Strong Rupee Impacts Indian IT Salaries

An article in The Times of India discusses the impact of a strengthening Rupee on the Indian IT industry.  After years of strong salary increases, Indian IT and BPO companies are moving to slow the growth of salaries.   The story puts it this way:

Salary cost is by far the biggest component of cost, accounting for 45% of IT companies' costs and 40% of BPO costs. With many mid-size and small IT/BPO firms seeing a fall in profits in the Q1 of this fiscal, and most larger ones witnessing a sharp slowdown, varied options are being considered to keep the salary component under check or to get more work out of each employee.

After years of unprecedented growth, Indian companies are finally having to look at how they deploy resources.  It is no longer sufficient to hire large numbers of employees.  Wage increases are causing companies to rethink their personnel strategy and compensation programs:

Says Gangapriya Chakraverti of Mercer India, "Variable pay will come up in a big way. Compensation related to productivity and contribution will take over. Companies will have to be careful about headcount. They will no longer have the luxury of maintaining a large talent pool that's sitting idle." Such pools are maintained to provide for attrition or to use in the event of the firm suddenly bagging a big project.

Rupee's rise is expected to hit BPO employees harder than IT. Unlike infotech, where 30% to 50% of employees work on-site and paid in dollars, in BPOs, 90% of the work is done in India and employees are paid in rupees. "Mid and senior level executives in BPOs have been getting increments of 14-20%. I think that will come down to 8-15%. Overall weighted average of increments used to be 7-8%. That may be down to 4-5%," Vashistha says.

Is It Possible To Spend Too Little?

I recently conducted a report out on a benchmark commissioned by a company in the airline industry.  Most report outs are predictable.  We throw up some slides showing how a company performs relative to its peers and to world-class companies.  Almost always, companies are in the 3rd or 4th quartile for expense ratios.  In other words, they spend too much to perform the same activities that world-class companies perform for much less.

In this particular company, however, their expense ratios were practically all 1st quartile.  So that’s good, right?

Not necessarily.  In one particular function, Planning and Performance Management, they appeared to be spending too little.  Yes, they were efficient, but stakeholder feedback indicated they were far less effective than they needed to be.  Put simply, the operations group wasn’t getting the support they wanted from the Finance department. This company, like many in the airline industry, was having a rough go of it.  It would be too simplistic to say that they needed to start spending more money in this area. 

The key point here is that a benchmark only tells a company how they compare with others in a particular process.  It doesn’t necessarily tell the company if they’re spending too much or too little.  That’s a decision for management based on their short-term and long-term objectives.  Benchmarks are useful tools, but they are only tools to aid in intelligent decision making.

SEC's Christopher Cox moves the XBRL ball down field

Marie Leone at CFO.com has an interesting post about the SEC’s Chairman to move to XBRL.  I think she correctly draws the conclusion that it’s only a matter of time before the SEC requires companies to generate and submit their data in XBRL.

Interactive data will clearly help the SEC; however, Chairman Cox is working to develop solutions that will benefit the companies generating the data.  Only time will tell what solutions are developed for the companies themselves, but as Ms. Leone points out, the reasonable conclusion is the the SEC is quickly moving towards the goal of XBRL submissions.  How quickly this will become mandatory is anyone’s guess.

Does India Have A Talent Shortage?

Conventional wisdom dictates that the United States and the European Union face an onslaught of highly talented and low cost IT resources from India.  Indeed, many Western companies have moved their operations offshore or outsourced their operations completely. 

According to an article in the Los Angeles Times titled India’s Looming Talent Shortage (registration required), not everyone in India is that optimistic.  The article quotes Lakshmi Narayanan, President and CEO of Cognizant Technology Solutions.

[A] shortage of talent is looming that could put a dent in India’s reputation as the world’s information-technology outsourcing champion. Three or four years from now, Narayanan and others forecast, qualified engineers in India are going to be at a premium as companies like his vie for their services to sustain the industry’s remarkable growth.  “Clearly there’s going to be a challenge,” said Narayanan, the president and chief executive of Cognizant Technology Solutions Corp., which produces business system software for such clients as Wells Fargo & Co., Aetna Inc. and ACNielsen.

