Pankaj Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at the IESE Business School in Barcelona. He completed his PhD from the Harvard Business School at the age of 22 in 1991 and was appointed the youngest full professor in the history of the institution. In this interview, Ghemawat speaks to DNA.
Excerpts:
How has Indian IT weathered the global financial crisis?
An environment like this always leaves some risk. So there are some risks facing the industry. But overall, what we are seeing — and this is evident in the financial results of companies, especially the majors, which have actually come out of the crisis relatively fast — at places like TCS are margin improvements as well as rapid growth.
TCS recently overtook Infosys in market cap. Are the days of Infosys as the blue-eyed boy of the stock market over?
The trend is a very encouraging one from TCS’ perspective, particularly once we recognise that because of reputational effects, changes in market valuations take a while to reflect real improvements in operating performance.
What we saw for a longish time was a situation where the companies that were the first to list publicly received extra attention and were placed in a different bracket from major competitors such as TCS, which listed later. That, among other changes, that historic asymmetry, has faded.
Looking forward, relative valuations will be influenced more by who is better positioned to do really new things, move into new market segments, execute mega deals, etc — all elements of TCS’s strategy for some time now. In contrast, competitors who historically grew more quickly by focusing and, in effect, doing similar projects over and over again will, at a minimum, have to change how they compete.
So do you see companies like Infosys correcting that now?
It is a little bit hard to tell from the outside but I would assume that a change in relative market share valuation must be the topic of huge discussion because in some sense this was the metric Infosys placed a heavy emphasis on, whereas TCS placed comparatively more emphasis on delivery and other operating metrics.
Have you seen the Indian IT business evolving in some way due to the financial crisis?
It is a little hard given how fast the sector is growing to decouple changes that would have happened anyway from changes that are a direct result of the financial crisis. But there are specific responses I can think of. For instance, take banking.
Given the regulations that have been put into place, and are being put into place, there is a whole new, banking compliance IT business, that is just getting of the ground, but is potentially a huge opportunity for those who have the ability to move in their quickly.
So normally we think of a crisis as reducing economic opportunities there is clearly some respects in which it has expanded it. The challenge is going to be maintain the right balance between learning to do new things and recognising that there is huge demand for the traditional business at very good margins to be made.
So one of the things I keep encouraging people is while of course you must think of doing new things but recognise that for the majors this is a beautiful business model that has delivered for a number of years now and don’t lose sight of that. This is because very few industries are structurally as attractive as the Indian software sector.
Any other issue?
I did the keynote speech to Nasscom in February 2009 and what I told them at that time was that in terms of the protectionist trends
we haven’t yet seen all that could happen. While I have been encouraged in the short run that governments haven’t responded with quite the protectionism one might have feared, the story remains to be told. And the very fact that employment is such a sensitive issue.
The fact that it has become harder to recruit US companies to stand side by side with Indian companies on Capitol Hill and press for increasing the number of H1B visas etc — it’s a different situation. So the industry justifiable takes credit in having weathered some of the public relations problems that it had and the lobbying issues that it faced in 2001-02.
So the point you are trying to make is..
My point to the industry is that given the global macroeconomic climate it is both really good news and really bad news. The good news, in some sense, is that more cost-effective IT is more of a priority for companies than ever. The bad news is that in terms of protectionism we are in unchartered waters and the waters may be about to get rougher in the sense what we are seeing is the expiry of the effect of the stimulus packages.
And governments were able to coordinate on that because no politician ever saw a spending increase, unless they are very conservative, that they didn’t like. You know, pumping lots of money into the economy has a certain natural constituency to it in politics.
I think that masked a lot of attention that one starts to see in a climate of excess supply and insufficient demand. And that’s why I remain quite worried about protectionism if the job situation doesn’t improve. And with people starting to talk, I mean this happens every two days, I wouldn’t rate it as a major turning point, but with people starting to talk about a double-dip US recession, this is kind of a reminder of how fragile the macroeconomic situation is and clearly if the macroeconomic situation deteriorates, protectionist pressures escalate.
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