Deloitte CEO, William G. Parrett, recently addressed the Confederation of Indian Industry (CII), India's premier business association founded over 108 years ago. In his remarks, Mr. Parrett outlined his views on what companies need to focus on for sustainable competitiveness in a global market place. He proposed that the strong Indian economy, and the creativity of Indian companies alone will not make them competitive in the long term. The four areas he discussed were: measuring performance, managing and imagining risk, governance and innovation. As Mr. Parrett noted, sustainable competitiveness requires "the right balance between creativity and appropriate management processes."
Ladies and gentlemen, it is a pleasure to be with you today and to have the opportunity to address the Confederation of Indian Industry. You are very much at the forefront of India’s future. And to any observer, it is apparent that India has both an exciting past and a promising future. But we live in a globalized world where competition is on everyone’s mind. Competition invariably involves India and China.
Of course, India and Indian companies are competitive by nature and have a strong sense of purpose and discipline. And the climate that can foster sustainable competitiveness is already emerging in India. For example, the government has taken steps to boost foreign investment by:
-
Restructuring corporate taxes.
-
Enhancing the regulatory environment around stock markets.
-
Supporting a healthy and growing securitization market.
-
Encouraging the continuing stream of IPOs.
Above all, India is a democracy that believes in the free exchange of ideas—and the free exchange of goods.
Deloitte and its member firms, made up of 120,000 people in nearly 150 countries around the world, make it their business to study and understand the competitive environment. Because it is the task of our member firms to help companies, their people and the communities in which they operate attain sustainable growth and maintain a strong competitive edge.
Today, in that spirit, I want to share some insights with you. They are just some fruits of the knowledge and insight I have gained from others and from my experience of over 30 years in professional services. What I am proposing to you is a course of action or action steps that Indian companies—big or small—need to consider if they are to successfully compete in the local, national and global arenas.
Now we typically think that being competitive always starts with a great and original idea. But reality is always more mundane. The success of competitive companies often lies in fundamentals, like rigorous management processes.
So today, I thought I would focus on sustainable competitiveness in four fundamental areas:
-
Measuring performance and sustainability
-
Managing and imagining risk.
-
Governance.
-
Innovation.
Measuring performance and sustainability
Let’s begin with measuring performance. Deloitte’s view places performance in a broad and balanced framework where financial results are just one indicator of success. Equally important are non-financial indicators. More on those in a second.
To learn how companies think about and measure performance, Deloitte partnered with the Economist Intelligence Unit on a study where we interviewed 249 company directors and senior managers. The results, published as a survey report entitled "In the Dark," reveal a troubling disconnect. In general, it seems management and boards are too focused on the short term. The survey showed that 86 percent of executives and senior managers believed their company was excellent or good at tracking financial results which are, in fact, lagging indicators of success. Only 34 percent of that group was inclined to say the same thing about monitoring non-financials—leading indicators of success. Such leading indicators include items such as:
As business leaders, we must discipline ourselves to look beyond the bottom line and focus on the future, invest in the future and grow sustainability in order to secure the future for our stakeholders.
Based on the findings from the performance measurement survey, we should not conclude that all companies are failing to measure sustainable performance. In fact, in India, there are companies already helping to set the global standard in performance measurement. A good example is Infosys. With a market capitalization of about US$18.5 billion and over 46,000 employees, Infosys prides itself on its ability to take the measure of its performance and the marketplace.
On a weekly basis it measures about 120 parameters, including:
Since it emphasizes performance, Infosys rewards up to 50 percent of its employees salaries based on measured performance. This conscious focus on the long term speaks directly to better management through:
-
Enhanced performance measurement.
-
Systematic attention to stakeholder expectations.
-
Rigorous promotion of sustainable competitiveness.
In sum, measuring performance and sustainability is somewhat like driving. You need to balance carefully the amount of time you look ahead through the windshield with the time you spend looking in the rearview mirror. A failure to do both appropriately will invariably lead to an accident.
Managing and imagining risk
Another important focus for maintaining the competitive edge in today’s "flat," global marketplace is managing and imagining risk. The key point about risk management is that it needs to be integrated into all business processes.
Let me quickly sketch out a holistic approach to risk management by providing a grid of four priorities that may prove useful.
The first priority is the need to identify and manage critical risk interdependencies. Some 80 percent of companies that suffer the greatest losses do so because of an exposure to more than one type of risk. Moreover, a failure to recognize and manage the interrelationships of risk often aggravates an initial problem. The result is then that a small event may quickly grow into a company- or industry-wide threat.
The second priority is the need to create a culture that emphasizes the central importance of ethical behavior, compliance and quality control, and broader risk management. A risk culture is not, however, tantamount to creating a culture marked by fear and paranoia. Instead, a risk culture focuses on setting standards—whether they relate to accounting and internal control issues, security procedures or human resources practices. These standards are useful for two reasons. First, they provide guidelines for employees. Hence it is imperative that all employees know and know how to apply these standards. Second, standards are essential for setting clear goals against which risk management practices and performance can be measured and adjusted.
