

a) Economic well being, thus leading to economic bond with the organization

b) Emotional well being, thus leading to emotional bond with the organization

Managers at senior level value emotional bond derived from openness, trust, empowerment, experimentation, collegial relations, recognition, vision and brand of the organization, fulfillment of psychological contract, enjoyment at work, and a sense of social contribution. Creation of such culture requires visionary leadership. Managers with strong emotional bond stay longer, take pride in their work and employment in the organization. They also excel in their work, provided economic well being is perceived to be reasonable by them.

Most of the service organizations including academic institutions need to adopt this approach. Institutions will have to pay reasonable compensation. Compensation need not be the best in the Industry. However, they will have to undertake various activities to ensure above stated culture through visionary leadership to ensure strong emotional bond. Unfortunately, my study also indicates that organizations are confronted with leadership crisis. Visionary leaders like E. Sreedharan of DMRC, who can create such culture, are few and hard to find.