The article goes on to point out that while India does indeed graduate a large number of IT students, only between 10 and 25% of these students are qualified to work for a multi-national, primarly because of insufficient English language and other soft skills.

It remains to be seen if these will be a serious impediment to continued development of the Indian IT sector, but for now Western companies continue to source their IT requirements from low-cost countries like India.  This is a development worth watching.

Forecasting the Future

In a previous post I discussed the budgeting practices of world-class companies.  In summary, world-class companies look for ways to reduce the time and effort of the annual planning and budgeting cycle, recognizing that a large effort is not efficient for a process that is obsolete soon after it is complete.

In contrast, world-class companies place more effort on continuous planning and forecasting.  Rather than making the planning process a once-a-year event, world-class companies are finding that it is more effective to implement a rolling forecasting cycle, looking out four to six quarters in advance. 

This has multiple benefits.  By implementing a rolling forecast, companies breakdown the artificial construct of a calendar year and look to forecast through the emerging business cycle.  Additionally, the rolling forecast gives companies time to adjust their capital allocation, ensuring that these allocation decisions are based on the most recent market events and opportunities.

One of the challenges I've seen in developing any forecast is understanding the key drivers of expenses.  Too often general or unrealistic assumptions are interwoven into the forecast without any real effort to track down the real drivers.  This has the inevitable and unfortunate result of creating a wide variance between the forecast and actual results.  Not good when you're looking to build confidence with your Board and Wall Street analysts.

By minimizing the effort to create an annual budget and maximizing the focus on continuous planning and forecasting, world-class companies create a mechanism by which they understand the key drivers behind the forecast and are able to respond quickly to new market opportunities through the flexible allocation of capital and human resources.

From Customer Service to R&D

The Times of India has an interesting article on how layoffs from several global companies is likely to benefit India as these companies look to fulfill the work with lower cost resources. Embedded in the article is an interesting point about the nature of jobs being shifted to India. It is fairly well known that relatively low-skilled jobs (from a Western point of view) such as Call Centers have been moving to India. What may be less well known, but that has been documented by author Thomas Friedman, among others, is that countries like India are not racing us for the bottom jobs, but for the top jobs.

Here is an excerpt from the article:

Intel India has an employee strength of close to 3,000 with nearly 90% in R&D and related activity, while the rest are associated with sales and marketing. An internal mail sent out to employees on Wednesday said the restructuring plan may not affect India as compared to its other global sites. Intel may become a smaller company globally, but Indian operations will be pursued.

Intel India president Franklin Jones, in a communication to all employees, said: “India is a key market for us as it is considered a growing economy. When all IT companies are positioning their strategy with India in focus, we cannot look the other way.”

The interesting part is that 90% of all Intel jobs in India are in Research & Development - hardly a low-skill job. The fact is India has many talented people with advanced degrees, at a fraction of the cost of Western resources.  This is also true in the Finance arena. Companies began by moving transactional business, such as accounts payable and general accounting, to low wage countries.  As they gain more comfort with the off-shoring model, they are looking to move high-skill functions, such as business analysis, to India.  Companies like Agilent have already proven the concept.  Other companies are in hot pursuit to secure these resources.

World-class Companies Downsize Annual Budget Process

I've recently concluded a series of benchmark projects for different companies in different industries, yet they all have a similar struggle.  All of them had annual budget processes that took too long, involved too many budget interations and included too much detail.  Does this sound familiar?  If so, you're not alone.  This is an area that many companies struggle with for various reasons.  While some progressive companies are getting rid of the annual budgeting cycle all together (typically for non-U.S. companies), the process is part of tradition in most companies.  Overcoming this organizational inertia can be difficult.  Additionally, many times manager's bonuses are tied to static budgets.  This also makes it difficult to significantly change the budgeting process.

While most companies haven't dispensed with the budgeting process altogether, world-class companies are working to de-emphasize the process and place more focus on the forecast.  According to one study, world-class companies complete the annual budget in 3.4 iterations instead of 4.2 iterations seen by median companies.  Additionally, world-class companies have 65 line items in their budget vs. a median of 214. 

