Sunday, December 09, 2007

Beating the odds of US recession

How will IT services fare in the coming US recession? Basab Pradhan asks here. He also refers to Infosys CEO Kris Gopalakrishnan’s statement at some conference as an update that I allude here. Kris says “so far the impact of the US slowdown is muted”.

Some day one of us can ask Kris Gopalakrishnan’s cardiologist about how many heart beats he may have missed while putting a brave face like that up. I am sure he hears about many fresh billion $$ write downs and CEO ejections as much as I do. All of these were kept off balance sheets (and investors) and the traffic is only getting busier. Bravo, Kris….

Points taken, Basab. But I ask - "why only IT? Can other businesses fare much better?"

Can the global economy afford to let its largest consumer slip into recession mode without committing economic hara-kiri? Is there another economy that can replace the US? I see none. Can the world business, especially IT services scale down their size of operations if US stops consuming? Europe ? No way.

That would be a catastrophe. In comparison, fixing US recession before it fully arrives seems a song. It is for global economies to be mature enough to rally around the US and get it out of trouble, if they have to stay in shape themselves. My hope is built around that (self-centered) altruism that fits very well with a flat world.

That said, IT services can certainly throw a few life boats in that ocean of US trouble, by

a) Toning down high margins (that gouge 25-30% post tax returns) to keep its US client afloat. The value it loses out in the short term will be more than made up by long term gains in brand perception and loyalty.

b) Working towards greater value adds. I would even say that bad credit appraisals that the US banks espoused that led to the current crisis were to some extent avoidable if quite a few Indian BPOs that processed the proposals blew the whistle. The workstation executive need not, but her top management certainly can build in risk-flagging protocol, in that it ensures the longevity of many a well paying client.

c) Allowing people to evolve from transactional, keep-the-lights-on activities to more challenging, innovation areas. And don’t start billing them until it’s proven.

d) Indian IT vendors can extend their relevance only if they truly partner in innovation by taking greater risks in the real sense, not just spray paint or rustle up something at the last minute by using some fit-all templates. Their R&D spends that look like rounding errors are mostly marketing efforts e.g. a lab set up to support a particular proposal or a "solution" center where small teams prototype and train on new solutions. They are usually just a training class ahead of client teams on new technologies. Can they not graduate to be rounded LOB solutions players ever?

e) Improving in areas which require deep vertical knowledge, complex program management skills, change and governance management, Data center management etc. In ERP practice, I see Indian IT vendors active only in “post-live” stage. They should deepen their spheres of influence if they have to seem relevant.

The central banks around the world can help US as follows, in their own interests.

f) Countries with artificially depressed currencies (you know who) will have to yield. Most global manufacturers that have built up huge scales counting on American consumer will choke to death if they don’t show up. For if they don’t, the global vendors – with China standing right up front - will be in trouble deep.

g) Build a central supervisory protocol to detect and control excesses in credit and money markets before they get out of hand. Today, the irony is that the huge foreign currency reserves of China are denominated in dollars and it isn’t easy to switch to a new denominator without pushing the yields further down. China is already facing criticism in its home turf for weak treasury management. Obviously it can’t dump its dollar reserves in the pacific to avoid inflation either. The trouble is, no other banking system has the appetite (or would even want) to mop up those huge reserves. So the dollar has to go up even by Chinese interests, be it at the cost of letting Yuan appreciate.

Do anything. Drive economies, value add, scale up, squeeze margins, innovate, sell cheap, offer free – help U.S.clients hold their heads above water. Relying on untested European market is like letting go the proverbial bird in hand seeing two in the bush. Europe is full of (not just linguistic) prejudices and isn’t as origin agnostic as U.S, and in between the time taken to schmooze and adapt, the fixed maintenance costs of large scale build-outs could kill you.

I go unless there is a competing market with the consumption levels close to that of US, world economies can’t put up with a moribund US markets for long. Every one feeds off it and it tastes nice. It’s impossible to conceive another market like that, not the least in IT services. Some day, others may achieve its size on the supply side(?), but demand side metrics will be hard to replicate. That sustains the imperative - Help U.S get its act together, fast. If US doesn’t survive, others won’t fare much better either.

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Anonymous Balaji Sowmyanarayanan said...

Never underestimate the power of Human Ingenuity( and stupidity too)
I will not be surprised if US citizens abandon their currency system for Local Currency( like and market their way out of the crisis.

The looming crisis is more an intellectual challenge, which will get be taken head on. Especially when every one is so plugged-in to the situation irrespective of if they like it or not. When so many minds are in sync, something spectacular is bound to happen.

5:37 AM  
Blogger Krish said...

Vikram Pandit and his sulking CEO mates of other US banks would swap currencies twice over if that could get them out of messy subprime woes… But the rot in the system runs too deep to be fixed by a band-aid. They've lent moneys to people that just can't repay. Heads may have rolled, but that alone doesn’t wash. The whole US banking system will have to go under the scalpel - if at all they manage to re-price risks after the huge write downs.

Don’t forget that it was the very human ingenuity (at wall street) that engineered this mess thro exotic financial products that neither the lender nor the borrower understood. Known cure for cancer is to char the malignancy. Like Merrill Lynch, Morgan Stanley, Citibank, Bear Stearns, UBS all learning the hard way…

The lingering worry is, if they’ve done it once, they can do it again.

8:26 PM  

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