10 Leadership Lessons from Sir Alex Ferguson

0

Written on Sunday, December 28, 2014 by Rohan Koshy


10 Leadership Lessons from Sir Alex Ferguson

Sir Alex Ferguson, former manager of Manchester United football club (hereafter MUFC), is considered by many to be the greatest manager ever in football (soccer) and even in all of sports. His towering presence over the game of English football as manager ofMUFC for over 26 years set him apart from other managers, even in the highest echelons of the sport. Over this tenure he won 13 English premier league titles and two Champions league trophies (the most celebrated trophy in club football) on the way to a 49-trophy haul that is unmatched probably across the field of sport.


Clearly, we all have something to learn from his leadership, his process to deliver success and his legacy. While his domain was sports, the lessons we can draw apply across dimensions to our life.

We’ve now looked at the playing field so to speak and its various characteristics. Within the bounds of these external forces we can now look at Sir Alex’s lessons and look at which ones are useful in an organizational setting or even to investing.

1.    Let your leadership style flow from your personality
Sir Alex is famous for using the ‘hairdryer’ to motivate players. This means that in the locker room players would often receive very noisy dressing down if they put in a bad performance. Also his style of managing was mostly Authoritative.  He managed the club and the players with an iron fist and forged the organization in the image of his own personality - strong at the top with orders flowing down to the rest of the organization. Other great leaders with a similar mentality(and thus organizations shaped by them) were of course Steve Jobs and Jack Welch. However it is crucial to take away that they built their organizations/teams to be in harmony with their own personality. Contrast this approach to Warren Buffett’s – decentralized delegation that flows from his own soft-spoken but results driven personality. Or take Carlo Ancelotti – another manager in European football who like Sir Alex has won everything there is to be won but his teams are shaped in his own quiet but strong and inspiring demeanor.
Key Takeaway – There are many roads to heaven. Make sure to mold your team to your personality.

2.    Have some simple rules which will guide recurring success
While success no doubt requires adapting to changing situations, Sir Alex was famous for having a set of rules to which he measured his team’s progress. One simple rule was – Be within touching distance of the leader by the end of December (half way of the season).  This put Manchester United with the highest probability of winning every season. Case in Point – Manchester United never finished outside the top three positions ever since the Premier League was created.  Another rule – ‘Never lose two games in a row’ was legendary for how it prevented a so-called ‘slump’. All these little rules added a lot to team discipline and results.

3.    Manage both for the short term and the long term
It’s easy to say that everyone should look at the long term. However football, like organizational success is a results business where short term results matter. You can’t have six bad quarters of results and have a good three-year outlook. Sir Alex was famous for making sure that his teams were always competing at the top end every year no matter which phase or rebuilding/harvesting his team was in. Like I mentioned in the previous point, not losing two games in a row, being near the top by December and making sure the team gave its best in the final 15 minutes meant that the team almost never underperformed in any one year.

4.    Don’t be afraid to experiment when the environment allows it
Ferguson’s teams were famously slow starters. As mentioned earlier, 38 games in the Premier League (sometimes upto 60 games in all competitions) allowed Ferguson to experiment. And experiment he did in the opening stages of every season. Teams lineups and formations would often be changed at the start of the season to judge both formations and players. However the deadline of being within touching distance of the leader come December meant that experimentation and results were kept in balance.
Key Takeaway - Don’t be afraid the experiment early on, especially when the operating environment (like 38 different bets in football through the year) allows you to do so. Keep an open mind to see what is working and what isn’t, and be comfortable that you may not have all the answers immediately when you begin.

5.    The numbers show the process of success
‘This is a results business’ – Sir Alex Ferguson. Clearly, while many of his strategies involved understanding human motives, abilities and outcomes, the final outcome was one that always counted in numbers. While bad outcomes sometimes follow good processes (due to bad luck) good outcomes are a high probability given a good process. The fact that United never finished outside the top three in the Premier league is testament to the fact that his process worked. Also considering how football changed over the two decades and that he built probably three completely different teams with different attributes reflects that his process was one that evidently withstood the test of time.

