The Hindu Business Line : Will CAs be the new financial scorekeepers?

HERE is a `playbook' on `industry consolidation' from Tata McGraw-Hill (www.tatamcgrawhill.com): Winning the Merger Endgame, by Graeme K. Deans, Fritz Kroeger and Stefan Zeisel. The book is "a natural history of M&A" writes James K. Glassman in his foreword. The authors have picked from `a database of more than 25,000 global firms' about 1,500 large mergers and found that `more mergers destroy value than create it', though merger activity is logical rather than emotional or ego-driven. Other important findings are that an internal growth strategy is not superior to a merger strategy; and the same forces of consolidation and deconsolidation — of merging and demerging — drive every industry.

The merger Endgames S-curve travels through four stages, viz. opening, scale, focus, and balance and alliance. The curve is touted as `the next-best thing' since we don't have a crystal ball. The curve is based on two sets of values: "The concentration degree on the y-axis and the dynamics or speed of concentration on the x-axis." There are many concentration indicators, informs the book. One is CR3 or `three-firm concentration ratio', which is "the combined share of industry sales held by the three largest firms in an industry". Another is HHI or the Hirschman-Herfindahl Index, "the sum of the squared market shares of the firms in a market."

The only optimal size is bigger — bigger than last year, bigger than the competitors, with a strategy to get even bigger tomorrow, advise the authors. Speed is everything, they say. "Companies that move up the Endgames curve the fastest are the most successful... Slower companies eventually become acquisition targets and disappear from the curve."

The book shares its vision of 2010, in which there will be `new financial scorekeepers'; and the role of auditors would change too. The authors foresee "an annual report with an independent section written by a company's auditor on where the company and its industry are positioned on the Endgames curve, the five-year outlook for merger activity and consolidation in the industry, and the major strategic imperatives for the company's management to address." Will the profession be ready for the new challenge?

Useful read.

Know your State

RECENTLY, when I met V. C. James, the Chairman of the Southern India Regional Council of the Institute of Chartered Accountants of India, a topic that came up for discussion was how CAs don't involve themselves much with the community. One can rue endlessly on the malaise, but I have a suggestion. That the professionals can apply a formula they adopt with their clients: gaining knowledge of client's business.

To be active in the community, CAs need to know about the place. And a good starting point can be the SDRs or State Development Reports. Take, for instance, the Tamil Nadu Development Report, published in 2005 by Academic Foundation (www.academicfoundation.com).

One of the important Tenth Plan initiatives of the Planning Commission was to sponsor the preparation of SDRs with the help of reputed national level institutes, informs Montek Singh Ahluwalia in his message to the report, that has been prepared by Madras School of Economics, under the overall supervision of Dr R. J. Chelliah. To help understand the various facets of the state, ranging from agriculture to information technology, from health to financial services, there are neatly laid out chapters with tables and graphs.

The chapter on finances notes that Tamil Nadu stood sixth in `per capita own revenues' at Rs 1,998. However, the State's Rs 1,777 of per capita own tax revenues was second, after Maharashtra (Rs 1,821). "In respect of own tax revenue as per cent of GSDP, Tamil Nadu occupied the first rank with a ratio of 8.5 per cent." However, a similar percentage for non-tax revenues was only 1 per cent.

The report has suggested two changes to the State's expenditure policy. One, that the government should introduce a three-year medium-term expenditure plan. And two, that the appointment of Pay Commissions at intervals of 10 years or so be given up. "Instead, adjustments in real incomes to be effected should be commensurate with the increase in the per capita GSDP," notes the report. How I wish the ICAI too, with its pool of many experts, came up with studied views that can be of use to the State governments.

The chapter on financial services argues for the promotion of Chennai as a financial centre, by pointing out how the World Bank set up back-office operations here, because of the availability of quality infrastructure and manpower. The report attributes the deterioration of cooperative banking to "the dual regulatory mechanism, involving both the RBI and the State government cooperation department".

Laudably, there is the Tamil Nadu Protection of Interests of Depositors Act, 1997; also, there is a special court to deal with offences. The report recommends that the government should expedite the pending cases and have the offenders punished, so that there is a strong deterrent for unscrupulous elements entering the financial services sector. Don't miss the chapter on IT.

HR metrics

A CHAPTER in John Bramham's Benchmarking for People Managers, from Jaico (www.jaicobooks.com) is devoted to an area of relevance to accountants: metrics. The author speaks of four approaches to gathering metrics, viz. key indicator studies, customer operational reviews, employee attitudinal reviews, and process benchmarking.

You must view the HR metrics within the context of the business, advises Bramham, and cites as example how training costs may rise with value-adding work. Collect both hard data, such as costs and absence rates, and also soft metrics (example, employee attitudes), instructs the author. For first-level analytical data, investment analyses and balance sheets are good sources.

A tricky question in a different chapter looks at the value created by the HR department. Studies cited in the book show that much of the activity carried out by HR departments is routine administration and not a key driver of the organisation. Bramham wants HR departments to see themselves as adding value. "Every time training takes place assets are added," and people's capabilities increase.

A book that traditional HR people may not like to see.

BooksOfAccount@TheHindu.co.in

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