The Hindu Business Line : Costly cost containment

ALL TURNAROUNDS don't have happy endings. And, failures can teach us as much as successes. Paul W. MacAvoy and Jean W. Rosenthal of Yale School of Management study one such case in Corporate Profit and Nuclear Safety, from Princeton University Press (pup.princeton.edu).

The book is about `an ambitious new competitive strategy' that Northeast Utilities Company of the US pursued, aggressively cutting costs `in key areas of nuclear plan maintenance and equipment upgrades' even at the cost of shutting down the power plants.

"Our greatest interest is not the technology of safety, but how that trade-off of management targets and safety may be part of corporate strategy," explain the authors in the preface. Management teams and boards of other nuclear-based power companies, and of other industries with hazardous operations, face similar choices, the authors point out.

A brief background of the company in question is that it was formed in 1966 "through the amalgamation of three electric companies whose histories stretched back to 1878." Northeast was the largest utility in New England and one of the 20 largest in the US.

The CEO of Northeast had worked in McKinsey earlier; it was predictable, therefore, that he got the consultancy firm to assess competitive threats and opportunities and also develop cost reduction initiative, for a fee of $1.022 million. Ruthless targets for cost containment were announced in 1987 as follows: "12 per cent reduction below projected costs of 1990, based on a 7 per cent reduction in operations and maintenance costs company-wide and a 13 per cent reduction in costs in nuclear engineering and operations."

Citing a slide that was used in management presentations, the authors inform that the approach in `activity value analysis', the criterion of `reduced expenses' outranked `excellent service'. The slide had posed the following questions about currently performed activities: "Could we: do it less often? Stop doing it? Reduce the quality? Have someone less skilled do it? Automate it? Do it differently? Centralise/decentralise it? Make or buy it? Combine it with something else?"

Northeast was not alone among electric utilities in rethinking strategy, but it had scarce company in the cost focus. "Of 14 major utilities, 8 chose to diversity out of electricity generation, 4 held to business-as-usual practices, and 2 proposed significant product differentiation. Only two of these 14 utilities made cost containment an element of their new strategic initiative."

Of great value is the chapter that deals with the complexity of nuclear power systems, especially in view of the sudden surge of interest in nuclear power closer home. It is estimated that India's power generating capacity, which is currently at 1,00,000 MW, has to be augmented, by 2020, by the following sources, as the President, Mr A. P. J. Abdul Kalam, recently highlighted: "Nuclear energy (20,000MW), hydroelectric systems (84,000MW), renewable energy (1,00,000MW) and thermal energy (96,000MW)." More power, but it has to be safe power, too, despite accountants!

Resuming the Northeast story, the book recounts an unusual development in 1990 and 1991: Financial results improved though plants were shutdown, and production was lost. "The reason was that regulatory accounting limited the impact: repair costs and the costs of replacement of power were booked to `recovery accounts' based on the expectation that the company would be allowed to collect future revenues to cover these deferred expenses." Disturbingly, executive incentive compensation was based on `shareholder returns' and `cost of service containment targets'.

Critical read, to realise how cost cutting can at times strike at the very roots of survival.

Fitness for use

VOLUME 15 in `The Best on Quality Book Series' of the International Academy for Quality is Juran, Quality, and a Century of Improvement, edited by Kenneth S. Stephens, from Pearson Power (www.pearsoned.co.in). Juran broadened the definition of quality from conformance to specification to `fitness for use', points out the book.

"He also considered two aspects of product quality. One is `freedom from deficiencies' and the other is `product features'. Quality improvement was earlier primarily focussed on reducing deficiencies but has developed to include even adding product features that meet the needs of the customers in a wider way."

A section titled `life behind the quality dikes' highlights the need for responding to the following trends: "Growing concern about damage to the environment; fear of major disasters and near disasters; action by the courts to impose strict liability; and growth of consumer protection organisations."

To secure the benefits of technology from service disruption, dikes are necessary in the form of good quality, urges the book. A way, that is, of living dangerously; but "the public is dead serious about its concerns and is willing to pay for good dikes", even as enlightened companies have begun to find "ways to reduce costs of providing solutions." Valuable inputs.

Recounting agriculture accounting

PUNJAB has always been associated with high farm productivity. But that is a fallacy `carefully cultivated' by the British, says Mridula Mukherjee in Colonizing Agriculture: The Myth of Punjab Exceptionalism, from Sage (www.indiasage.com).

The author, who is Director of Nehru Memorial Museum and Library, New Delhi, wades through "data culled from government archives and private papers in India and Britain, as well as from village surveys, farm accounts and family budgets," and argues that Punjab was "by no means an idyllic land of prosperous peasant proprietors."

Yet, the British maintained such an image because the then government needed to recruit people from the state for the army. The Green Revolution of the late 1960s was, therefore, "not the result of a continuity but actually because of a break with the colonial past," writes Mukherjee. The book, which is ninth of a series in the `Modern Indian History', has chapters on peasants as taxpayers, and as debtors, apart from topics such as capital accumulation and investment, and commercialisation.

Essential literature, with historical inputs, such as that maximum remission was to be up to 50 per cent of land revenue "in the case of those villages that had sent three-fifths of the eligible males or one-fifth of the total male population into the army" (citing the Punjab Revenue Department Proceedings, January 1927).

And this, from the Revenue Secretary's letter dated December 4, 1928: "While addressing the landowners at Sargodha, Sir Michael O'Dwyer, the Governor of Punjab, thought it wise to let them know that their willingness to supply recruits would weigh with the government when it decided the term of the revenue settlement." Unsettling.

BooksOfAccount@TheHindu.co.in

More Stories on : Books | Books of Account

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
For a second farm revolution

The Little Blue Book

A place for India in `Asian' Century

You can't be too busy to think of BCM

`Standard' lag in accounting for financial instruments

SAFTA: India should lead by example

Costly cost containment