The third priority is the need to proactively address low frequency, yet high impact risks. Some of the greatest losses in value or capital occur because of exceptional events:
-
Systems failures
-
Financial crises
-
Terrorist attacks
I speak from experience. In 1993, after the first terrorist attack on the World Trade Center in New York City, I decided to move our offices to a nearby space in a new office complex. Our offices had occupied the top floors of the North Tower of the World Trade Center, the first building hit on September 11, 2001. I can say, with all conviction, that in a global and volatile environment, too many companies discount the importance and impact of unlikely events. And once they begin to focus on the problem, it is already too late.
The fourth priority is the need for companies to improve their internal information and communications systems to ensure that senior management and the board of directors receive accurate, near real-time information on the causes, financial impact, and possible solutions for risk and control situations. After all, good decisions can only be made based on good information.
Central to the creation and maintenance of a culture of risk management is the Chief Security Officer (CSO). A full 63 percent of the companies surveyed by the U.S. Council on Competitiveness have a chief of security. To be effective, it is essential the CSO's mandate extend beyond straight security issues to embrace a broad strategic and corporate role, one that incorporates risk management into the very fabric of corporate success.
One parting thought on the subject of risk. We all need to be imaginative in our approach to risk, to think creatively, to factor in the neglected—everything:
Governance
Now to my next subject—governance. Measuring performance and managing risk effectively can only be achieved in the framework of appropriate corporate governance.
Experience tells us that governance models vary and that no single country can claim to have the best practices. Each system has its strengths and weaknesses. For India, some of the challenges include managing a governance process in which there are large majority stakeholders, frequently a family or the state. A second issue is a shortage of business management skills that ensures that company boards are composed of experienced and independent members. Whatever the circumstance or country, there is no easy answer. Still, regardless of cultural issues or the business environment, there are fundamentals or guiding principles for good governance. These should inform the governance process and the role of all corporate stakeholders, including management, employees, stockholders and outside service providers, including auditors. I would divide these principles under two headings: First, corporate culture; second, fundamental values.
Corporate culture addresses such issues as tone at the top—namely, the behavior and good example set by management, especially the CEO's team. It also encompasses matters such as a balanced focus on the interests of all stakeholders, a focus that also ensures appropriate attention to both short-term goals and long-term objectives—a point I addressed at the very beginning.
Fundamental values must be at the core of a company’s governance practices because they are also essential to risk management as I outlined it a moment ago. Independence is the foundation of all business judgment and advice. Unless the advisor, board member or analyst is free of financial interests in a given company, it is very difficult for him or her to provide insight that is not tainted—or at least not perceived as tainted by other stakeholders or third parties. Objectivity is that value and ability to think critically and challenge accepted wisdom, practice or convention. Without objectivity a board or management team loses touch with the interests of its many stakeholders. Finally, we come to integrity and quality. These twin values are the cornerstone of all business sustainability and competitiveness. Without integrity and quality one loses the trust and confidence of stakeholders and customers alike. And once trust is lost, it is extremely difficult to rebuild it.
Innovation
Much of what I have said focuses on issues related to management processes, the foundations of sustainable competitiveness. The final dimension I would like to discuss is innovation. Innovation is critical to sustaining a competitive edge. In the past 50 or so years, most innovation has come from the United States, Europe or Japan. This almost seems inevitable given the comparative advantage these countries have enjoyed in terms of education, research labs, funding, regulatory conditions and an intimate understanding of consumer culture.
Today, things are changing and the tide of innovation is beginning to shift in favor of certain developing economies. India for one produces over 350,000 engineers a year as well as 3.1 million English-speaking graduates. And India's culture of research and development is emerging thanks to both domestic and foreign investment.
Now it is not unusual for large western companies to combine their talents with those found in fast-growing economies. The combined talent of GE engineers in Germany, China, India and the United States is responsible for a new generation of wind turbine. Intel developed its new Centrino processor in an Israeli research and development lab.
India and China are attractive research and development sites because they offer the rare combination of low cost and highly skilled labor. That’s why Motorola India was called upon to develop inexpensive cell phones for emerging markets or why most pharmaceuticals are conducting research—and more and more early stage research—in India where they can realize cost savings of 30 to 50 percent.
The challenge for India now becomes how to move from "fast followers" to innovators. One critical ingredient in this process is for management to promote "constructive turmoil." Constructive turmoil recognizes that good ideas are not necessarily developed in a linear fashion, nor are they necessarily the monopoly of top leadership. That is why it is imperative for management to continue to invest in research, even when the return seems low; or why it must continue to empower younger managers to think for themselves and nurture a culture of collaboration that challenges traditional thinking.
In closing, let us bear in mind that sustainable competitiveness requires the right balance between creativity and appropriate management processes. Going forward, Indian companies need to benchmark their performance against the highest global standard and measure their business processes against best practices.
The numbers for India are impressive. Growth in 2005 and 2006 is slated to exceed 7.5 percent for a third consecutive year. For its part, the government needs to continue to lower trade tariffs, facilitate foreign direct investment in all sectors and make labor laws more flexible.
For their part, companies need to promote the sustainable management practices I discussed:
These kinds of actions may not grab the headlines, but they will benefit Indian capital markets. The potential is real and enormous. India's market cap is already over US$500 billion and is bigger than that of either Korea or Taiwan. Indian companies are well-positioned to continue a steady stream of domestic and international IPOs. They are in fact developing a sustainable competitive edge. Who knows? One of you in this room today may soon be managing the next breakthrough global company from India.
Thank you and good luck!
Download the speech in PDF format below:
