Managing in gloomy times

THE AIR is thick these days with terms like layoff, downsizing, putting people on the bench as the IT world puts it, and cost cutting in every possible way. The morale of employees is lower than ever before from the chief executive downwards to the last rank and file employee. Given this gloomy situation with no immediate hope of an upturn, and with the impending threat of the WTO impact, how does one manage to keep the show going? What strategies have to be used to pull the organisations out of the rut? Appropriately, the Bangalore Management Association in its annual convention on August 10 and 11 is deliberating on the theme of ``Managing in Turbulent Times''.

Intelligent cost reduction needed

Cost reduction for the competitive edge of Indian industries has been a much needed exercise ever since the globalisation process started. Whatever may be the reasons expounded, where is the justification for producing goods at almost double the prices at which China is able to offer?

The situation calls for a ruthless effort at hacking away all unnecessary costs. Once this is done, one can certainly look for markets around. This can work well if there is an assured quality image of the product. To cite a case in point, the popular MTR at Bangalore is giving a run for their money to the multinationals which are withering under its onslaught of offering quality ice creams for just Rs. 5.

Outsourcing is the order of the day in many industries. There are obvious advantages in that a smaller firm with a lower overhead can always produce goods at a lower cost. Joint thinking along with the suppliers at the design stage itself is called for, if ultimate cost reduction is to be achieved. Using the e-business techniques, transaction costs also can be cut down considerably.

Activity based costing

The manufacturing area offers considerable scope for cost reduction. Better asset utilisation by productivity improvements is a must. Identifying the direct cost drivers of an activity is half the battle won. Very often, skimming the surface is resorted to, with removal of costs incurred on training of employees and advertising, since these are easy options.

But real cost reduction can be achieved only when `activity based costing' is vigorously applied. It is a powerful tool which is more often talked about than implemented! Value analysis is yet another tool which has always been there waiting to be utilised better.

Even packaging improvements can help reduce costs and increase the value for the customer through proper design and handling. India has to learn a lot in packaging from other countries. Just a little bright sticker on the reddish New Zealand apple is able to tempt the buyers though in taste it might be a poor cousin to its famed Kashmiri counterpart!

Illusions tend to be created on a firm's growth by showing higher sales figures every year. Chairmen's speeches are accompanied by bar graphs on sales usually going upwards. What Hindustan Lever has demonstrated in its last year results is while sales growth is low, profitability growth has been high due to their effective cost reduction measures along the supply chain through e-business applications. Productivity improvements have yielded good results.

In fact, in future, rather than reporting the sales growth, companies can do well to report profitability growth and productivity improvements. This will reflect their health better and let the shareholders know their true worth! Far too much emphasis has been laid on market capitalisation in recent years than the real financial engineering of the company which alone can stand it in good stead even in times of trouble.

Variable pay concept

``Survival of the fittest'' is an apt slogan for the hard times we are going through. This applies to performance of people as well. For a long period in Indian industry, non-performers have been allowed to do piggyback riding on actual performers.

Many a time this proportion follows the famous economist Pareto's law of 80-20. This means that while 20 per cent of the people work very hard, the rest 80 per cent find ways of getting along though underperforming all the time. In this context the concept of ``variable pay'' assumes significance.

Variable pay, a means to align individual performance to successful business results, was once exclusive to the top management. But it has broadened to involve a larger population in organisations across industries.

This is especially important where labour costs are nearly half of the total operating costs. A company can pay its employees more in good years and less in lean years. This has also a side advantage in reducing the need for cutting down staff when times are tough. At the same time, the cost of doing business is reduced.

Fortunately, from the mad rush for money induced by the IT industry expansion in the last two years, some sanity is returning to compensation structures. No longer can employees think that their jobs are perennially safe even while they underperform. Linking pay to performance is becoming a necessity in the survival game.

Otherwise let alone the jobs, the organisations themselves sink and cease to exist in due course. This phenomenon has been amply brought out in the demise of many dotcom companies.

Swarm Intelligence

The Harvard Business Review issue of May 2001 has an interesting article on ``A whole new way to think about business'' called Swarm Intelligence. Curiously enough, the inspiration is drawn from studying ants, bees and wasps because of the amazing efficiency of these social insects. The authors have cited companies such as Unilever putting this research to work with good payoffs.

For social insects, team work is largely self-organised, coordinated mainly through interaction of individual colony members. They are able to solve difficult problems, such as choosing the shortest route to a food source, through the process of one ant simply following the trail left by another! The collective behaviour is called Swarm intelligence. This is also a kind of knowledge management! The researchers have found that the social insects succeed because of three characteristics: (1) flexibility; (2) robustness (even when individuals fail, the group can still perform its tasks and (3) self-organisation without any supervision.

A major finding in Swarm intelligence is that even when individuals follow simple rules, the group behaviour can be remarkably effective. It appears British Telecom and others have started designing ant-based routing methods. It is felt that the ultimate application might be on the Internet to handle its unpredictable traffic!

Unilever's researchers used Swarm intelligence applications through `software ants' _ when a piece of machinery breaks or demand for a particular product changes abruptly, the software adjusts the schedules quickly and automatically.

The way insects allocate labour holds valuable insights. For instance, in a honey bee colony, individuals specialise in certain tasks and yet the allocation of work is very flexible. When food is scarce, nurse bees will help by foraging. Using honey bee as a model, a system was devised for scheduling paint booths in a truck factory.

Another model of work allocation comes from seed harvester ants carrying food back to the nest. Like runners transferring a baton in a relay race, the ants pass food down a chain. But the ants are not stationary and their transfer points are not fixed. This approach known as `bucket brigade' helps dramatically to increase efficiency of operations. Variations of these approaches are used in distribution centres at McGraw Hill and other organisations.

Capital One, known for its credit card business, rapidly expanded into the IT field. This was when its CEO, Mr. Donehey, who believes in Swarm intelligence, came up with four basic guidelines: (1) Always align IT activities with the business (that is, keep the company's overall goals in mind); (2) Use good economic judgement (spend the money like it is your own); (3) Be flexible (don't box yourself into one thought pattern) and (4) Have empathy for others in the organisation (when people ask you to do something you don't agree with, put yourself in their shoes). Application of these rules resulted in the attrition rate coming below 4 per cent, compared with 20 per cent for the IT industry as a whole.

Game of survival

The Swarm intelligence described above has a valuable parallel. Just as insects strive for survival, so do the organisations now. Survival, without sinking in difficult times, is an achievement by itself. While the atmosphere is tough, just managing to stay is an aim to be worked at.

Swarm intelligence has also important lessons for businesses to exploit new markets, when you consider how different species of ants attract their nest mates to new food sources. Even for understanding customers, Swarm intelligence has a few tips to offer. Basically, all this means self-organising by learning from the environment about how various species go about the task of organising themselves in the survival game. Perhaps this was why the Panchatantra stories were used by the sages to train future kings in the art of survival.

What is needed now is a `back to basics' approach with pragmatic thinking on weeding out all unnecessary costs and toning up the performance of people as well. ``Sweet are the uses of adversity'' is a saying which is relevant now. Those who make determined approaches and survive in these difficult times are bound to emerge stronger in the long run and utilise all the opportunities that come their way.

M. S. S. VARADAN

Send this article to Friends by E-Mail

Section  : Business
Previous : BPL: rating downgraded