Ajit Balakrishnan, chairman of the board of governors, Indian Institute of Management-Calcutta, and founder and CEO, rediff.com, delievered the convocation speech at IIM-Calcutta on April 1, 2007. The speech is reproduced here:
Let me start by telling you a modern tale: Five private equity funds get together to buy a large international steel company. The seller states his price: he wants half the money that the first fund has plus all the money the other four have. He gives them other alternatives as well: he will sell his company for a third of the second fund plus all the money of the others, or a fourth of the third fund plus all that of the others, and so on.
The question is: what is the price the seller wants for the steel company and what size fund does each private equity player have?
Those of you who are mathematically inclined will recognise the problem as one of solving a set of indeterminate equations [1].
Those of you who are students of history will recognise this as one of the many problems from the Bakshali Manuscript [2]. This manuscript, written on pieces of birch bark, was found by a peasant in 1881 [3] in a village called Bakshali near Peshawar. It is written in a language that was a precursor to Sanskrit [4] and has been dated as from between the 2nd century BC and 2nd century AD [5].
In the Bakshali Manuscript, it was five merchants who set out to buy a jewel, and not five private equity funds to buy a steel company. But otherwise, the formulation of the problem and the method of finding the answer are the same.
I can see from your faces that you are all eager to go on to the real world of business. I want you to remember that the Bakshali Manuscript serves as reminder of the great intellectual tradition you come from.
In 1971, I remember waiting in cap and gown, like you wait today, eager to receive my diploma and set forth to conquer the world. It was on a day much like today, the romantic Calcutta winter had receded into memory but the dog days of May had not yet set in. But it was different in other ways. There was the sound of guns outside, some from a distance, some from quite close. They served as a humbling reminder that though we were armed with the latest tools of operations research and psychology, there were fellow citizens outside fighting more basic battles.
It was the peak of the Naxalite uprising. The government, desperate to find a solution, called an election. The usual election officers, the state and central government employees were wary of volunteering, so they called for students. I was eager to contribute to a solution to the strife and volunteered for election duty.
Thus I found myself in Sonagatchi, the red light district of Calcutta, soon after graduation assigned the job of marking indelible ink on the fingers of voters while guns went off all around us.
This is why I have boasted for years that I have held hands with most of the sex workers of Calcutta.
As I stand here today it is quiet outside. The social battles of the 1970s seem so far away and quaint.
What is different in today's India compared to when I graduated in 1971? I suppose the big difference is that the world's macro-economic factors have swung India's way.
It started with the Western world's information technology industries developing in the 1990s an insatiable demand for low-cost, English-speaking manpower to convert billions of lines of computer code that had been patched together in the early days of the computer industry. India luckily had large numbers of such programmers idling because Indian trade unions at that time would not allow computers to be introduced [6].
Smart entrepreneurs seized the opportunity to ship these programmers abroad and moved on from there to build IT services companies that are now the envy of the world [7].
This labour cost arbitrage [8] opportunity has continued. Western financial service, healthcare and customer service industries have started a transition from a craft mode to an industrial mode. During this transition, they need a large supply of reasonably skilled, low-cost, English-knowing workers. Low telecom costs [9] have made it possible to serve this need long-distance from India [10]. When that transition is complete, [11] the arbitrage opportunity will disappear but that is still some time away [12].
A second fortuitous wave that is propelling India farther forward is the tremendous liquidity surplus in the world. Capital today is gushing out and finding its way into the Indian equity markets, into real estate, into almost anything that you can name.
But big questions stare us in the face, and yours is the generation that will have to find the answers to these questions.
What if the rupee that today trades at about Rs 45 to a dollar goes to Rs 20 or even Rs 10 per dollar in the next decade [13]?
What if the current excess liquidity situation in the world tightens and capital becomes risk averse and expensive? [14]
What if millions of our countrymen say we too want to be part of this Shining India [15] that is currently available only to the sons and daughters of people already in the middle class [16].
Remember, one day, one of you will be invited to make a Convocation Speech just as I have been invited today. If it takes the same time it took me to be invited, it will be the year 2040.
By that date, some say [17], India's GDP in US$ terms will exceed not only the European countries and Japan but also, perhaps, the United States.
But what these reports also say, and this part is often overlooked, is that in 2040, India's per capita GDP will be just 15% of that of the United States and a third of that of even Russia.
Another way of putting it is that even thirty five years from now, the average Indian will earn just Rs 5,000 a month. On this income he will have to feed and educate his children, look after their healthcare needs, afford entertainment and life insurance.
This means he must have a place to stay with clean water supply at, say, Rs 200 per month [18], uninterrupted electric power, perhaps at 50 paise per unit at the consumer level, medical insurance at, say, Rs 10 per person per month and life insurance perhaps at Rs 5 per person per month.