World-class companies have come to recognize that, while the annual budgeting process has some value, it is inefficient to spend an inordinate amount of time and effort on a process that quickly becomes obsolete.  The key is to slim down the process, focusing only on the key budget line items to eliminate unnecessary detail and reduce cycle time.

Fixed Asset Investments in China Continue Rise

One of the aspects of globalization that has benefited Western companies is the ability to build plants in China on the cheap, relatively speaking.  Most people know that labor is substantially cheaper in China.  Indeed, the entire issue of labor outsourcing has been featured prominently in the news.  What gets less visability, however, is that capital costs are also substantially cheaper in China.  This only fuels the incentive for Western-based multi-nationals to continue shifting production to Asia. 

From the Shanghai Daily newspaper:

CHINA'S fixed asset investments continued to rise last month, buoying the money invested in factories and infrastructures to 29.6 percent in the first four months of this year, the National Bureau of Statistics said today.

Investments totaled 1.8 trillion (US$224 billion) from January to April, the bureau said.

In addition to the cheaper capital costs, the Chinese government also throws in various economic incentives such as tax holidays.  Without any counter-incentives from the U.S. and European governments, Asia looks increasingly attractive as a location to base manufacturing operations.  And the statistics continue to bare this out. 

Fostering Communication

I recently finished up on an engagement in which I had been asked to document a manufacturing plant's finished goods management.  It was an interesting exercise that reminded me of how important it is to use basic communication.  The plant was having difficulty keeping track of their finished goods.  A cycle counter was employed to track inventory daily.  Their inventory system wasn't set up to track the goods in the warehouse by location.  It was all done by memory.  Granted, it wasn't a particularly big plant, but the business was growing and they had a problem.  All of the inventory issues led them to have a high error rate of order fulfillment.

My mission was simple.  Go into the plant, interview all of the relevant stakeholders, create a set of detailed process flows that outlined their existing processes, and offer a portfolio of improvement initiatives based on my experience and my company's proprietary database of best practices. 

What I found was something that is repeated in companies around the globe.  What people thought was true wasn't always true.  There were assumptions made by one group about what another group was doing, how they did and when they did it.  To be sure, these weren't necessarily monumental misunderstandings, but the accumulation of a number of small misunderstandings added inefficiencies into the process. 

By taking the time to document all of the processes and foster communication between various factions in the plant, we were able to gain a common understanding of the challenges facing finished goods management and order fulfillment.  As much as I hate to admit it, it really wasn't rocket science.  It was really about old-fashioned communcation.  In the rush to perform the daily tasks of business, communcation often gets squeezed.  Best practice companies ensure that processes are efficient and well-understood.  And basic communication between stakeholders is essential for understanding.

Amending AS2 for Efficient Audits

Ever since Sarbanes-Oxley legislation was passed, auditing firms and their corporate clients have been trying to figure out the standard of proof required for the testing of internal controls.  As you might expect, auditing firms like to play it safe.  Consequently, they have used the ambiguity of Auditing Standard #2, which requires the testing of internal controls, to require a high standard of proof before they were willing to sign off on management's opinion of internal controls.  Clients, on the other hand, have an interest in keeping compliance costs as low as possible.  This sets up a natural conflict between clients and their auditors.

Apparently the PCAOB has gotten the message.  They're looking at ways to reduce the compliance effort while still assessing the strength of key controls.  An article at CFO.com entitled Under Fire: Auditing Standard No. 2 has the details. 

Here's an excerpt from the article:

PCAOB board member Daniel Goelzer, who spoke at a meeting of the National Association of Corporate Directors in Minneapolis on April 27, said the PCAOB will focus on uncovering control weaknesses that are likely to lead to material misstatements rather than matters that are trivial, he said. "That may well require amending AS No. 2." Goelzer did not describe how the auditing standard could be changed, but he stated that the PCAOB will be more aggressive in ensuring that audits of internal controls by outside auditors are performed efficiently.

