Softscaling: A New Growth Strategy for Volatile Environments

By Ritu Agarwal and Peter Weill

In an increasingly volatile world what were tried and true business maxims yesterday probably won’t work today. Just think Blockbuster and Borders. To understand how to thrive in volatile business environments we studied five top performing Indian companies – that were conceived and now thrive in chaos. What do the names Airtel, Hero Honda, HDFC, Tata Motors, and Max Healthcare have in common? At first glance, not much. Their businesses span the gamut from telecommunications to vehicles to healthcare services. Their products range in price from a less than one cent (per second cost of a mobile telephone call) to thousands of dollars. But look beneath the hood and the journey of these companies starts to reveal a common approach. Their managers have figured out how to delight customers in fast growing and competitive environments. We call the approach they use Softscaling – a powerful left and right brain combination of quantitative optimization and emotion linked together with data-informed empathy. The result is spectacular growth rates, industry leading profits and delighted customers.

 

Many will recognize these names as world-class industrial leaders from India. Yet what is less known about these companies is how they got to where they are today. In this article we describe the Softscaling strategy and how it enabled these companies to become global contenders. Growing in volatile environments requires more than optimized business processes, more than an emotional connection to the customer and more than great data pored over and processed with great empathy – it requires all three.

Softscaling for Exceptional Growth

Observers of India will tell you that the Indian economic environment in the last two decades has been volatile and chaotic. In 1991 the government of India introduced an aggressive set of reforms targeted at spurring international investment, deregulation, and increasing privatization of industry. The business landscape and environment changed overnight. A formerly closed economy was suddenly an attractive place to invest. Foreign capital flowed and foreign direct investment increased from US$107M to $4,101M over the ten years to 2001. All of a sudden the rules of business changed. The reforms created unprecedented business opportunities but also challenges. The infrastructure – roads, telephones, and power – was not ready for the increasing demand. The setting was dynamic, volatile, and unpredictable but, at the same time, offered tremendous opportunities for companies to start capitalizing on the growth.

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Against this volatile industrial backdrop, a handful of new Indian companies emerged. Airtel’s CEO Manoj Kohli says “…we are a child of liberalization”. Others transformed to meet the market’s needs. India’s biggest underwriter of home mortgages, HDFC (Housing Development Finance Corporation), was founded in 1977, a time when “we were the only people getting into the business,” Chairman Deepak Parekh says. Housing finance was unheard of in India 30 years ago. After liberalization, owning a home suddenly became more than just a dream for millions of Indians. HDFC not only created the market, they helped it grow and expand as consumer demand accelerated, and they even helped train their competitors. Commencing operations just a decade ago in 2001, Max Healthcare (with close to 1000 hospital beds and 1500 top-notch physicians catering to residents and non residents seeking high quality health care) was born from the market need and the expanding middle class’ want for private healthcare.

We set out to investigate these companies’ recipe for success. We interviewed over 60 executives including their Chairmen, CEOs, CFOs, CIOs, as well as customers and partners¹. After peeling away the different terms they used, the five top performers we studied, despite operating in different industries, had the same strategy: softscaling. Softscaling is a distinctive and, we think, undocumented approach to rapid growth amidst volatility and yes, chaos. A unique blend of three building blocks (see Figure 1): optimization (the circles in blue), and emotion (the circles in red.) and empathetic use of data (yellow arrows) that collectively drive hard-to-beat customer value.

 

 

The Building Blocks of Softscaling
Softscaling combines the distinctive strengths of optimization with the best features of emotion and links them together by informed empathy that is data driven (see Figure 2).

Optimization
Optimization is a left-brained focus on finding the best way to do something, and then replicating that throughout the organization. This is a strategy that Western and Japanese companies have mastered. It prescribes a rational, best-practice approach to business, a continual search for efficiencies, and often rigidly defined business processes that are embedded in automated systems. Like their Western counterparts, managers in companies adopting Softscaling recognize the need for optimization. But they approach it rather differently.