If we have to achieve this, we need to convert our economy to one that has the lowest transaction and transformation costs [19] in the world.
These seem impossible targets to achieve using the current management methods and present economic institutions. We need to devise new paradigms that achieve these targets without any subsidies, and one that allows businesses that provide these services excellent returns on their capital.
In finding answers to such challenges, in the past, all of us in Indian management have borrowed paradigms from the West and force-fitted them into the Indian situation.
For example, we often hear calls for reducing 'labour rigidity' in India. Every such call should remind us that we are trying to force-fit Henry Ford's mass manufacturing system to India. We forget that this paradigm [20] assumes a social system in which business cycle downturns can be dealt with by lay-offs and production cuts. It assumes, both, a labour shortage economy where people who are laid off quickly find jobs and a social security system that pays you for the time in between jobs.
Similarly, when people cry to 'improve quality' as a panacea for competitiveness problems, they forget that the Six Sigma Quality paradigm was developed by Deming [21] in the context of the 1960s Japanese consumer electronics boom [22]. It works very well in industries like electronics and auto where efficient assembly is the key to success. Transplant it to creative software product development, for example, and it becomes merely a marketing gimmick and makes little difference to results. [23]
Finally, a third example, the much admired US National System of Innovation [24] as it applies to the healthcare industry.
We forget that it assumes a State [25] that lays out vast amounts of money in research, allows private companies and individuals to own the patents that rise out of this research, employers who bear the cost of the resultant high-priced healthcare system. US companies in the older industries [26] find themselves in an impossible situation today and American business and political leaders are desperately trying to find a way out of this debilitating system.
In a few years many of you will head large corporations and will be responsible for producing the vast array of products and services that our fellow countrymen will need. Others among you will hopefully join academics and contribute to theory. Whatever you do, please remember the inheritance you carry within you and the obligation that you owe to your less fortunate countrymen.
Please remember that each management paradigm [27] has its societal context and cannot be that easily borrowed. Original management paradigms [28] to address the Indian challenges have to be developed and it is your generation that will have to do that.
Be inspired by the early examples that demonstrate such a possibility: The Aravind Eye Care System that treats over 1.4 million patients each year, two-thirds of them -- or almost a million patients -- for free, is often cited as an example. They apparently succeed because they have improved surgical practice and invented low-cost eye implants. [29]
If you succeed in doing this, [30] you will release a tsunami-like demand that will not only create jobs for the millions coming into the job market, but also allow them to live a fulfilled life in which life's necessities are within their reach.
If you succeed, Indian managers and management theory would have made its own unique contribution to the world and you will personally have lived a worthwhile life.
Our ancestors have been doing cleverer things and for very long. The Bakshali Manuscript is evidence of this.
If you occasionally wonder whether this immense task is within your talent, remind yourselves that you come from ancestors that created the Bakshali Manuscript. If you ever doubt the power of ideas to transform the world, be inspired by the Bakshali Manuscript -- it's written on crude birch bark, the language in which it is written has been long extinct, but the power of its methods is relevant even today.
Thank you very much for inviting me today. I wish you all a very successful management career.
[1] The equations take the following form: x1/2 + x2 + x3 + x4 + x5 = p, x1 + x2/3 + x3 + x4 + x5 = p and so on
As x1/2 + x2/3 + x3/4 + x4/5 + x5/6 = q the equations become (377/60 )q = p with a number of possible answers. If q = 60 then p = 377 and x1 = 120, x2 = 90, x3 = 80, x4 = 75 and x5 = 72
[2] The original manuscript is in the Bodleian Library; a reprint of G R Kaye's first translation is now available at Aditya Prakashan, Delhi.
[3] This account appeared in the Bombay Gazette on August 13th, 1881:"The remains of a very ancient papyrus manuscript have been found. . . [near] mounds believed to be the remains of a former village. . . while digging in a ruined stone enclosure on one of these mounds much of the manuscript was destroyed by the ignorant finder in taking it up from the spot where it lay in between the stones. . ."
[4] According to Dr Hoernle, the head of the Calcutta Madrasa who gave a description of the manuscript to the Asiatic Society of Bengal in 1882, it is in the Gatha dialect, "the literary form of the ancient North Western Prakrit ( or Pali). It exhibits a strange mixture of what we should now call Sanskrit and Prakrit forms."
[5] There is a vigorous debate on the dating of the manuscript.
[6] Protracted negotiations between the government and the unions of the nationalized banks resulted, in the late 1980's, in the unions agreeing to the introduction of microcomputers as long as these were called "Advanced Ledger Posting Machines" and not called computers. Since computers arrived late in India, many earlier generations of programming languages were skipped- most Indian programmers went straight to Unix and Cobol and used relational database systems like Oracle which were just coming in to the world then.
