When Public Goods is No Good

28 03 2011

 In the upcoming assembly elections in Tamil Nadu, the competing Dravidian parties, DMK and AIADMK are bending over each other to please (bribe ?) the electorate by offering unheard of freebies. Given below is a quick overview of the promises made by the two parties taken from MSN.com.

AIADMK

20 kg of rice for all ration card holders

20 litres of drinking water daily

1 mixie, 1 grinder & 1 fan

Laptops for students of Class 11 & ITIs 25,000 & 4gm gold coin as marriage assistance

Free modern, green homes of 300 sq ft, costing Rs 1.8 lakh each to three lakh BPL families

Rs 25,000 or 4 gm gold as marriage assistance

60,000 cows and sheep

DMK

35kg rice for below poverty line families

Wet grinder or mixie

Laptop for all backward college students 15,000 marriage assistance for poor women

Rs 15,000 marriage assistance

The media and the political analysts are all shocked at these promises. Elections are about promises made in manifestoes and all attempts are made to lure the electorate by showing them a vision of a better future.  Is mixie, grinder, fan or laptop for the poor not a vision for a better future? It is. Then why is everybody shocked.

The shock comes from the fact that these appliances or items of consumption are private goods and not public goods. The implicit assumption in public discourse is government expenditure ought to be made for public goods. Nobody is shocked, if a political party promises better roads or more electricity or drinking water. Because these are essentially public goods. It is expected that government is best equipped to create these infrastructure and deliver these services.

Quoting Wikipedia :

In economics, a public good is a good that is nonrival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability that no one can be effectively excluded from using the good.

The opposite of a public good is a private good, which does not possess these properties. A loaf of bread, for example, is a private good: its owner can exclude others from using it, and once it has been consumed, it cannot be used again.

It is not that there is no demand for public goods in Tamil Nadu. Tamil Nadu is a power deficit state and Chennai has a perennial water shortage. It is not that there is a lot of surplus in the government coffers, far from it. Tamil Nadu has a huge debt burden . Then why this great desire to improve the standard of  living by providing mixies, fan and even laptops to the poor .

The political parties have understood that the electorate have become smarter and mercenary. Perhaps based on the TV gift given by DMK in the previous elections which swung the result in their favour.  The voters are clearly asking ‘what’s in it for me ?”. The electorate in Tamil Nadu perhaps realizes that expenditure incurred in creation of public goods, benefit the politicians and bureaucrats far more than it benefits them. So they would much rather be happy taking home an appliance free, obviously, paid for by the taxpayer.

Is this a good trend? Obviously, not. Private good purchases are best left to individual choice. Large quantity of appliances purchased through tender and placing the order on the lowest priced ( L1) supplier is not going to satisfy majority of the users, even if he/she is poor. This will trigger a secondary market for these appliances and distort the market for these products.  Or else, it may lead to wastage. The voter may accept the appliance because he is entitled and may not use it at all.

Hopefully, better sense or election commission will prevail to curtail this dangerous trend.