The leaders of these companies believe in standardized and automated transactional processes as the only way to cope with and scale the chaos in India. Tata Motors and Hero Honda both utilize process excellence and six sigma principles to drive quality and reduce costs in their manufacturing activities and Airtel manages by “…a handful of numbers”. “The endgame of our CRM is analytics”, says Jagdish Belawal, CIO of Tata Motors. But they have come to realize that process is a means to get a task accomplished and not an end in itself. Managers allow for the possibility of local differences and the need for tailored customer responsiveness.

Despite having standardized business processes these firms handle customer needs flexibly by combining an exceptional process (optimization) with a judgment based on direct customer contact (emotional attachment to the customer) and local decision rights. This combination is enabled by informed empathy: the compassionate use of data where the local “feet on the ground” make decisions and the firm looks across all the local interactions for opportunities, risks and governance. In other words, they have processes for operations but don’t let them strait-jacket managers’ thinking.

When HDFC was born, the Chairman confronted deep skepticism from all sides. Many people believed that no one would repay their home loans in India. Today HDFC has a strikingly low loan default rate of less than 1% (as mortgage lenders across the world struggle with bad debts). How do they accomplish this feat? Like most financial institutions that have a pan-India presence, HDFC optimized its business processes with all loan appraisals conducted centrally. But unlike other banks where managers typically move every 3 years, and often before they become familiar with their customers and clients, “we have done exactly the opposite. The man who runs the Madras office has been there for twenty years … and so his job is not only to lend; but, equally important, his job is to collect”, says the Chairman. When someone is late on a payment, the local officer knows what the reason might be (e.g. daughter’s wedding) and is empowered to “forgive” a late payment. The result: a satisfied customer who works even harder not to be late on the next payment or default on the loan.

 

 

Most managers across the world understand the importance of partnerships, but few companies implement them with the same skill and thoughtfulness as these Indian leaders do. The executives in each of these companies have crafted a tight ecosystem of business partners that gives them leverage, scale, and resources to continually grow and innovate. Partners not only provide resources, they also offer co-innovation and a unique window into the market. Partners such as IBM, Nokia-Siemens, and Nortel provide the capacity for scaling to meet Airtel’s spectacular growth. “Our strategy is to grow on the shoulders of giants…”, notes CEO Kohli,” to find the best in class partner, and leverage their capital and expertise.” Bharti’s Chairman says that “a good partnership is one in which both parties are smiling”. So they structure contracts with partners so that incentives for growth are aligned – much more of a shared risk profit model than a master–servant model. To illustrate, the shared-risk partnership with IBM has not only created significant business value for Airtel, enabling scale and speed, IBM research has created innovations that are now being monetized by Airtel in India and Africa.

The final element of optimization, digital technology, is a familiar strategic and operational tool in most Western companies. The Indian managers’ perspective on IT is somewhat different. Doubtless, technology is critical for growth in these companies – their digital platforms compensate for the poor physical infrastructure and provide the foundation for speedy scale. Yet, these Indian companies embody a fundamental cultural value that is deeply embedded in the fabric of everyday life and born from a long history of being economically not well-off: they are “value conscious.” It’s not a question of affording it, it’s an issue of ethos, of culture.” This ethos extends to frugal but effective digitization.

The frugal approach to IT is visible in many of the strategic actions these companies have taken. At Max Healthcare, “we are probably one of the first hospitals to think about outsourcing and getting into a cloud computing environment,” says Nina Pahuja, CIO. “We also have a centralized database of our patients, so irrespective of which Max hospital you visit, we know you.” In steady state, the CIO anticipates an IT budget of 6% of revenue, significantly smaller than similar companies in the West spend. Airtel’s approach to IT was to build a digital platform that can accommodate escalating transaction volume, with only 150-160 internal IT employees. Add 2200 at IBM on the Airtel account and together they handle 170 million calls each month. So they selected a single digital platform to run the business, a single CRM system, a single billing system for over 150 million customers.”

