The Hindu Business Line : `We have to find ways to break up audit firms'

IT IS the in-thing to think `out of the box'. But Vijay Govindarajan takes us into not one but three boxes. Which is how he began the hour-long chat with us a few days ago when we met VG, as he is called, in a Chennai IT company.

VG believes that everything a company does can be slotted into three boxes. The first box is the present, which includes all that most companies do. Second is to `selectively forget' the past. And third, `create the future'.

Don't get stuck in the first box, but move to the second and third, he urges. "While box one is terribly important, it has nothing to do with strategy." Because that's the job of boxes two and three.

Well, he should know, for he topped the CA exams in 1972, but went on to study business administration at Harvard Business School, and is now the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business, Dartmouth, and an acknowledged guru on strategy.

"Where is the accountant?" we nudge him, and he responds, "I moved out of the first box!" and adds: "I have left accounting but not the accountant's mindset." And it shows in VG's emphasis on costs. Strategic Cost Management, a book that he co-authored with John K. Shank has been translated into five languages.

He cites the example of toy maker Hasbro to illustrate his three-box-thinking. "Hasbro is in the traditional games business — Monopoly, Scrabble, GI Joe and so on. Box one for them is to see that the traditional business continues to be profitable. But that won't position Hasbro for relevance and leadership in 2015." True, a decade later, the company would have to handle a whole lot of non-traditional competitors such as Electronic Arts, Sony or Nintendo apart from traditional competitors such as Mattel.

VG points out the other `non-linear shift': "Children are growing `older' younger! If, historically, they played with a toy till the age of 10, they are now losing interest by the fifth year itself. So, a huge customer base is leaving Hasbro." Frightening, isn't it, that profitable companies can start making losses sooner?

But there's an opportunity in the ageing of population, as in some Western countries.

What does this mean for Hasbro, or any similar company: "Grandparents have more time with their grandchildren than parents have with their children. So, Hasbro can create toys and games that grandparents can play with their grandchildren. It can also have a whole new set of products for customers over 60 years."

That's no grandma tale, but VG wisdom for companies that are stuck in box one.

What it has to do, in short, is: create the future. That's probably what the accounting profession didn't think about all these years, comments VG. "We have to wake up and do something about accounting," he says. "The profession needs to step back and think about other management professions, and not just their traditional rivals, as their competitors."

We ask him, "Do you support the idea of multidisciplinary partnerships in accounting?" He replies without batting an eyelid: "Yes." And then he reminisces the time he grew up in India, studying accounting in India, through the degree and CA courses.

But, sadly, he is far from nostalgic. "I felt short-changed," he remarks. "It didn't prepare me for the future. For six years I was into accounting. I felt I was done a lot of injustice in that profession because it was six years of nothing but accounting. And I don't think you can be an auditor without understanding the management process. And therefore, you must understand marketing, you must understand technology, you must understand engineering to be a good auditor."

The ideal accountant, in VG's view, should be able to sit with a CEO and participate in strategy discussion. A far cry from the usual accountant. How one wished the ICAI listened to his views on the profession! And VG leaps at the suggestion, "I'd love to!"

Any discussion of accounting is incomplete without some reference to the recent scandals. "How do you view them, as a thinker on strategy?" we quiz VG. And, let's caution you that his thoughts may not be palatable to multinational firms. "The problem lies in the fact that economies of scale in the audit profession have been highly overstated. In short, more competition is needed," he says.

"We have four big accounting firms and that's part of the problem why the scandals may continue. Because, KPMG was recently replaced for Fannie Mae, which faced some accounting irregularities. Out of the remaining three, two were auditing competitors of Fannie Mae; so, they were forced to go with the remaining firm. I believe competition is important for audit firms. If one of the remaining firms falters, we will have only three. I don't think it's a sustainable model. We have to find ways to break up the audit firms."

But we break off into some of the topics that VG likes to talk about. Such as the BPO industry that he is currently advising. "The BPO industry, in a way, didn't get created by a tremendous amount of strategic thinking but by a window of opportunity. Companies rose up to the challenge. The window of opportunity was a cost arbitrage, which is not sustainable in the long run. It's not a strategy."

He identifies quite a few pressure points acting on the industry right now. "Consolidation is one; entry of MNCs is another," he points out. "And if Indian companies continue to do what they did in the past five years, their future is suspect," VG declares.

Globalisation, he reckons, is an inevitable extension in the process of creating the future. "One place growth happens is outside your domestic markets. Once you want growth outside, you have to think in box two and three terms."

Indian companies will not have much option but to go global as the global companies are coming here, he says. On the positive side, Indian companies, particularly the successful ones, have an advantage in terms of having managed diversity in the domestic market.

"A truly global company is global along five dimensions," according to VG.

These are: market presence (presence in every strategic market across the world); supply chain (locating value chain activities in every part of the world); capital (raising capital in the most efficient markets); talent (ability to attract, develop and retain the best talent in every country in which you compete); and corporate mindset (understanding differences across countries and rising above such differences to have global solutions).

Are Indian companies `there' yet? No, not yet, VG shakes his head, but he is more bullish about India than about China, the favourite destination for many Western companies. He is bringing in fifty US businessmen to India shortly, and getting them to see the country as an investment destination, as a component of their strategy.

VG's China-thinking, again is boldly different from the chime one is familiar with: "I am pessimistic about China." Why? "Growth rates are inflated in China. They talked about 10 per cent growth last year. There's a lot of violation of intellectual property in China. If they have to import the goods that they are illegally producing, it's going to reduce the growth rate."

The next bubble, in his reckoning, could be China. "How soon?" we ask in a hush. "25 years," he hazards a guess. "So far, it has been a one party rule and simultaneously capitalism. It has certainly worked for 25 years. But I don't think it's sustainable. You can't have economic growth without political freedom."

We then shoot a straight question at VG: "What will be your advice to Indian companies looking at China as a destination?" He responds, "Yes, they should. But they should also have an exit strategy."

mailto:dmurali@thehindu.co.in

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