6.   Set the bar high - both for your team and your environment
Ferguson is famous for the discipline he instilled in the team once he took over. His 7 am practice sessions inspired others on the coaching staff to themselves show up before 7 to mimic the boss.“Hard work is a talent” as Sir Alex once said.  He also surrounded himself with a great assistant coach (Carlos Queiroz) and a best in class scouting team. Not only this but Ferguson also made sure the environment was conducive for success. Training facilities were upgraded continuously (including installation of high walls to prevent snooping), criticism of players was never done in public and a siege ‘Us against them’ mentality was created to foster a great team spirit. Training sessions matched the intensity of game day. Moreover, anyone who dropped his standards was swiftly dealt with no matter what the reputation or previous contribution might have been. Negative influences resulted in swift departures of hitherto vital team players (Roy Keane, Ruud Van Nistelrooy)

7.  Always look ahead three years and dare to rebuild your team
Ferguson, although he never really mentions an exact formula always looked at three-year timelines. He also had a mix of players under the age of 23, 23-28 and 28 and above. Therefore, he always looked to build teams with players in different stages of development.
Key Takeaway – keep your team/portfolio with members/stocks with different levels of experience/payoffs so that you can simultaneously manage short-term performance and long-term stability.
When looking at a team, Ferguson was famous for placing his trust in younger players and using the United Youth Academy to groom future stars. His teams always had a core of strong internally chosen candidates. However he never hesitated to bring in players from outside (like Rio Ferdinand and Wayne Rooney) often paying record transfer fees if needed to sustain success.
Key Takeaway – Keep a core internal team (which of course changes over time) and supplement them with outside players if needed. This applies to letting team members move on when they don’t fit into the core strategy.
Finally, Ferguson above all, looked at players who were hungry for success. If he found players (especially stars) whose effort was waning he would not hesitate to move them on.

8.     Adapt to survive and never give in
Another trait that set him apart from other coaches was his ability to adapt to changing circumstances. While Ferguson wasn’t known to be a tactical master, he did master how to adapt his team to the changing game of football. When he initially joined the focus was more on fitness and discipline. However he adapted to several changes that happened in the game. As sports medicine took hold he got the best to implement it for United. As stats tracking and selection by numbers revolutionized the sport, United kept pace. He also adapted to changes like inflated transfer wages due to the rise of agents. Finally in a particularly unpopular move, he decided to play youth players in certain competitions (like the capital one cup) inciting outrage among the media acknowledging that top teams just couldn’t handle 4 competitions in a season. Adapt to change even if you’re the best.
Something relatively unknown about Ferguson is how his playing career affected his coaching career. He spent 17 relatively unsuccessful seasons as a professional player. That lack of success defined him.  In his own words - “The adversity gave me a sense of determination that has shaped my life,” he said. “I made up my mind that I would never give in.” He also forged Manchester United in this image. His teams were famous for scoring in the final seconds of the game. They never gave in and as it happened more and more often teams would psychologically give in as United risked all to find a goal.
Key Takeaway– Adversity can shape a person/team and can forge a backbone that can define the team.

9.     Don’t be afraid to lose but hate it
A significant temptation for organizations, investors and teams is to play safe when it comes to the late stages of an outcome. Sir Alex’s teams had the notion drilled into them that if they were 2-1 down with 5 minutes to go that they should go all out for a goal. Losing 3-1 was acceptable. This tied in with Sir Alex’s risk taking philosophy and imbued his teams with an attacking mentality that though would fail on a one-off basis ensured positive payoffs over the course of 38 games.
Also, Sir Alex hates losing. He’s often quoted as saying he’d liked players who were sore losers. This ‘always need to win’ philosophy meant that team members were always set with a mentality that only winning was acceptable in a results business such as football. While this advice may not be valuable in all aspects of life, it does bear out Ferguson’s observation that hating to lose often made players work harder than they otherwise would have.
Key Takeaway
In organizations- This point dovetails with a multitude of others. Hating losing means that team members aren’t satisfied with products/services delivered that aren’t the best in the industry and continue to stay at a high performance level day after day to deliver recurrent success.
In investing -Taking unnecessary risks often leads to disaster. However the main takeaway is that one must also dare to be great (risking failure) in order to stand a chance to be at the top. This advice is similar that of famed investor Howard Marks which he detailed in his ‘Dare to be great’ Memo.