– G. Mohan





Crude Reality Hits India

26 02 2011

In the US, where gas prices are completely deregulated, when international crude oil prices go up, the gas prices at the stations also go up. Although it is not immediate and not exact and there are also local and company level variations. A look at the graph of prices in the US for the last 3 years indicate this. In July 2008, when the crude prices touched a high of US $ 147 per barrel the Gas price at the stations peaked at US $ 4.12 per gallon. ( 1 gallon = 3.78 litres). In Dec 2008, the crude oil prices came down to US $ 32 per gallon, the gas price at the stations also came down to 1.61 $ per gallon. When the crude climbed back again in May 2009 to nearly 70 $ per barrel, the gas price at the stations climbed upto 2.5 $ per gallon. Now that the crude prices have climbed up again to over 100 $ per barrel, the gas prices at the stations is nearly 3.5 $ per gallon. One analyst on BBC mentioned that the rule of thumb in the US is for every increase of 10 $ in the price of crude over a 3-6 months period, the gas prices at the station increases by 25 cents per gallon.
In India, where the petroleum prices are still largely under government control it is difficult to come up with such a thumb rule. Also, the crude oil cost is only about 45 % of the petroleum price at the petrol pump. Rest being made up of other costs.
If the price of petrol stands at Rs 58.90, the break up of cost as calculated by the Indian Government is as follows:
• Basic Price: Rs 28.93
• Education Tax: Rs 0.43
• Dealer commission: Rs 1.05
• Excise duty: Rs 14.35
• VAT: Rs 5.5
• Petrol Custom: Rs 1.54
• Crude Oil Custom duty: Rs 1.1
• Transportation Charge: Rs 6.00
• Total price: Rs 58.90
Yet, India imports 80 % of our oil requirements. So when the crude oil price increases the price increase has to be passed on to the consumer/ taxpayer sooner or later.
Business Standard reports that
The Indian crude basket averaged around $99.85 per barrel in February so far, a rise of over 6 per cent, compared with January’s average of $93.87. The current quarter average, at $96.43, rose 13 per cent, from $85.06 in the previous quarter. The current year’s average price stands at $82.07 per barrel, up over 17 per cent from last financial year’s average of $69.76.
In January 2011, there was a price increase of Rs 2.50 to Rs 2.54 per litre of petrol. ( 4.5 %). This was over and above the price increase of Rs 2.5 (5.5%) in December. The average price of India crude oil basket in the quarter ending September 2010 was 76.22 $ per barrel. So when the crude oil prices increased by 8.28 $ per barrel between the Sept and December quarter, petrol prices were increased by Rs 5 in December and January.
So we can say that the thumb rule for India would be about Rs 6 increase in the petrol prices at the station for every 10 $ increase in the price of crude oil. So as the average price of Indian crude basket in this quarter is already 96.43 $, an increase of over 11 $ from the previous quarter, if the Indian government and Oil Marketing companies decide to act, be prepared to face an increase of Rs 7- 8 per litre of petrol at the station.
– G. Mohan





Tata’s Troublesome Telecom Legacy

30 11 2010

If you analyze case studies on strategy, business success would be attributed to one or more of these factors. First mover advantage, cutting edge technology from global leaders, big brand name, deep pockets, broad portfolio of products and services, opportunistic acquisitions etc are often cited as recipes for business success.  But if you would like to know an example of how despite all of the above, a business does not achieve success, look at Tata’s telecom sector businesses. Despite everything, it is an also-ran in one of the fastest growing markets. Not becoming for India’s largest business house.

Way back in 1983, Ratan Tata had visualized entry into telecom as a part of the business plan for Tata Industries. When the government liberalized EPABX , Tata Telecom was set up in 1989 in collaboration with OKi of Japan. Tata Telecom later entered into collaborations with AT & T in 1994 and Ericsson in 1995 for distributing and commissioning various telecom hardware products in India. Tata Keltron was the second venture of Tatas for manufacture of push button telephones, in collaboration with Siemens. The hardware side of telecom business tasted some success in the late nineties and early 2000s. Tata Keltron was a BIFR case for some time and later merged into Tata Telecom. Now the Tatas have virtually exited the hardware side of telecom having sold majority stake in Tata Telecom to Avaya in 2004. Now this company is called Avaya Global Connect.

Tata  Teleservices was the vehicle through which Tatas entered the telecom services market way back in 1996. It started with basic telephony services using the CDMA technology for fixed wireless. TTL started with the AP circle. In 2002, Tatas acquired Hughes Telecom, a basic services operator in Maharashtra and renamed it Tata Teleservices (Maharashtra) Ltd. TTL now has an all India footprint and offers both fixed wireless and mobile phones under the Tata Indicom brand name.

Tatas were also among the first set of license holders for cellular services, through a joint venture with Bell Atlantic. They started their GSM operations from AP. After Bell Atlantic exited the JV, it became part of a Birla-AT&T- Tata joint venture, often referred then as BATATA in the media. In 2002, it became Idea Cellular Ltd and management control was with the Birlas. In 2006, Tatas exited this venture completely.

