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The year ahead for the 'new normal' economy

Time to swim against the tide

 By Vineet Nayar, CEO, HCL Technologies for The Financial Express

The momentum carries you down hill but you need skill and stamina to climb uphill. For students of management and aspiring leaders, there has never been a better opportunity to learn the forgotten art of not only navigating the teams in a momentum business but also in a business that needs climbing to the top again. The skills required are quite different and the attitude to love challenges is an essential because each day is a challenge.

Never before have you been pitted against so many odds and never before your decisions had such far reaching impact. Thus if there was ever a period to be in the industry and be excited—this is the time. These few years will produce a very different class of leaders—smarter, sharper and leaders who do believe that hope is not a strategy and know how to take rifle shots at opportunities by focusing few resources for bigger impact rather than spreading the risks evenly. If you love a challenge, next few years are going to unfold ample excitement for you.

The past 12 months however have been quite literally a bloodbath for world economies. As businesses across the globe witnessed degrowth in every direction, most companies put on hold any investment in expansion plans preferring to wait and watch the global recessionary trends play themselves out.

A safe approach, you might say. Yet, not necessarily the best. As pointed out in a study titled Learning to Love Recessions in a special edition of the McKinsey Quarterly on Risk and Resilience, which studied business behaviour in previous recessions: “When other companies simply battened down the hatches, seeing only risk during the recession, the more successful competitors found opportunity and pressed their advantages.” The companies emerged leaders when the winds turned.

The leaders at HCL Technologies for example decided to swim against the tide. We believed, as McKinsey had inferred, that “managing risk does not mean avoiding it altogether.” We refused to see the recession as an excuse for declining performance. On the contrary, we saw it as an opportunity. We pressed on the accelerator while others applied the brakes. We increased our sales and marketing spend and focused on targeting uncontested market spaces in line with our Blue Ocean strategy, remember, we inked the largest acquisition ever made by an Indian IT company by taking over AXON, a UK based, high-end SAP blueprinting and consultancy firm at the height of recession. We acquired new strengths, while demonstrating value-centricity and flexibility to our customers.

The result was evident: We have outperformed global as well as Indian IT services providers during the recessionary year (last 12 months). While revenues of most global and India IT majors dropped or at best remained flat, we were able to grow nearly 20%year-on- year during this period.

The theme was simple—we saw opportunity in adversity and realised it to our advantage.

Now let’s look at the present scenario. Once again, while people are rejoicing the end of the recession and expected recovery, we can see there are tough and thus exciting times ahead.

Looking at data from SMP 500, we know that broad economy recovery is expected by Mid-2010. An analysis of S&P 500 companies shows that number of companies with negative sales growth peaked during AMJ’09 quarter with 75% of companies registering a negative growth and 25% companies registering positive growth. The situation is estimated to reverse by AMJ’10.

However, business growth in the recovered economy won’t be same as before. An analysis of S&P 500 companies’ growth distribution shows that there were over 50% of the companies registering growth greater than 10% year-on-year in AMJ’08. During AMJ’10, only 24% companies are expected to register growth greater than 10% year-on-year. So, the number of companies registering high growth will almost be halved.

So what does the crystal ball foretell about the year ahead? The 2009 tidal wave has brought us to shore in what is increasingly being referred to as the ‘New Normal’ economy. The storm has passed. But there is work to do, craters to fill, pitfalls to avoid and a new phase of ‘frugality’ to be understood.

To quote William A Galston, senior fellow, Governance Studies, at The Brookings Institution: “Once the dust settles from the economic crisis of 2007-2009, we are likely to enter a period of new normality, with lower household debt, higher personal savings, and less consumption as a share of gross domestic product. The effects of this transition will ripple through both the domestic and the international economy.”

The conclusion seems inescapable. We are entering an era of private thrift and public restraint. In the US, a recent Gallup poll showed 59% of Americans now say they enjoy saving money, compared with 48% in 2001.

The impact on industry will be far reaching. Clearly, we are looking at a market of a different shape and size ahead. Lower ‘normal’ levels of expenditure, lower volumes, hard costs, lower margins, lower annual increases—a demand environment that appears permanently damaged. What is more, there are no ‘undisputables’, no ground rules anymore. Gone is the undisputed leadership of the US and Europe, aka ‘the West’. New countries are emerging as growth leaders within the global landscape. And within these new geographies, new industries are emerging as boom sectors. Finally, the regulators—until now a passive partner—are ready to play an active role in the post bailout arena.

Yet, as will be the case in any era, there are new opportunities for those who are able to follow the pulse of the new trends and leverage the change.

Look back at developments within our industry, Y2K was the last mega trend that transformed our world. In the early formative years, the industry could monetise outsourcing opportunities due to surplus demand despite a lack of maturity on several fronts. This will no longer be the case.

Beyond evident local pressures against outsourcing, CIOs today are not looking for technology solutions. They are looking for business solutions. They are in search of partners who have the expertise to help them get from point A to Point B on their business plans.

So winning on the basis of quality, experience or relationships is passé. The future lies in providing clarity—the ‘what’ and the ‘how’—to help client on mature terms of partnership. And we, as an industry, will have to grow up to be counted as true business consultants.

As the roller coaster comes to a halt, only those who can pick their markets in uncontested spaces within this dynamic Blue Ocean, and stay sharply focused on delivering deep value within them will succeed. As future managers and leaders you have a great opportunity ahead of you. Watch carefully, listen often, think more and make every action count. You will love the times ahead as what you do or do not do will make a big difference.

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