Is XBRL on its way to becoming mandatory?

An interesting article in the May 28, 2006 edition of CFO.com questions if the transmission of financial statements in XBRL is on its way to becoming mandatory.  Up until now, the SEC has asked companies to participate in a voluntary program to submit SEC filings in XBRL format.  At the close of the recent program, only 17 companies had submitted its financials in XBRL.  As the article states:

Last October, SEC deputy chief accountant Andrew Bailey told CFO.com that the SEC might indeed want to make XBRL mandatory. That makes Cox's current campaign sound like a clear message to Corporate America. "It's pretty difficult to see the chairman of the SEC give XBRL that much play and not get the message that this is coming down the pike and it is not going to be optional," says Dan Roberts of Grant Thornton. Roberts is chair of the XBRL-US Steering Committee, part of an industry consortium working to develop XBRL in the United States.

So far, that work has been voluntary — and slow. Although XBRL, which stands for eXtensible Business Reporting Language, has been under development in this country for more than five years, it has yet to have much of an impact on financial reporting. "The United States is, to its potential detriment, significantly behind other major markets in its adoption of XBRL," says Roberts.

Indeed, a pilot program by the SEC to encourage companies to report their financial results in XBRL has attracted only 17 companies. And while International Financial Reporting Standards include a full taxonomy — that is, XBRL tags for all major financial reporting line items — the tags for items involving U.S. generally accepted accounting principles are still being written. By some counts, that project, which includes some 3,000 tags, is less than half complete.

Based on these comments, it appears that companies ignore to the move to XBRL at their own peril.

Chinese View of American Business

There's an interesting article at CFO.com written by the Chinese editorial director of the magazine.  It discusses the Chinese view of American business.  The gist of the article is that the Chinese are loosing some of their respect for American business, although they still admire our entrepeneurial spirit.

You probably won't agree with everything in the article.  I sure didn't.  Still, it's interesting to get a different perspective.

India to grow at 8%

An interesting article in the Shanghai Daily notes that India is projected to grow 8% over the next year.  The article notes that despite the projected growth rate, Indian unemployment is still a concern.

What I thought was interesting is that the economic report suggests that India needs to adopt more flexible laws, like they have in China.  I think the irony is that communist China has more flexible labor laws than does democratic India.  Of course, India is still in the process of throwing off the old vestiges of socialism, but I can tell you first hand that China has indeed moved quickly to adopt Western business practices. 

It will be interesting to see if India does implement more flexible labor laws, in additon to improving it's basic infrastructure.  India needs to do so, because in the race to the top, China is well on its way.

FASB and IASB Issue Convergence Memorandum

The FASB and IASB issued a joint Memorandum of Understanding that outlines the desired goals and focus areas for convergence standards.  The memorandum outlined 11 areas of focus:

1. Business Combinations
2. Consolidations
3. Fair Value Measurement Guidance
4. Liabilities and Equities Distinctions
5. Performance Reporting
6. Post Retirement Benefits (including Pensions)
7. Revenue Recognition
8. Derecognition
9. Financial Instruments
10. Intangible Assets
11. Leases

One of the points emphasized is that the convergence program is not interested in simply picking one standard over the other, but rather to assess areas where improvement is needed and generate new standards that better serve investors and other relevant stakeholders.  The full text of the Memorandum is here.

The World is Fat

In developing the McDonald's theory of globalization, New York Times columnist Thomas Freidman may have overlooked an angle.  According to the Shanghai Daily, nearly 40 million Chinese are extremely fat.  Since China's population is over 1 billion people, they still have a lot of eating to do to catch up to Americans on a per-capita basis.  Still, it's interesting to see an article about Chinese health patterns.  Correlation does not imply causation, but I have to wonder if globalization and the growth of Western business in China (including McDonalds) is impacting Chinese health.  It remains to be seen if advances in health care will outweigh the disadvantages of a global economy, but at least the Chinese can overcome any depressing news with a nice Value Meal.