After initially betting on CDMA technology and exiting GSM completely, Tatas re-entered GSM once again through Tata DoCoMo in 2008. By then telecom regulatory regime had changed to Unified Access Services from separate licence for basic, fixed wireless and mobile services. Also, additional spectrum was issued in 2008 to new players, the origin of the current 2G scam. TataDoCoMo is credited with the price war that started in 2008 with per sec billing plans etc.

Perhaps unable to break into the crowded marketplace for cellphone services, Tata brought in the Virgin mobile brand in India. Virgin mobile was positioned as a national youth-focussed mobile service. Tatas took some regulatory risks by bringing in Virgin when the policies related to MVNO ( Mobile virtual network operator) were not very clear. Virgin mobile today offers both GSM and CDMA services.

As if these many ventures was not enough, Tatas acquired a strategic stake in Videsh Sanchar Nigam Ltd (VSNL) when the government of India started its divestment process in 2000-01. VSNL had a monopoly in International Long Distance telephony till 2002. VSNL , also the first Internet Service provider ( ISP) in India since 1995 and had brought internet to India. Before acquiring VSNL, Tatas also got an ISP license and had launched Tatanova services in a few cities. VSNL is now Tata Communications. Tata Communications having lost monopolies is now hardly the money-spinner VSNL once was.

After all these years of investment, hard work and risk-taking, if one looks at the report card it is not a pretty picture for the Tatas. In cellular subscribers base Tatas are 5th behind Bharti, Reliance, Vodafone and BSNL. After the launch of Tata DoCoMo the new subscriber additions are faster. In wireline, they are again fifth, behind BSNL, MTNL, Bharti and Reliance as per this report. Financially, Tatas are even worse off. TTSL continues to reel under losses. As per an ET report the accumulated losses of the unlisted TTSL had mounted to Rs 10, 991 crores at the end of March 2009. The listed company Tata Teleservices Maharashtra continues to make losses. It reported Rs 97 crore loss in the latest quarter. The other listed company Tata Communications Ltd is also reporting losses. The consolidated results show a loss of over Rs 500 crore on a revenue of Rs 11,000 crore. The Indian operations are profitable but it is the African subsidiary which is reeling in losses.

Not able to become the market leader, in a market like India, where latecomers have become market leaders is bad. Accumulating huge financial loss is worse. But as if these woes were not enough the Niira  Radia controversy has added further to the tale of woes emanating for Tatas from the telecom business.

The Radia tapes has hit the Tatas where it hurts most. Tatas had a squeaky clean image in a country where corporates are known to grease the wheels of power to make things happen. Tatas had almost the image of a lotus in a cesspool.

There is nothing incriminating in the conversation between Ms.Radia and Mr.Tata. But it is quite clear that Tatas also play the same game that most corporates play to garner favours in the corridors of power and also manipulate in the choice of ministers. As it appears they were not in favour of Dayanidhi Maran , getting the Telecom ministry in UPA-II and used the services of Ms.Radia to manipulate the choice of portfolios. Now there is another investigation opened up to find out the role of Tatas in funding Unitech through an advance paid for a land deal just before they had to make payment for the telecom license.

Even in hindsight it is difficult to point out what blunders did Tatas do in the telecom business. Was it poor strategy? Was it poor execution of strategy? Was it poor leadership? Was it inability to secure favors and other privileges like free spectrum by manipulating the levers of government, (which Mr.Tata himself charges some other operators)?

The Radia tapes have taken the sheen of Tatas a bit, perhaps, quite a bit. Now, they don’t even have the excuse of playing straight in an otherwise corrupt and crooked business environment.

Mr. Tata, as he gets ready to hang his boots in 2012, may regret not having quit the murky telecom business earlier. It will remain a black mark in his illustrious track record of enormous achievements.





TCS Under Ramadorai: A Case of Providential Success?

11 10 2009

S.Ramadorai (Ram) has relinquished the charge of Managing Director of TCS Ltd and has handed over charge to N.Chandrasekaran, (Chandra). Business Standard described Ram’s tenure in TCS as follows:

“ Ramadorai has bid farewell to Tata Consultancy Services after being with the organisation for 37 years. 