Besides watching every rupee spent on IT, the companies exhibited another distinctive characteristic in their approach to technology: standardization and simplicity. Core processes are typically highly standardized and fully automated – for example, customer billing at Airtel, factory automation at Hero Honda and Tata Motors, loan appraisal at HDFC, and quality monitoring at Max Healthcare. Minimalism in technology is critical for growing at a phenomenal pace in a setting with poor infrastructure, no guarantee of uninterrupted power, users that may be less than digitally savvy and a host of other challenges. Simplicity means standardizing as much as possible and using platforms that are familiar to end-users.

Emotion

The second component of softscaling, emotion, is a core capability for these companies. It is less visible in Western management, and when it does occur it is often viewed negatively – the opposite of rationality and reason – and perhaps a sign of weakness. We found that emotion is a big part of the success of these companies.

Why emotion? Because it helps infuse passion in relationships within the company and across the partner ecosystem. Where there is a shared sense of inter-dependence rather than independence the whole ecosystem benefits. Emotion is visible in actions such as communities of practice for technology partners; Airtel’s ecosystem of partners are responsible for the day-to-day operations of the company, ensuring seamless and reliable cellular service, handling customer enquiries, serving customers at thousands of points of sale all over the country, and allowing the company to grow fast by installing one wireless base station every 20 seconds. Their performance can make or break the company. How does Airtel ensure alignment and commonality of purpose in this diverse community? Jai Menon, the CIO notes: “It’s not just the technology – what my group does and what I focus on specifically is building alliances. Because we are outsourced I needed to do something to make sure that everybody felt part of one organization, so I created the iTi (IT and innovation) Community of Practice. The COP is Bharti and our strategic partners, so … the feeling of “belongingness” happens here.”

The results of connecting with employees emotionally are remarkable. India faces a dearth of managerial talent that has only been getting worse with the recent explosive growth leading to companies raiding each other’s best performers. The companies we studied have managed to keep their attrition rates far below industry norms (to illustrate, turnover is 3% at HDFC in a highly competitive financial services sector), and retain all of the firm-specific expertise and customer knowledge of their executives.

Also, part of the “emotional” side of Softscaling is how these companies have learned to effectively exploit a cultural trait to their advantage: Indians’ love of debate and argument. They all have expended significant effort to develop mechanisms, structures and processes that encourage open debate and allow for the free-flow of information even in what is typically regarded as a hierarchical system. These range from joint management councils, to the chairman of the company being “accessible to anyone”.

Open debate and argument does more than give employees a sense of empowerment: the rich interactions that occur are a key to these companies being able to innovate. The openness to debate and argument has two powerful benefits. Firstly, the openness surfaces problems and opportunities that may be hidden or not identified in optimized processes. So often, firms that are very strong at process optimization have little tolerance for debate once implementation has begun, and often problems are baked into the process. Just ask the bank tellers at many large banks, or worse, ask the customer. Having an open environment for debate, and believing in it, allows anyone to challenge the status quo.

Secondly, the open environment supports the belief that anyone in the company can innovate, and that innovation is part of everyone’s job. Sure there are crazy ideas, but there are also those hidden gems, and a number of Indian companies have put in place creative mechanisms for nurturing this innovation. For example, Tata Consulting Services – another company in the Tata group – has created a strong culture of innovation including PIPs, IdeaStorms and COIN. TCS’ Process Improvement Proposals (PIPs) gather more than 30,000 ideas per year from employees via a short structured web form. IdeaStorms allow thousands of employees to virtually brainstorm around topics chosen by the top leadership team. A recent IdeaStorm focused on better “on-boarding” of new hires. To extend the innovation capacity beyond the firm, they created the TCS Co-Innovation Network (TCS COINTM). This group of venture capitalists, startups, academics, strategic partners, and selected clients meets periodically to discuss future trends and opportunities.