10. The edge you have over others is miniscule and so you must look for every inch to build the edge
Organizations are finding it harder and harder to keep up with startups. Big firms are increasingly being split into smaller ones to keep up with change. Investors find that beating other investors (collectively the index) is an enormously hard task for the majority. Similarly Football at the highest level is one where no one has an unassailable lead. Case in point - No team has ever defended the Champions League title successfully since it was incorporated. All this points to the fact that at the highest level of sport and business, edges (or moats as Warren Buffet defines it) are tiny and often temporary. Thus in this environment the edges generally lies in the tiniest of details.

Sir Alex displayed cognizance of this with United.  Every chance to gain an edge over rivals was taken no matter how tiny the payoff. Training facilities were upgraded to the best in the business. Prospective team players would often find that United would come back season after season to get their signature. Most famously Sir Alex often persuaded officials to add ‘Fergie time’ to the end of games often extending games by an extra minute giving his team a chance.

Key Takeaway – Leaders in organizations, startups and investors must humbly recognize that the competition is just as good as we are and that finding the tiniest of edges is a necessary condition of success. We must continuously look to build our edge in order to sustain a tiny lead.

In Summary,as Tony Robbins, the inspirational self-help author and teacher mentions, modeling the best in a field is often the easiest way to make ourselves better. We don’t have to always re-invent the wheel. There are many lessons to be modeled from Sir Alex and his unusually long winning streak at the top of professional football. These are just few of them but we believe some of the most valuable.

Comment Now!

Shifting the odds

3

Written on Thursday, February 06, 2014 by Rohan Koshy


 The world is probabilistic. While this statement may seem fairly obvious and matter of fact, it is seemingly very easy to forget this fact and how it affects the outcomes in the world and more importantly, how we view them. This mindset may seem natural to many (especially those with a higher IQ) but the more i closely observe my own conclusions from events in my life and the conclusions that others draw from their own lives, the more it becomes apparent that developing a probabilistic mindset is an incredibly hard.

The world is probabilistic. That statement means, that outcomes are not actually written in stone. There is no one outcome that will always happen in a situation. There are a range of outcomes that might happen and only one of them does. Most outcomes of the world are random, but a majority of these random outcomes are a mixture of skill, grit and luck. 

Sliding Scale
Outcomes that we see must be looked at across a luck/skill sliding scale. At one end of the scale, outcomes are completely random, like the flip of a coin. On the other end is a game like chess, which has an extremely small element of luck - The better chess player will probably win 999 out of a 1000 games (he'd probably be drunk for the other game)

Consider the statements - "It wasn't meant to be" and "You got very lucky there". These statements represent a deterministic view of the world, as if  the outcome itself was predetermined. Reality it seems to me, is different. Any outcome that we wish for ourselves, like getting a job, getting married or making successful investments starts out with the odds involving a mix of luck and skill/grit. It could be 50:50 or 80:20 or 10:90. The odds themselves are different for each task. Its obvious to everyone that that almost all endeavors involve some parts that are NOT luck. Lets say that the odds start out at 50:50. Our job essentially becomes to, through grit, skill and sheer persistence, to shift the odds the outcome. By doing this we may bring it to 80:20 or 90:10.

The exciting/terrifying part about life is ... we almost never know the odds of success in any endeavor. Lets say your deciding whether to continue to work for the same company or switch to a competitor. While the immediate odds of getting  a hike are easy to see, its almost impossible to see what team you'd join, predict whether the new company would do worse than your present one and whether you'd get a good boss when you join. Just ask anyone who joined Infosys or Satyam just before these companies ran into difficulty. You could make the same decision today and have a completely different outcome. So, the odds become visible to us only in hindsight. We seem to trust blindly that things will work out, because in essence that's the most rational thing to do. If we ever worried about everything that could go wrong, we'd find it difficult to take any action at all.

Once we've figured out that we're only improving the odds, we may need to prepare ourselves for unexpected or terrible outcomes. How do those come about? Largely it might be because we don't plan thoroughly. Many times though, it's because we are unable to eliminate the element of luck. Luck can take many forms but by definition will include events or twists in the tale that are entirely unexpected. Only in hindsight can you see it. You may question - "How'd i miss seeing that?" That question is in error. By definition, you cannot see blind spots.