Ramadorai joined as a trainee engineer worked his way to the highest position in the company. Ramadorai would continue his association with the company as the non-executive vice-chairman. Ramadorai took over as CEO in 1996 and has been instrumental in building TCS to its present day stature.

When he took over, TCS earned just $100 million and had 6000 employees. Under his leadership, the company has grown to be one of the world’s largest global software and services companies. 

His favorite quote is: No dream is ever too small; no dream is ever too big.”

Being the CEO of a large company for 13 years and taking it from 100 Million $ sales to 6 Billion dollars is no mean achievement. Yet, it is extremely difficult to articulate Ram’s management style or attributing any breakthrough step taken by the company or the IT industry to him.

Ramdorai inherited the TCS mantle from FC Kohli who had already identified and clearly laid down the building blocks for TCS business in software and IT services. The key presence in leading markets like US and Europe was already in place. The business model of hiring engineers and programmers from across India and posting them on projects abroad and earning profits by wage arbitrage was well established. Servicing foreign clients from providing offshore centres in India also began in the late’80s.

In a Business India article which came after Ramadorai took over as the CEO from FC Kohli, Mr Kohli had made a terse comment that ” Ramadorai had no vision for TCS, but will acquire it over time.”

The strategy and business model of TCS from the FC Kohli era was scaled up by Ramadorai and his team to levels no one ever thought was possible. Year 2000 presented a great opportunity to scale up this model and create software factories. Even the decision to leverage Y2K was not really a conscious decision by Ram/TCS but being with the flow. The entire Indian IT industry was gearing up for it and having had a head start in this business TCS and Infosys made the most of it.

There is no clear evidence or information that some of the acquisitions made by TCS were actually driven by any grand vision of Ramadorai. It appears that the CMC acquisition which happened as a part of the disinvestment programme of the Govt of India, was a decision thrust on TCS by Bombay House. The merger of Tata Infotech with TCS also appeared to be a Bombay House decision to strengthen an ailing company. Even the decisions of not launching an IPO at the height of the dot-com boom of ’99-2000 and finally launching an IPO in 2004 was more a decision of the owners rather than the CEO’s.

It has to be said that after TCS ceased to be a division of Tata Sons and became a public limited company and was declaring results Quarter after quarter, visibility of TCS and Ramadorai improved considerably.

In spite of his frequent appearances in media as MD of TCS or as an elder spokesperson of the IT industry, Ramadorai’s statements or quotes had minimal substance and little impact. Even his favorites would not credit him of having any charisma. Ramadorai and TCS always looked pale in front of the well-oiled PR machinery of Infosys.

In the last five years after the IPO, even though Ramadorai was the CEO, it was becoming increasingly visible that the day-to-day operations and much of the strategic decisions were being made by the top team particularly the current CEO, Chandra. The recent acquisition of Citi BPO or the organizational restructuring of 2008 were seen as Chandra’s initiatives rather than Ram’s.

Ramadorai had a very minimalist style of management. Being at the helm of affairs of such a large company, yet appearing very aloof. Sometimes he went along with the decisions and initiatives taken by his bosses in Bombay House and sometimes by his team. He did not make any grand statements of vision or put his personal prestige behind any major decision. Yet, he did not do anything silly. He may appear like a bystander, but he was very much on the ball in terms of facts and figures. He had the wisdom to know he had a good thing going in TCS and did not upset the applecart. He floated on the top of TCS unruffled as if he had a Teflon coating around him.

Having been the CEO of India’s No 1 IT company, does it make him a great technologist in the Bill Gates mould? Hardly. He had an engineering qualification, but that did not make him a great technologist. He started his life as a hardware engineer. But, the hardware he used to maintain, have long become obsolete. Having grown the sales revenue over 60 times in 13 years , was he a great marketing or consummate deal maker. Perhaps not. Although he would never shy away from meeting clients across the world, he did not show any flair in salesmanship or innovative deal making. Was he a great people person, having managed a company with more than 140,000 employees? Most probably not. He appeared distinctly uncomfortable in the company of his employees, majority of whom were less than half his age. He was neither liked nor disliked, because most employees did not know what he stood for.    