[7] An authoritative account of the processes which led to this success has yet to be written. Most of us who lived through that period remember the GE teams visit in the late 1980s as the first big round of orders for the nascent software industry. The next big step up in scale was the Y2K orders in the late 1990s.
[8] Domestic inflation through the 1960's and 1970's contributing to improving this arbitrage by forcing the depreciation of the rupee at periodic intervals.
[9] Students of history will remember a parallel development in the 15th century: ocean freight rates sharply declined and led to a great resurgence in world trade.
[10] At the moment, most of the manpower in the Indian BPO industry is deployed in Call Centres. Call Centres became popular in the United States post the 1973 oil shock and the advent of 1-800 number technology. It was originally an attempt to save on the cost of traveling salesmen. US Call Centres, originally located in cities, progressively shifted first to rural areas of the US in an attempt to save costs and then moved to India as further cost savings were pursued. Forward looking Call Centre companies in India are attempting to use the relationships created with call centre orders and move up the value chain by taking on a bigger piece of the customer service process of which the Call Center is one component. A minority of business now done within the BPO rubric is in transaction processing which is believed to be less immune to pricing pressure and has higher switching costs.
[11] For instance, if current research on voice to text conversion bears fruit, the Call Centre opportunity will decline sharply.
[12] For a ranking of jobs based on their potential to be outsourced, see the McKinsey report 'The Next Revolution in Customer Interactions,' McKinsey Quarterly, December 2005
[13] The Goldman Sachs BRICs Report assumes an annual appreciation of the rupee of 2.5%.
[14] How dependant the Indian equity markets are to international financial institutions entry and exit has been observed in recent steep one-day falls and gains. Anecdotally, again, 70% or more of funds deployed in the Bombay Stock Markets are of foreign origin
[15] Politicians now understand that small, single digit swings in votes can lead to regime change in India, as has been observed in the defeat in the Chandrababu Naidu's government in Andhra Pradesh and the BJP Coalition's defeat in the Lok Sabha Elections
[16] A recent study published in the Economic and Political Weekly shows that both the parents of most employees of Bangalore IT Services companies are graduates.
[17] India's Rising Growth, Goldman Sachs January 2007. This is an update of an earlier report -- Dreaming with Brics- the Path to 2050, 1993
[18] These are arbitrary numbers that I have chosen.
[19] This is going to be as much a political challenge as it is an economic and management one. As the New Institutional economists have demonstrated, transaction costs arise from the rules that govern the working of institutions- these rules are , in turn, made by powerful interest groups. Bringing transaction costs down will mean working around these interest groups.
[20] The original drive was to have pistols with interchangeable parts so that they could be repaired in the field. The innovation was to have workers specialize in each operation, deployment of specialized machines like milling machines and piece-rate payment. These methods soon spread to the making of clocks and sewing machines making these products affordable by common people. Viewers at the First Industrial Exposition in London in the 1850's were amazed at all this; a British Parliamentary Committee investigated these new methods dubbed it the 'American System of Manufacture.' Ford used these methods in planning his new car plant.
[21] Mainstream US interest in Deming's work was sparked by the airing of NBC's documentary, 'If Japan Can, Why Can't We?'
[22] Sub-contracting of TV set assembly by US manufacturers ( and later the Japanese) was a key ingredient in the growth of the Tiger economies of Asia in the 1960ss. This arose because of the nature of elecronics technology: capital intensive component making which the US companies specialised in combined with labour-intensive final assembly which was farmed out to Asia. India missed this whole boom because autarky was at its peak in India during this period.
[23] In the United States, particularly in the Silicon Valley, where most software innovation in the world takes place, there is no talk of statistical quality control methods.
[24] The concept of a National System of Innovation was proposed by Richard Nelson (National Systems of Innovation, Richard Nelson, Ed, Oxford, 1993) and by this he meant the set of institutions whose interactions determine the innovative performance of national firms.
[25] Nearly half of the R&D amount spent in the US Pharma industry comes from the US Federal Government.
[26] The current travails of the US auto industry on account of health care benefits to retired employees is an example of this.
[27] For a panoramic review of management paradigms: Thomas Clarke and Stewart Clegg, Changing Paradigms: The Transformation of Management Knowledge for the 21st Century.
[28] C K Prahlad and Stuart Hart first raised the possibility of a new way of thinking in The Fortune at the Bottom of the Pyramid. They presented this as an opportunity for large multinational companies to make profits and help development by selling products to those earning $2 a day on a PPP basis. They have not touched on what management paradigm it takes to do this profitably.
[30] Clayton Christensen (The Innovators Dilemma) discusses this challenge from the perspective of successful incumbents who have to make their products affordable for new classes of customers who do not value all the features in the high end products they currently make. His insight is that the very practices that make these companies successful are what prevent them from serving these new customers.
Comments welcome at ajitb.rediffiland.com
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