Handling the Impostors
"If you can meet with Triumph and Disaster And treat those two impostors just the same" - If by Rudyard Kipling

One of the biggest shifts that occur once you understand the probabilistic nature of the world, is that you start to see alternate outcomes just as clearly as the outcomes that actually happen. This produces a mind bending shift where you are able to see success and failure in any endeavour, as what they are - Impostors.

Impostors, because they represent only one of the possible outcomes that happened and not a one to one outcome. You could repeat what you did and not succeed. On the flip side, you need not be disheartened if something didn't work out. If you gave it everything you could. IF. You're only trying to change the odds. That is all that you can do.

 When you realize that the outcome you see is only one of the possible outcomes that could have happened, you start to forget about things like fate, destiny and start to replace them with chance and randomness. What you see is what the odds were BEFORE the event and what influenced those odds. You start to judge the outcome not by what happened but by the process that made it happen. 

 One of the biggest outcomes of looking at success and failure as impostors is it immediately releases an enormous amount of pressure. You no more look at successful individuals as Gods and stop judging failures as terrible people.No one starts to become above or beneath you. True, success is rarely the outcome of pure luck. It usually occurs when preparation meets opportunity  and grit guides you through the difficult moments. However it is almost never truly about skill/talent either. Success leaves clues but very rarely can it be repeated as is. 
If you look at actors who currently rule the box office, none will seem like the best actor in the field or the best looking or the best dancer. Almost all have benefited from an enormous amount of luck. This you can see if you go back 25 years and look at all the other actors that were around. You wouldn't really be able to pick which ones would become superstars and which ones would vanish without a trace. 

 "Its a sin to judge any man by his post" -  St. Augustine in "The City of God,"
Translated - Hold on to your judgement when you look at a successful/failed person. You cannot hope to see what twists of luck affected their lives.

 If you've failed at something, you simply go back and see if you could have shifted the odds somehow by doing more. If you could have, then you've failed. It you couldn't have, then luck played its part and you walk away content that this outcome is simply chance.The difficult part is figuring whether there was/wasn't anything more you could have done. It is rarely the case that we have given everything we could have in pursuit of an outcome

 Understanding that neither your success or your failures are completely your fault will keep you humble through the good times and calm through the difficult ones. Maybe what we need is a kindler, gentler definition of success and failure 

Dealing with Tragedy
If you believe that the majority of the world outcomes are at random, you are likely to keep your own tragedies in perspective. No matter what happens in your life, it almost never will go through phases of grief that will equal those who were born in any previous century, or those who experienced the holocaust or the partition or World War II. You will notice that everyone, bar none, will go through tragedy, So you're not alone in experiencing grief. You suffer grief alone, but lonely in your own grief, you are walking in a crowd, each carrying their weights of grief.

Understanding the probabilistic nature of things will ensure you never to ask yourself the question - "Why me"? Besides time, nothing in life is equal. Neither do we having the same starting line, nor do we run on the same track. We don't even have the same running abilities. It is simply random what we get when we're born and at what times the wind is at our back or in our face. Crucially, this isn't a pessimistic view but a liberating one. Since none of us are equal, success/failure for each one is different. We simply have no scale to judge anyone or to BE judged, thus liberating us from the notion of success defined as relative achievements of fame, beauty, sales or networth. 

So if it's all random and tragedy will come, how do we deal? Maybe,we simply choose our response. Choice is our own decision. Just like we carry grief alone, we carry choice alone too. It does not depend on chance and thus is truly in our control. This is of course easy to say but incredibly difficult to do. For anyone who has gone through a difficult period, every second can seem like its designed to, like Chinese water torture, slowly eat at us. However, In all probability the torture is mental and not physical. In essence, our own thoughts drip like acid eroding our ability to function for a time. Yet over time, fatigue over the pain seems to set in. Human beings show an incredible ability to adapt. Part of that is beginning to remember that there is always something to live for and that tragedy, no matter how many times you look back to see if you could have done something else, is in essence, large parts of luck. Tragedy comes to us all, some bear unusual amounts, but almost none really seem to deserve all of it. So if it does come, we simply have to accept that we are required to take it. 