 

Linking Optimization and Emotion: Informed Empathy
There is much talk and excitement among managers today about the potential for exploiting “big data” to drive business success. Data is doubtless critical, but has little inherent worth without insights and then action that creates business value. In Softscaling firms, data in three key areas links optimization and emotion: customer, performance, and product. All firms have such data, but Softscaling companies have figured out how to use the data with empathy by infusing the numbers with context.

Even though Airtel has asked partners to do many of their core business processes it retains ownership of customer and product usage data. This data enables Airtel to excel at market and customer management (i.e. the “smell of the customer”) a key capability they keep in-house. Also, for Airtel managing regulation (or “navigating the maze”) is a core competency that requires empathetic use of data – for example, how much should we pay for new spectrum? Getting this wrong can lead to serious problems as we saw with sky-high prices paid for broadband wireless spectrum at the auction held in April 2010.

 

 

The empathetic use of data provides common ground for the rational to communicate with the emotional. Without the data it’s the left brain optimizers who dismiss the right brain empathetics or vice versa. The data is the constant, the “facts” that both left and right can agree on and work with. For example, Tata Motors’ engineers go on ‘Naka’ (street corner) visits to drink tea with truck drivers to get a feel for how their trucks perform on the often perilous Indian highways. Product designers at the plant in Pune then combine this input from the warranty claims data received from dealerships to design a better truck that works in the local setting.

Building Softscaling into Your Strategy
Softscaling allowed the companies we studied to achieve growth rates that are remarkable and perhaps unprecedented. We are convinced that together optimization, emotion and data are a successful approach to achieving high performance amidst volatility. In unpredictable environments relying on optimization is too rigid and inflexible. We have seen many examples of Western companies who have struggled to export their very left brained models (logical, analytical, objective) into more volatile contexts. We have also seen more right brained (intuitive, thoughtful, subjective), emotionally based companies (startups and some franchises are great examples) fail to scale into larger multi-site corporations. Success in a volatile environment – in most business environments going forward – will require some version of Softscaling.

In conversations with companies on Softscaling we have found it useful to assess how effective the firm or business unit is in the three Softscaling domains. Typically the response is: we are very good at the blue (optimization) or the red (emotion) but not both, and better data and its empathetic use (the yellow) would help – particularly now we see how they fit together. We are not recommending all firms adopt Softscaling as implemented by these five firms as there are many economic, cultural, and historical factors that matter. We are saying that all firms who want to grow fast in volatile environments can learn from these firms and need to develop their own version of Softscaling.

About the Authors

Peter Weill is the Chairman of MIT Sloan CISR and Senior Research Scientist at MIT Sloan School of Management. He researches the role, value, and governance of IT. He is a popular presenter to executive audiences and has published widely including award winning books, case studies and journal articles. His work has appeared in Harvard Business Review, Sloan Management Review and The Wall Street Journal. Peter has co-authored five books published by the Harvard Business School Press including the “best selling” IT Governance: How Top Performers Manage IT Decision Rights for Superior Results and his latest book IT Savvy: What top executives must know to go from pain to gain. In 2008, Ziff-Davis and eWEEK.com recognized Peter as #24 of the “Top 100 Most Influential People in IT.” And the highest ranking academic.

Ritu Agarwal is Professor and the Robert H. Smith Dean’s Chair of Information Systems at the Robert H. Smith School of Business, University of Maryland, College Park. She is also the founder and Director of the Center for Health Information and Decision Systems (CHIDS) at the Smith School. Professor Agarwal has worked extensively with Fortune 500 companies on a variety of research and consulting engagements and regularly makes presentations to groups of senior IT and business executives and government policy makers. She is currently the Editor-in-Chief of Information Systems Research. In 2011 she was appointed as a Fellow of the Association for Information Systems and also awarded the University of Maryland Distinguished Scholar-Teacher Award.

Reference
1. For more information on this research project please see 1). http://cisr.mit.edu, 2). “The Benefits of Combining Data With Empathy” Ritu Agarwal and Peter Weill by SMR, Fall 2012 Vol. 54 No.

 

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