The downturn has made companies the world over more sensitive to the way they manage and grow business. Aware of the uncertainties of today’s business environment, they are taking every step with caution. Yet they are eyeing growth and see emerging markets as their playground. Sylvie Ouziel, group chief operating officer for management consulting, Accenture, spoke to Amit Ranjan Rai on some of the key issues companies are facing post-recession, the growth opportunities for businesses in emerging markets and how the business of consulting is changing.
What are some of the key business issues and problems companies are coming to you for in the post-recession period?
A lot of it is still in the area of cost-cutting. Companies are focused on maintaining the good discipline they had put in place during the downturn. They are looking at cost-cutting from a mid- and long-term perspective — it is no longer about short-term cost-cutting. It is about being efficient in the long term. They are all deeply impacted and changed by the downturn — it is not back to the past and let’s grow again. Companies know that it can happen again. If you look at the big macroeconomic cycles, downturns are becoming more frequent, and companies want to be prepared for that and be more flexible and viable. A lot of them are thinking on setting flexible subcontracting agreements — which part of the value chain should be handled internally and which can be handled externally through contracts. They are thinking of flexibility in terms of scaling up or down as the need be.
Growth is the other big obsession with most companies. The good news is that since the beginning of the year, growth is back — we say that from the sold jobs we do for our clients. Companies are looking at geographic expansion; they are looking at the BRIC countries and emerging markets. Most of our clients are also looking at innovation in a big way. We are helping them with new services they can take to clients, new product ideas, new positioning in the value chain, in their ability to integrate upstream or downstream and innovations involving consumers and partners.
In the growth space, mergers and acquisitions are back. But there is a new flavour to them in the post-crisis world. Companies are looking out more for joint ventures, alliances and flexible solutions, because M&As take a lot of resources, cash and time, and yet there is no surety that they will succeed and deliver as expected. That’s because you try to marry two large organisations which may not have synergies in all areas. Moreover, when you do a merger it keeps you busy for two years. You have to focus on properly aligning the two organisations. It may probably destroy as much value as it may create. So, more and more companies are today focusing on specific and targeted alliances by forming joint ventures or finding partners. The pharmaceutical industry used to go for big M&As — to an extent, that is still happening — but a lot of companies are now going for targeted joint ventures to innovate on molecules or in biotech.
What is your advice on some of these problems and taking business forward?
Companies are today rethinking on the kind of products and services they can take to their clients and market, and the way they innovate in different areas. One key area we are helping our clients with is how to go about more open innovation within their business ecosystem with their partners and consumers. For instance, what Procter & Gamble has been doing for years — instead of having a big R&D department inventing all the products, the people at the distribution centres and partners propose ideas and innovate for them. Lego, the toymaker, invents most of its products through a community of heavy players of their building-block toys. These players, who are completely into it, exchange ideas with the company such as what parts have been missing when building something and so on. IKEA, the furniture maker, too, is taking ideas from its consumers. So you see a lot of companies today are not generating all the ideas internally or having big R&D departments; instead, they are open to ideas from partners and consumers.
Another area we have been working with clients is around the value chain. The relations between companies, partners, wholesalers, retailers and so on are moving to a new level. Companies are today going to emerging markets and they cannot find all the traditional channels in place as they find in developed markets. So they are rethinking what they can do in the value chain.
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Then there are new technologies that are enabling you to do what you cannot think of before — with retail or mobile commerce you can directly reach your consumers. For instance, ICICI Bank has developed mobile banking for emerging markets, for regions where people don’t expect to find a branch or even a PC and plain mobile banking is very effective. So, companies today are rethinking about their place in the value chain, their distribution channels, the customer experience and a lot of innovation is happening in all these areas.
Companies are today looking at emerging markets for growth. Do you see a change in the process of globalisation?
Globalisation today is in a totally new phase. It is no more about emerging markets being the factories of the world, which was the first phase of development. Globalisation today is much more multidirectional. The world today is multipolar. If you look at emerging markets today, they are made of a new set of consumers, and the internal demand is huge. So the internal market is a huge opportunity.
Emerging countries themselves have rising multinational companies which are global players. It you look at the global workforce growth in the next 10 to 20 years, all of it is happening in the emerging markets. Of course, these economies will require a lot of natural resources and cash. Both China and India have emerged as players in the global economy.
Where should companies in emerging markets like India focus?