"Life is difficult, and complicated, and beyond anyone’s total control, and the humility to know that will enable you to survive its vicissitudes. Talent and intelligence never yet inoculated anyone against the caprice of the Fates" - JK Rowling.

 Grit and shifting the odds
"You make your own luck". This sentence is now of course famous because it denotes the power we all have in us. The ability to take massive action, bear massive pain and display persistence in the face of terrible odds is hallmark of the power we have displayed. Grit, it seems is more important than anything else. Yet in a probabilistic world, the chances of success are never 100%. Worse, we don't even know the odds. So what do we do?

 The short answer simply seems to be- to persist. Failure seems to make us ponder, it seems to strip away the inessential, makes us question our own view of ourselves. Having a probalistic view can increase our ability to persist. This is because we don't ever view success or failure or certain or completely of our own doing. We simply look at every endeavour as having certain odds of success. Our job is simply to tilt the odds as much as we can. Sometimes it means cutting out many areas of our lives to focus, sometimes it means giving more of ourselves to someone without receiving in return and sometimes it means simply waiting in the hope that things will turn in our favor and continuing to do what we've done. Sometimes it simply requires us to wait and not get tired of waiting for an outcome. You don't know the odds, you simply know how much you are willing to suffer for what you want. So we tilt the odds as much as we can and when the outcome is certain, we walk away (or forward). 

 The world is so hopelessly complicated and dependent of the behavior of irrational humans that a huge number of things have to go right for you to get what you want.  Understanding the odds of this happening simply allows you not to get disheartened by failure or arrogant by success.

 "We don't make our own luck. We simply change the odds so luck has very little part to play.We don't eliminate uncertainty. We only give it everything we've got and let the chips fall where they may"

 Fat Tails
"In the long run , we are all dead" - John Maynard Keynes

Our lives essentially revolve around fat tails. Almost everything that occurs or that we achieve is an improbable, against the odds event. So while we focus on the long run, we need to complement that serene view with an intensity born out of understanding that time is limited for us. This allows to fill our days to the brim, to move on quickly after we fall down and spend little time pointlessly looking back at the past. 

Is this India, Mr Columbus?
This post isn't meant to be a nike advert. It isn't meant for anyone to go out and Just do it, believing somehow that with loads of hard work anything is possible. Its meant to bring about a more tacit understanding that no matter what you do , how hard you work and what risks you take, you may still end up failing. 

I think its better to look at our lives not as being deterministic in the sense that with hard work and grit, anything is possible. I think its better to look at our lives as sailing ships. You start out with a particular boat (some exceptional , some terrible, most average) and with some sailing abilities. We work everyday to become better sailors, to read the winds and waves as they occur. Yet like Columbus we never arrive exactly where we wanted to and who we wanted to with. Some stay with us throughout our journey, some get onto our boats at certain ports and may get off at others(whether we want them to or not) and a rare few will come to become our lifelong companions, forever helping us to navigate the high seas. Nothing is certain on this journey and yet that is ours to enjoy, not curse. We have a destination in mind, but we are forever shifting course. 

If we look at our lives as having alternating periods of high winds, sometimes strong and at our back, sometimes difficult and in our face and sometimes there is no wind at all, we are likely deal with the lean and difficult periods as a sailor would, with patience. Yet like a sailor, we must learn to adapt when the winds change and act and not worry too much on what plans we had set initially and what the consequences would be. Not even the very wise can see all ends.

 Our lives are tremendously shaped by the winds which we encounter, so much so that sometimes we can feel helpless in face of luck, which has a  temperament all its own. So what are we to do? Maybe, we simply decide how to face those winds and not worry that we may not end up exactly where we planned. We don't choose the winds that rock our boats, we only choose between spending our lives trying to adapt to them and use them to benefit or giving up fighting with them completely and letting them take us where we may and enjoying the journey.

 As always, no matter where i go with my thoughts, a poet has gone there before me.
To be, or not to be, that is the question—
Whether 'tis Nobler in the mind to suffer
The Slings and Arrows of outrageous Fortune,
Or to take Arms against a Sea of troubles,
And by opposing end them?