Ramadorai remained an enigma. Ramadorai may not have been anywhere close to the textbook profile of a great corporate leader, yet he leaves the top job at TCS as an extremely successful manager. As Ramadorai moves up as the VC, hoping that the elephant called TCS continues to trundle along on Ram’s luck.

– G. Mohan





If Jim Collins Were to Analyze the Grounding of Jet Aiways …

10 09 2009

Thousands of passengers were left stranded in airports due to cancellation of 186 Jet airways flights last Tuesday. The flights got cancelled because 360 pilots reported sick

The flash strike by the Jet pilots is just a symptom of the larger problem that Jet Airways is in. It is a manifestation of the sickness that Jet Airways has got into. If I look at Jet through the model propounded by Jim Collins in his latest book How the Mighty Fall, then it is showing many signs of being in an advanced stage of failure.

In this book, the author Jim Collins based on a study of many large companies, proposes that most companies who fail, go through five stages.  Let us look at each of these stages in the case of Jet.

Stage 1:- Hubris Born of Success; – Jet Airways was very successful and became the market-leader in Indian aviation till 2006-07. It redefined customer service and was the toast of the business passengers. It is the sole surviving private airline among the many which were launched in the 1990s. It also made reasonably good profits till 2005-06. In 2005-06, it made a profit of Rs 452 crore on a turnover of Rs 6,088 crore. The success bred arrogance.

Stage 2 – Undisciplined Pursuit of More: – From 2005-06 onwards when the domestic aviation market was growing fast, Jet like other airlines expanded its fleet and network. In the eagerness to grab market share it bought Sahara in 2007.By the admission of Jet Airways CEO Wolfgang Prock Schaeur in Business World, “We have expanded rather fast.”

Stage 3 – Denial of Risk and Peril: – From early 2007 onwards the operating environment of the aviation industry has been very negative. The price of crude started going up and touched its peak of 147 $ in July 2008. The competition in the sector was severe and thanks to the slowing down of the economy, the utilization rates of Jet fell. Jet management behaved as if it was a temporary problem. They launched their international flights. They renamed Sahara as Jet Lite. Yet it continued to make losses quarter-after-quarter.

Stage 4 – Grasping for Salvation: – Using the Collins model we can say with reasonable degree of confidence that Jet is currently in Stage 4. This is a fairly advanced stage after which redemption is rather difficult.

A look at the ‘Markers for Stage 4″ for Jet is in order here.

  • A Series of Silver Bullets: – Jet tried a number of dramatic, big moves like launch of the international service. Even though it was a full-service carrier, it tried to position Jetlite as a low-cost carrier . It also launched Jet Konnect as a new service, which was neither full-serive nor a low-cost carrier. Now, the silver bullet is a 600 Mn $ cost reduction programme.
  • Panic and Haste: – Collins says that instead of being calm, deliberate and disciplined, people exhibit hasty, reactive behaviour bordering on panic. in 2008, when Jet fired 1.900 staffers at one go and then with government pressure Naresh Goyal, Chairman, Jet  made a spectacle of himself when he took the back. Clear demonstration of haste and panic. BusinessWorld reports that based on some insights, Jet Konnect was conceived in a four-hour brainstorming session. It may well be a record time for launch of any new brand, says BW.
  • Confusion and Cynicism: – The flash strike by the pilots stems out of the cynicism and absence of trust in the management. They want to form a pilots union to negotiate their case, which the management is responding by sacking the pilots leading the union. Passengers are totally confused whether Jet is a full-service carrier, low-cost carrier or something in-between. Their drop in service standards has led many long-standing Jet Privilege (JP) customers to shift allegiance to other airlines.
  • Chronic Restructuring and Erosion of Financial Strength ;- Jet has been making losses since the last eight quarters. It has a huge debt burden of 3 Billion $. It has not been able to raise any equity since its IPO in 2005.

Stage 5 – Capitulation to Irrelevance or Death; – This is the last stage of failure. There have been very few instances in business history where companies have recovered and renewed themselves after reaching Stage 4. Xerox is one such case. 

Will Jet Airways be able to pull itself out of the mess? Will Jet xerox Xerox ? 