Wanted: A Few Good Companies

The SEC issued a press release a few days ago announcing that they will offer expedited reviews of registration statements if a company is willing to volunteer for a test group.  The group is to submit it's information in XBLR, a technology that , in the words of the press release "holds the promise of transforming the static, text-only documents companies file with the SEC into dynamic financial reports that can be quickly and easily accessed and analyzed".  As part of the test, participating companies will have to track their involvement, including the cost of submitting in XBLR.

I believe that XBLR submission will quickly become the norm.  Best Practice companies are always looking for ways to increase the efficiency of compliance efforts.  This technology will enable companies to reduce manual efforts in preparing financial reports and increase the amount of time dedicated to analysis.  There will be initial costs to cross over to this technology, including training for workers.  The benefit, however, will be better compliance at a reduced cost.  And that can only be good for companies.

Improving Management Information

A recent article in Business Finance magazine, Where Reporting and Consolidation Need to Improve, reports on some interesting survey results.  They surveyed 200 Finance, IT and Line-of-Business employees to find out what they were missing in financial and other management information.

As part of the survey, they noted that 47% of survery respondents said they did not have enough information on their own performance.  Half thinks their company provides too little information on leading indicators and 80% want more information on their competitors.

I'm a little surprised at these statistics, but only because the survey portrays, in my view, an optimistic state of financial reporting.  My experience is that many companies have very little in the way of leading indicators, relying instead on mostly historical financial information to manage their businesses.  Additionally, very few companies I've delt with make any serious attempt to incorporate financial and statistical data from outside their organization.

Part of the problem is the over-reliance on the use of ERP systems for Business Intelligence.  These systems are very good at capturing, aggregating and reporting information throughout an organization, but they have typically lagged behind Point Solutions for their Business Intelligence capabilities.  As a result, historical financil information is provided to employees in abundance while leading, operational and external data is sorely lacking.  As the price of Business Intelligence technologies continues to fall, more companies should take another look at implementing them to ensure their employees have the information they need to make informed and timely decisions.

The World is Getting Flatter

I recently finished reading The World Is Flat by New York Times columnist Thomas Friedman. Of the many excellent points that he makes, one of them is that many educated workers in other countries no longer need to come to America to achieve the American Dream.  An article in the Shanghai Daily makes this point. 

The article, titled City Lures Back Overseas Workers, mentions that it is having great success luring back educated Chinese from countries like the United States and Great Britian.  Of the workers returning, 98% have a university degree, 23% have PhD's and 63% have Masters degrees.  It also mentions that private employers are powerful magnets for returning workers.  No longer do they need to leave their home and family to achieve their potential.  Due to China's aggessive entry into world markets, Shanghai is able to offer it's citizens multiple opportunities for professional achievement.

In the coming decades, American companies will have to compete more and more for educated workers.  It has been noted many times that American universities are not churning out near enough scientists and engineers to meet the future demand.  Until now, we've been meeting that need by 'importing' educated workers from countries like China and India.  As more and better opportunities become available to the citizens of those countries, American countries will be left scrambling.

China Growing Faster Than Previously Thought

An interesting report is out that shows China growing faster than previously thought.  That's because they changed the way they count economic growth.  By taking into account emerging service business, China pegged it's 2004 growth rate at 16.8%.  The newly revised figure places China as the world's sixth largest economy.

I don't find these numbers suprising at all.  My recent time in Shanghai revealed a nation determined to move into the pantheon of developed countries.  Investment in basic infrastructure is strong and Chinese universities are producing large numbers of educated workers.

The result of all this is that China is and will continue to be a good choice for multi-national corporations looking for a place to locate Shared Service Centers.  Low cost, the Chinese work ethic, and the country's commitment to economic development should place China on the short list of places to locate workers.

Building A Finance Team

The best CFOs also understand that focusing on recruiting and retaining a high-quality and high-performing finance team is essential. Having the right team in place ensures that nothing is slipping through the cracks. I'm very dedicated to developing leaders within our finance organization. At the end of the day, a company's success is determined by its people, and we can never forget that.

Carol Tome', CFO, Home Depot (as quoted in Business Finance Magazine, August 2005)