The Recession Man: How CEOs are coping with assets acquired during boom

In May 2007, when Manmohan Singh made his famous “conspicuous consumption” speech at the National Conference of the Confederation of Indian Industry (CII) in Delhi, some dubbed it a critique of capitalism. At a time when GDP growth was 9% and the Sensex was 15,000-going-on-20 ,000, the Prime Minister called on the gathered CEOs to be “models of probity, moderation and charity” and “resist excessive remuneration to promoters and senior executives” . What a party pooper. He even quoted Keynes, saying that if the rich spent their new wealth on their own enjoyments, the world would have long ago found such a regime intolerable.

Surinder Kapur was one of the CEOs attending the CII meet that day and he recalls being quite affected by the speech. “There was a sense that quite a few things were going out of kilter in corporate India, including salaries,” says the chairman of Sono Koyo Steering Systems . “The downturn has shown that the PM was right. Corporates had far too much money available to spend and greed had come to be synonymous with success.”

Temptation was everywhere and nearly every company ended up splurging during the boom in some measure . But now all those the expenditures on acquisitions, diversifications, real estate, talent, are causing headaches akin to hangovers after a binge, except that these after effects aren’t about to fade easily with time. Today, the toughest task before the downturn CEO is to work the assets acquired during the boom.

As an auto component manufacturer, Kapur is one of the worst affected by the global recession. The leader in this sector, however, is Bharat Forge, a company that made several global acquisitions in the height of the boom.

Chairman Baba Kalyani admits he was caught completely unawares by the severity of the global recession in the automobile sector. “During the boom, we were focused on creating capacities ahead of the expected demand curve. We were making capital investments ahead of the curve, hiring people ahead of the curve, creating working capital ahead of the curve. Now we have to do just the opposite . The automobile industry is not going to return to previous demand levels anytime soon,” he says.

It’s not uncommon for corporates to accumulate fat in good times — some even make a provision for it. But as everyone knows, working off the fat is always much harder than putting it on, so the downturn CEO is forever on the treadmill. Kalyani, for one, is trying to diversify his customer portfolio and produce products for the global energy industry, which has been less affected by the recession. That’s actually a strategy adopted by many recession-hit CEOs. Rakesh Sarin, managing director of Wartsila India has seen demand for power plants dry up in the shipping sector, once the company’s mainstay. Now the Finnish company is trying to open up the market for smaller capacity power plants of 300 MW and less, meant to serve small cities and metropolitan suburbs .

“You have to be creative in a downturn ,” he says. “The CEO’s job today is to go out and spot new business opportunities.” The downturn has certainly changed the way the CEO allocates his time. Acquisitions are out and CEOs are no longer spending time with investment bankers. Instead, they’re spending more time with their staff, working out ways to deliver better products and services at lower costs. Labour and staffing policies can’t be left to HR — they’re strategic. Launching newer, competitive products and services for the shrinking market can’t be left to marketing, they’re mission critical. With the dollar swinging from Rs 39 to Rs 52, forex contracts are no longer the CFO’s prerogative, they’re strategic too.

“In a downturn, the only strategy is operational strategy,” says Accenture’s Jaime Ferrer, who heads the firm’s consulting business in for Europe, Latin America, Middle East and Africa. “The companies that come out of this recession better will be those that achieve excellence in their operations.”

Since it’s become increasingly difficult to predict the economic weather, the downturn CEO is now busy building a boat that can withstand storms. This means envisioning worst case scenarios and building systems and structures designed to keep the organisation afloat if they actually occur . “Several CEOs are having problems because they have been unable to sense risk,” says Arun Maira, senior advisor, The Boston Consulting Group.

“Now, in order to grow their businesses in an uncertain environment, not only must the CEO have a mind that is permeable to a variety of ideas, but also an organisation that has permeable boundaries with the world outside.”

The Indian IT services industry is one that has always had close ties with the world outside, which may have helped it cope in a steadily deteriorating market. But as global customers negotiate increasingly tough terms, companies in this sector are gearing up to shed what is likely to be a voluminous quantity of flab. Ashok Soota, chairman of Mindtree Consulting says he’s seen many booms and busts in his long career but this has been different: “This time, our customers are in real pain. We have to do whatever it takes to help them.”

The pain after the champagne is familiar to French technology consulting firm Capgemini , where India CEO Baru Rao says, “Your hopes do ride high in a boom. Everybody wants to invest in a bright future. Indian IT has been relatively vigilant compared to other sectors , but we’re still under a lot of pressure. The downturn is a good opportunity to focus internally and reduce inefficiencies.”

As a people-intensive operation, Capgemini has been using the downturn to add flexibility to its work practices. For one, it is training its programming staff to work in sales, a move that might have been resisted two years ago, but is accepted today. These are the kind of policies that send out signals to the rank and file that the organisation is taking creative, proactive steps to counter the downturn. Says Praveen Vishakantaiah , President, Intel India, “People watch the CEO very closely in a downturn. They won’t accept empty assurances. You have to do things to make it better.” For Indian IT, the downturn has been the unimagined Black Swan.

An industry that till recently was complaining of talent shortages is now faced with the prospect of lay offs. As a result, IT’s leadership is still struggling with the restructuring process with many haven’t yet taken the bull by the horns. But as Akila Krishnakumar , country head of global software company Sungard says, “You can’t hunker down and wait for the downturn to pass. You have to be seen as someone who is thinking through this intelligently and taking action. This might mean doing things you would never have had the spine to do earlier , like letting go of non-performers . But you have to do it in order to hold on to your best employees and customers.”

The CEOs of MNC subsidiaries have arguably been under even more pressure than the average Indian CEO, since their parent companies have been severely affected by the recession. Ravi Chauhan was the managing director of Nortel India when the parent company filed for bankruptcy in the US (he has since moved to a different role within the company as head of the company’s Communication Enabled Business Solutions). He says: “The CEO’s job is to cut costs without doing damage to the essence of the business. Cost reduction is also the key selling point today. You have to position yourself as one who can help the customer reduce costs — that’s the only as you get traction.”

One thing is certain—the downturn is forever changing the persona and outlook of the Indian CEO. In good times, India Inc has been shown to be capable of irrational exuberance in the extreme. In these difficult times, its chastened leadership has to reckon with the bad karma of lay offs and cut backs. How will it cope? Two lines from the PM’s “conspicuous consumption” speech might help: “promote enterprise and innovation , within your firms and outside. If our industry has to make the leap to the next stage of development, it must be far more innovative and enterprising.”

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