The odds are clearly stacked against Jet.  

PS: Readers are advised to redeem their JP Miles at the earliest. They may be worthless before you know. 

–       G. Mohan





Lower Returns from Higher Education: A View from Hyderabad

22 08 2009

 

This is that time of the year when  professional colleges in AP conduct their counseling sessions for fresh admissions to Engineering, MBA and MCA courses. The students armed with  their entrance test (EAMCET and ICET) ranks  under considerable stress jostle for  information on colleges, streams, vacancies, fees etc and making their career choices. This year in AP and perhaps in many other states the managements of the colleges are also under stress, more than possibly the students.

 

Blame it on the global financial crisis. The global financial crisis may have had a nominal impact on the Indian economy, but the impact that it had on the employment scenario of fresh engineers has been significant. The IT and ITES companies which have been the largest recruiter in the campus until last year have virtually stopped recruiting. Out of the over 180,000 engineers who passed out from AP in 2009, no more than 10,000 were taken by the local IT industry.

 

The poor placement performances in 2008 and 2009 have had a telling impact on the preferences. There is an about-turn in the demand for disciplines which feed the IT industry from being the most coveted to the most avoided. The engineering disciplines like Information technology, Computer Science and Electronics are being avoided like plague. Similar sentiments prevail for MCA admissions too.

 

For AP, that has the distinction of having the largest number of engineering colleges in the country, numbering 577, with over 240,000 seats. Nearly 100 new colleges got their approvals in 2009 alone.

 

The drop in demand and the increase in supply have created a huge glut in engineering and MCA seats in the state. This has forced the managements of many private colleges to go on an advertising campaign to enroll students. Education fairs are being held all over the state to persuade students to join a particular engineering college. There are canvassing agents appointed who promise colleges in relatively better colleges even if the candidate has a lower EAMCET rank.

 

Out of the 242,000 plus students who took the EAMCET admissions test for engineering admissions, over 81,000 students who had a rank did not show up, even after two rounds of counseling. This would mean that many seats would go vacant. The Deccan Chronicle quotes Mr. Rajeshwar Reddy, the General Secretary of AP Engineering Colleges Association

 

“This is not a good sign. If thousands of seats lie vacant, then it will not be financially viable to run colleges.”

 

When, the merit based seats are going vacant, then the demand for management seats would be even lower. Usually 20% of the seats are reserved as management quota and the management quota fees are usually four times the free payment seats. The entire business model of private engineering colleges is based on the earnings from management quota. Now, this assumption has been severely impacted.

 

The admission scenario in MCA is also similar. MCA seats have also increased this year, but the number of students opting out of MCA counseling is very high. The MBA admissions scene is slightly better. In fact, many colleges which offer both MCA and MBA are asking the government and the university to convert their MCA seats into MBA seats. A news item reports that even general graduation seats for BA/B.Sc in universities are going abegging, thanks to the huge number of seats in engineering.

 

As if the placement and admission blues were not enough, there are huge question marks being raised on the quality of engineering education in the state. The raids on AICTE officials first came to light in AP when an AICTE official was caught red-handed seeking money for accreditation while dealing with an AP based engineering college. As if to prove that the quality of education was indeed poor, the pass percentage for first year engineering at JNTU, the technological university which oversees the technical education in the state, had a meager 29 %. Out of the 1.8 lakh students who appeared for the first year, only 49,000 could clear the exams. This is in a university where most students rely on guides like “All-in-one” (a guide where last three or five years’ exam papers of all subjects are solved) and usually the exam papers usually do not change, including the order in which the questions appear.

 

If really the quality of the education was superior, surely the government could have allowed foreign or non-local students to come in, but it is not.

 

Each of the stake-holder needs to take blame for this mess

 

  • The IT and ITES industry which created in an illusion that they will continue to grow at 25%+ year-on-year. NASSCOM projected a 500,000 shortfall by 2010. Instead of a shortfall, India will have a huge surplus. The industry also in its eagerness to keep up with their own growth targets, allowed the quality to fall.
  • The students and their parents who rather than looking at planning the careers based on the capabilities of the student, got carried away by the hype of the IT industry. Also, taking such a short term view now by avoiding the IT oriented disciplines.
  • The promoters of the engineering colleges and the politicians (usually both are same), were too greedy for short term profits and assumed that whatever the quality of their delivery, the demand for higher education will continue.
  • The less said about the regulators AICTE, UGC and universities the better.