 So go out there and in a sense Just Do it. Just Shift the Odds.

Comment Now!

Winning the Lottery

1

Written on Monday, March 16, 2009 by Rohan Koshy

The Upcoming Indian Elections made me think about how I’ve won the lottery. Not in the sense of this election actually, but in how lucky I am to be born at this time. The fact is that I’m incredibly lucky to be born into a country that has been and probably (I say probably) will always enjoy long stretches of peace. I imagine that this current generation is the luckiest generation of Indians to come along in the last 150 - 200 years.

Being born in this era means you've enjoyed virtually no major wars and the country is both independent and tolerant (for the most part). While a lot of people look at the situation and say - there's communal violence, there are bad roads, bad politicians, bad infrastructure, corruption and deceit and the list goes on and on, you cannot ignore the rewards of this society

When I look at myself, I feel lucky to be born here. I've been privileged to get the very best education here. More importantly, I've been lucky enough to live in a time of relative peace and have been able to pursue my own interests. India at this time continues to be the world’s second fastest growing economy. I've been born at a time when the country has been moving up the global ladder, has reaped the benefits of opening up the economy to the world and will continue to enjoy strong domestic consumption. Having my upbringing almost entirely in Pune has allowed me to witness the rapid growth of the economy. Where once you had only maruti 800's you now don’t give a second look to Audi’s and BMW's running amok around the city. In effect I’ve luckily been at the right place to witness how a growing economy can rapidly lift the standard of living of its citizens.

India, despite its problems, allows people here to achieve riches and create value and contribute without the fear of retribution. It still is secular and more than anything continues to allow anyone who achieves greatness in their fields to achieve recognition, regardless of colour or religion. That IS the good news

Slumdog Millionaire is not a spectacular film to Indians. While it is no doubt a fantastic film, Indians are used to seeing everything it portrays. The film correctly displays to opposite side of the effects of uneven capitalism. That's the bad news. The system as it currently stands is akin to loaded dice. If you're born here, into a decent middle class family, have a decent education and work relatively hard, it actually very hard for you to end up poor in the current scenario. India's growth will carry all those "lucky" enough to have won the ovarian lottery to greater riches and a relatively stable, (economically speaking) life. (Unless of course, there’s a world war or a massive war with Pakistan). But, and this is a big but, if you're NOT born on the right side of the fence, you have to overcome massive odds to enjoy the benefits. In most cases, you will continue to stay in an economically disadvantaged position. The classic case of the rich getting richer and the poor getting poorer will remain.

The luck that we have had in being born into the right situation is what must be acknowledged by this generation. Whether you now live in America, Australia, Britain or anywhere else, you must acknowledge that you have been lucky enough to get the opportunity to use your god-given talents to contribute and basically follow your dreams to fulfill your destiny, whatever that might be. You have a duty to the country you live in because it gives you the opportunity to be rich. We cannot escape the responsibility that privilege has given us. You cannot say that as a believer in free markets that you don’t have to worry about anything else other than your own self interest. Society has given you all the tools to enjoy yourself and you must return that favour.

Consider this situation - A man has been working in a shoe mill for 40 years of his life. He works hard and does his job diligently. Unfortunately the Chinese have jus reduced the cost of production by 90%. His company has no option but to relocate all the plants abroad. IN this situation he has no transferrable skills. He's not going to learn java and xml and change careers. Society must, in some form provide a safety net. If all this "creative destruction" (i.e. the fittest, most innovative companies winning and the others going bankrupt) benefits society, then its side effects - the displacement of workers and the associated stress- must be picked by society as well. Society must pick up the tab, if it’s going to receive the benefits.

It's not just the government that must do that, but rather individuals. If you acknowledge that you've won the lottery then you must do what you can to benefit the ones who didn’t win.

That’s creative capitalism. It's like a volcano. Those at the top who enjoy the explosion of profits and money must use it to enhance the ones who don’t get the benefit.

By all means, play to win. Follow your passion and turn it into millions if you can Make as much money as you can but remember to give it away so that you can close the gap between the haves and have not's

Remember,

"The Man who dies rich, dies disgraced." - Andrew Carnegie.