Indian companies looking for overseas footprint need to focus first on solid domestic growth and internal demand, they need to have a solid domestic growth engine, other than an export growth engine. They are not the only ones from emerging markets — we see companies from Mexico, Vietnam, Indonesia and Malaysia as tough challengers.
The other important thing would be to have some roots in the developed world (through acquisitions), not only to tap the export potential, but also to think in terms of developing bonds, reaching out to consumers, building distribution channels, connecting with local markets and so on. Compared to other emerging countries, Indian companies have a head start in this direction. Despite the challenges, they are on the right track, which is still not the case with many Chinese companies which are still struggling to emerge as local players in the developed world.
Another way to grow would be from emerging market to emerging markets. That is, by taking what you have done in your domestic market to other emerging markets such as Vietnam or Indonesia.
So there is a clear shift from the West to East and North to South?
It is not really the shift it used to be in the past. It’s more a multidirectional game. An Indian company would need to be strong in India, strong in other emerging markets using a similar recipe to what it has done in India, and then it has to be strong in the developed market as well having some local presence and roots and connecting to the local market and consumers.
What Indian companies should also do is export to the developed markets the innovation they have done in India for Indian purpose. If you’ve innovated under more difficult conditions and come up with robust, smart and very cost-effective products, then these products also make a lot of sense to the Western world. So if GE is innovating on medical devices that are smaller and cost-effective in India for emerging markets, these are equally beneficial to the US and European markets where the healthcare system is under pressure. What Tata has been doing with local acquisitions, acquiring strong brands, connecting with consumers and distribution channels in developed markets is another good example.
A lot of companies in emerging markets today are also moving up the value chain from just being, at times rather anonymous, a low-cost manufacturer of products. They are moving up in terms of adding value to their products, improving quality through innovation, working on the brand image and so on. Many Chinese brands which were rather unknown outside the country are establishing themselves in the West and emerging markets. For instance, Hisense, an anonymous Chinese electronics company to the rest of the world a few years ago, is reaching out to the global market with branded stores in cities like Milan, Paris, Los Angles and so on, building a direct connect of the brand with the consumer. This also means you can have higher margins because if you just subcontract, your margins are squeezed.
Companies need to have the broader part of the value chain — from innovation, design to distribution — instead of just having one piece. That will help them with a solid strategic position in the market. If you are doing just a part of the value chain, that part may well move from, say, India to Vietnam depending on market conditions, and you will suddenly lose business. So if you have a hold on the entire supply chain, it is more profitable today. Chinese companies are clearly seeing that as their growth slowed down before the crisis in 2005 and their profitability never reached the European standards. Many of them are today upscaling from design to distribution and building brands that are synonymous with quality and building direct links to consumers in the West.
How has the consulting business changed for you in this new business environment?
What clients are demanding these days is actually less consulting and more outcomes and results. Clients no longer want PowerPoint presentations or a set of advice on the things they should be doing; they want results and want us to commit to some of the results such as growth, reduction in costs and so on. They even want us to do things with them.
So the whole nature of consulting business is undergoing a change. And you are more involved in actual operations…
What I am describing will never be 100 per cent of what we do. But as a trend there are more and more expectations, and a part of our fees would be linked to actual outcomes. So often we run a part of the client’s business for a while and then we do capability transfers. So the next time when they launch a new product, they are better at doing it themselves. Many deals today are variable — we get a fixed component of the deal but we get a variable component only when the project goes right.
How are companies de-risking their businesses?
The structured official approach to risk used to be mostly something financial institutions have been dealing with — all the Basel II types of regulations saying that you need to have enough cash to be able to support a commitment. If you look at the role of a chief risk officer at a financial institution, it was clearly to look that companies are not taking too many loans or financial commitments when compared to the cash they actually had to their assets and so on. So you had prudential rules limiting the business that you can do based on the capital you have. You can argue that these didn’t work very well because everyone had some off-balance sheet commitments which created a big bubble. A lot of tricks were found to develop off-balance-sheet commitments which could not be monitored. So, all those rules were not enough.
So, the financial sector today is rethinking its regulation rules, trying to find a new generation of rules which would not prevent growth, but would be safer, and create less space for regulatory arbitration. The old notion of financial institutions playing a major role in managing risk is changing. Today, most companies are having a chief risk officer and they are working around operational, market, currency risks and so on. The function of chief risk officer getting more professionalised even in sectors where it was not formalised.