 

This correction in the higher education sector is long overdue. When the regulators are lax, the market forces have their own mechanisms to correct such anomalies. Hopefully, in this correction phase, the wheat will be separated from the chaff and many of the hole-in-the-wall teaching shops will close down and  the balance in the demand for different streams of higher education will be restored.

 

At the end of this phase, if the standard of higher education in India gets better and the employability of the output of its institutions is improved not only  the IT/ITES sector but the all other sectors of the knowledge industry, this pain would have been well worth it. 

– G. Mohan





BPO : Taylorism Redux

11 08 2009

Recently I had an opportunity of interacting and studying Business Process Outsourcing (BPO) operations closely. Till now, I had read about them in media and through books like Chetan Bhagat’s “One Night at a Call-center”. The perception that I had about BPOs  was of fun places as many young boys and girls work together. Their steel and glass buildings with multiple levels of security are so intimidating that I never ventured going beyond their reception. 

The BPO unit I visited is a captive unit of an MNC financial services company. Besides, the traditional voice-work, this unit also does a lot of non-voice work. I had some vague idea of what this non-voice or transaction processing entails. But I had never got a chance to look at them closely.

I met a small team of young MBAs who were engaged in the P2P process. One team is engaged in servicing their US offices and other their UK offices. (P2P is BPO jargon for procure-to-pay. Procure-to-pay in turn is what we would call the traditional purchase or procurement process). At the end of the interaction, I am amazed, bewildered and depressed all at the same time.

I am amazed because of the level of sophistication which the MNC have been able to bring to a rather routine process of procurement. It is not just the use of IT systems but doing away with the very concept of a store. Most purchases are where the user directly places the order with the vendor and the vendor supplies, based on a pre-agreed service-level agreement. I have not seen any Indian company taking so much care to study their vendors’ business and risks associated with doing business with their vendors. For most Indian companies vendor registration is a one-time affair and after which it is more of a relationship between the vendor and the purchase manager. There is no concept of an inspection, either before dispatch or after receipt. If the user complains about quality, the vendor will have to address the complaint.

I am bewildered because the rather short P2P process has been broken into as much as 60 activities. The activities range from Business analysis of the vendors, financial analysis, risk assessment of the vendors to contracts uploading, invoice verification and settling disputes. The items purchased are bunched into various categories and there is a separate buyer for each category. For example, there is a buyer who looks at the paper category. His entire job is to finalize contracts for 1000s of different types of stationery and paper items the company requires.

What depresses me is that out of these 60 activities, each employee just handles 2 activities. Day-in and day-out he or she is just doing the same activities repeatedly to achieve efficiency. The employee has little or no idea of the other activities in the full process. Besides emails and phone calls, they have no idea who the user of the materials or service is. Most of the materials they buy is just a code on the IT system and they may have never seen the item physically. They also have no face-to-face interaction with the vendor with whom they negotiate on behalf of the company. The hard work that they put in for nine hours everyday is largely irrelevant outside of the company in which they work. Hence, there is no real domain knowledge or skill they acquire doing this repetitive activity. Even though the work is carried out from India, the employees have little or no clue of the Indian business context.

The work-processes in a BPO like this remind me of the scientific management principles of Frederick Taylor. Taylorism is a theory of management that analyzes and synthesizes workflows, with the objective of improving labor productivity, division of labor. The key criticism of Taylorism was that it pushes division of labor to such extremes, that it leads to de-skilling of the worker and depersonalization of the workplace. I see Taylorism beneath the glossy façade of BPOs.

There is much that Indian industry has to learn from the MNCs in terms of business processes and management. But, it is too naïve to expect that the employees of these captive BPOs would be able to transfer this knowledge. The presence of such cutting edge MNCs in Indian soil will have little benefit for the Indian industry.

– G. Mohan








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