Comment Now!

Houdini's great vanishing act

0

Written on Tuesday, January 13, 2009 by Rohan Koshy


It's ironic that satyam, which means truth in Sanskrit, is the scene of what is one of India’s biggest corporate scandals. While there have been many scandals before, these pale in comparison with that of satyam's.

Emerging market risks include a whole list of factors but fraud on a scale such as this is beyond these "normal”, actually expected risks. India's problem was that the private sector was smart, dynamic and most importantly honest. The government was the problem. Now we have another one. The magnitude and duration of the fraud is both stunning and deeply disturbing. 

Infosys has an impeccably honest and straightforward leadership but so did satyam it seemed. The shock comes from not only the scale of the fraud (close to 7000 Cr) but from the fact that it comes out of the industry which put India on the global business map. The IT industry, while being criticized for doing back office and BPO work, has no doubt brought prosperity and opportunity to an emerging, ambitious young generation of Indians.

The fact that the industry touted it's adherence to global standards, be it in terms of governance or facilities provided to employees makes it worse. That image is now tarnished.

While I agree that it does not represent the majority of the industry (satyam's employees are hard working, honest people), the fact remains that a lot of people had to be complicit in the fraud for it to have gone on so long and been at this scale.


A few questions,

1. What was PWC doing exactly?

There is absolutely no way that they could not have known. This is further borne out by the fact that after the botched attempt to buy maytas, Merrill lynch, which was asked to look at merger opportunities cut ties with satyam after just ten days citing "irregularities in accounting". They took ten days to find out what PWC didn’t find in 7 years?

2. How can no one else inside the company know?

I can understand that some independent directors may not have known. They may not verify the balance sheet statements simply because I don't think anyone does that but raju couldn’t have these figures on hand unless someone accounted for him. It means there are many more from top management who would know. There's no way that 7000 crores can be fabricated without someone knowing.

3. Was the margin really 3 percent?

This is really difficult to believe. What's easier to believe is that he used the profit to either a) pay down existing debt which he owed to his personal creditors or b) Use it to fund other purchases like land, or some such personal reasons. It's impossible to have such low margins in the IT industry. It may happen in the future but as business is now, there’s no way it can happen. What it means is that they money that was earned by the hard work and late nights of employees was sucked dry by raju.

4. Which banks are now in on this scandal?

The scandal will spread. NO doubt about it. The money is kept in banks. If there is no money, as raju claims, the banks should know it. This isn’t a small amount. The fact is that there definitely is some cover-up at the banks themselves. Even if forged statements were shown and the banks didn’t know this, wouldn't they have seen the quarterly statements and realized it was a big lie.

The bad news

Before we say anything about the image of the IT industry being tarnished and India Inc suffering a global PR nightmare, let's focus on those affected most - the employees of satyam. Working for an IT company I can testify that most people work pretty hard and are honest in their dealings. When you work hard and you see the company expanding at a good rate and maintaining margins, you do feel proud. They will feel duped. They’re hard worked has paid off. They have impressed customers and improved service. The customers have paid the money they deserved BUT their leader has sucked it dry. They've filled the bank and raju, along with his conspirators have drained it. That must really hurt.

The worse news.

Job cuts are imminent. It's difficult for the company to burn cash now at the rate they were before because they have no money in the bank. Innocent, hard working employees will face the brunt of the impact. Even senior managers who've spent more than a decade with the company will find that they have worked and worked and have been duped. I hope that there are no job cuts but it’s difficult to imagine such a scenario.

The crazy part.

Satyam won a corporate governance award a few months ago. Wonder what that stands for now.It seems unlikely that the awards panel looks into the authenticity of the company’s statements because that's not their job, it's the auditor's. In any case, what we've come to see is that awards may mean something, but it isn’t much. Performance in the market and the bottom line is quite clearly, THE bottom line.

The good news.

I have noticed on many message boards that satyam's employees are defiant and ready. It’s incredible to see a satyamite say - “We will script the biggest comeback in Indian business history". They realize that they're company is honest, just not the leaders. Can the turnaround happen? Probably. The company makes money. It's not a loss making business. Once the dust settles and the company starts smaller it can still come back. The short term need for cash and more importantly a strong vision is the main concern. A merger may also be an option but it looks unlikely.

