why corporates need to rationalise costs

economies across the world have slowed down, those posting good numbers of gdp growth rate aren’t faring well on equitable distribution of national income. then is the issue of rising number of loan defaulters. so what happened suddenly in the economic landscape that well-established companies, barring a few, are increasingly falling in the trap of squeezed profits?

first globalisation (that in the indian scene resulted in public sector undertakings sharing their market base with more competitive enterprises, causing gradual decline in performances of psu firms) and now easy access to information (all thanks to the internet revolution) that is not allowing companies to reap unfair profits owing to new ventures in related business coming up rapidly through easily gained knowledge of a profitable market.

google is perhaps the best company to work with as per studies, the internet giant has great workplaces, jaw-dropping salary packages for staffers and the perfect work-life balance. but google can afford this, at least for the time being, for no other internet-based company can today challenge its might.

but for others, is replicating google’s workplace and work culture a sure-win position? infosys (an india-based outsourcing firm), for instance, started off with some eye-catching buildings and perks for its staffers; today the company is finding ways to cut costs. others like flipkart too are matching international standards on the back of foreign funds, but will they be able to sustain these costs is a question.

uber recently announced its departure from south-east asia and its only promising market outside us and Europe is india, where again it is struggling to convert revenue into profits.

the ground reality for today’s corporates is that the market is wide open for participants. you just cannot afford doling out great salaries and perks to your staffers that work from expensive and lavish offices. you may be able to sustain this for initial few years, but the rush of entrants in your sector will eat into your profits sooner than later and turn these so-called eye-catching assets into burdens.

same is the story with indian public sector undertakings and banks that have failed to grasp the fact that you cannot offer excessive pay packages to your employees when the private sector peers are working on comparatively lower packages.

the corporate sector on a whole is reeling under the pressures posed by hiring workers that are promised good pays and regular appraisals, margins are regularly thinning and entering negative territory. the hard reality of today is you just can’t afford these. should you not correct course, be ready to fall.

why the world economy stagnated

only two events are responsible for where we stand today, agrarian advancement that allowed non-agri populace become manufacturers and traders, and industrial revolution that increased availability of goods for which people worked to satisfy their wants. these two had a long-lasting impact on world economy, the rest, of which digital revolution is a part are only flashy successes.

other factors included competition which kept prices in check, allowed employment growth and fortified the supply side, thus keeping the demand side in continuous motion; innovation that was real such as invention of motorized vehicles, telephones and consumer electronics, which tempted buyers who could only make purchases by lending their labour.

in the past few decades, the world economy grew on the strength of services sector including banking, communication and information technology. and this is where we made mistake. consider each of this and you will notice that these aspects only compliment manufacturing, banks enable credit for business growth, communication and information technology increase efficiency, nothing more beyond this.

tv commercial of one of leading webhosting providers mirrors the errors we are committing. the advert asks businesses, small or medium, to shift to building websites to promote their products and services and denounces conventional promotional activities. now do you believe that millions of businesses showcasing themselves online will actually be able to garner the public interest they intend to?

same is the case with other information technology services. how many mobile apps can we sustain, how many e-commerce portals does the public need, is online video streaming adding to the economy, does the society need so many software?

the irony of today’s world economy is that businesses like google, facebook and netflix have outshined those that are truly the driving force. as simple as this, people would not want to give their labour to earn for accessing google maps, websites, facebook pages or netflix videos; but they will do so to own a refrigerator, television, computer, car and other tangible goods.

it is time we realise that technology and other businesses in the services sector aren’t the main driving forces of economy, they only compliment the manufacturing sector.

another problem is the education flaw that has enabled a person with acquired knowledge on business administration to run companies. a few among these may hold qualities of a capable leader, the rest are mere degree holders, unable to gauge the real mood of market. what we need is a redefined criteria for appointment of managers and leaders, a beeline outside b-schools will only further deteriorate the already ailing economy.

the simple solution is – treat services sector as inferior to manufacturing, and alter the hiring criteria for managers.