Where do we go from here?

First things first. Find out what happened. No matter how long it takes. Make a big public spectacle of it. Let it ring loud and clear that there are massive consequences for trying to defraud the system. There have to be changes made to how authenticity of accounts and balance sheets are maintained. I admit this is pretty difficult, Business, no matter what anyone tells you, still runs on trust. We bill our customer by the hour. But the customer doesn’t verify whether every resource that billed on a particular day came to work or not. They can't. It's impossible. They have to trust us. We have to regard it as sacred and never attempt to breach that trust.

A little hope.

Warren buffett says - 'it's only when the tide goes out that you see who's been swimming naked'. Well the global financial crisis has taken its toll. Wall Street has been exposed for what it is and now companies that cashed in when the going was good, now face the consequences of all their bets going bad at the same time. A perfect storm if you will.

What we're now seeing is a cleansing of the global business digestive system. A detoxification. Capitalism has brought benefits, but like the saying goes - "anything worth working hard for is worth stealing". People will steal. Eventually though the tide reverses.

In the end, the tortoise does beat the rabbit. SAFE and steady wins the race. 

Comment Now!

And so they failed Capitalism

0

Written on Wednesday, October 29, 2008 by Rohan Koshy


The recent financial turmoil that has caught the world's attention has brought with it a big debate about the death of capitalism. With the U.S and U.K taking major equity stakes in a majority of banks many have questioned whether this signals the end of laissez-faire capitalism. The reluctance of Henry paulson and George Bush to nationalise the banks was because they believed in the idea of "free markets" as it were. It is generally accepted that the government cannot regulate markets any better than the market participants (acting in their own self interest). Alan Greenspan, who is a big believer in free markets (having spent time with Ayn Rand) admitted that he had misjudged the potentially disastrous situation that would occur if the markets were left unregulated.


While I've read Ayn rand's books and certainly subscribe to part of her philosophy, i feel that the no holds barred laissez faire capitalism that she has supported would never really work.Working in your own self interest may certainly be the best thing for everybody but it leaves out one thing. Integrity. Self interest is totally skewed when integrity is taken out of it. When you're self interest is to make money no matter how much somebody else may lose then its not in everybody's self interest. It's also known by another word.Greed. Unfortunately that's what became of wall street at the end of 2007.

If i put a revolver containing only one bullet to your head and say ," If you pull the trigger I'll give you a million dollars" would you do it? While 80% of the time you'll get 1 million dollars you know that when you get it wrong, you'll get a funeral. Unfortunately it's not that easy in the real world. When a bank is leveraged 30 to 1, its pretty easy to see the bullet in the chamber but there are many reasons that could be given as to  why this may be your lucky day. The biggest one being record company profits, which is what the banks were making. It's pretty hard to argue against record corporate profits. But eventually they got the silver bullet.

One more reason i believe that markets without regulation wouldn't work is perception. Greed is not the only reason for the fiasco. Usually humans first perceive a problem , then decide best course and then finally take action. I believe that there definitely is now a problem of perception. You may not act in your own "best" interests because you may not be able to perceive the risks. Most of the industry couldn't perceive the risk and so we chartered into incredibly risky waters. We couldn't see the storm so we couldn't take action. Credit default swaps(CDS) are supposed to insure you against the risk of default by a company. INSURE. Sound's safe doesnt it?Unfortunately it isn't. You may not be able to perceive the risk that comes with a $62 trillion UNSUPERVISED market. Too many counterparties chasing the same thing. Sometimes we need to be protected from ourselves and i suppose that's what we'll see now.

So does it mean the end of capitalism as in the old days? Yes. But risk tasking is a requisite for progress.Just because countries go to war does not mean democracy has failed. In the financial markets, getting 7% return instead of 6% is not worth it if getting that 7% could also mean biting the bullet.I suspect we haven't seen the end of it but a much more risk averse culture will rise from these ashes and capitalism will continue to create fantastic progress. That is, if we don't manage to break the banks in the process. 

Comment Now!

Subscribe to: Posts (Atom)