Monday, April 30, 2007

Now Mittal is eyeing the Oil Industry

Excerpts sourced from Wall Street Journal

Lakshmi Mittal, the global steel business giant, is setting his sights on another elemental commodity: oil. Some of the strategic initiatives by him in the recent times validate this statement:
# In the past year, the London mogul's private investment company, Mittal Investments, has joined with India's state-owned Oil & Natural Gas Corp. for several overseas joint ventures in oil field exploration.
# It also has teamed with large oil firms in Russia and France to develop reserves in Africa and Asia.
# Last year in Nigeria, ONGC and Mittal successfully bid for promising and sought-after oil-exploration acreage. Part of their pitch: a commitment to invest some $6-billion (U.S.) to build, among other things, a refinery, a power plant and a railroad in the country.
# Mittal Investments holds a 48.02-per-cent stake in two joint ventures – ONGC Mittal Energy Ltd. and ONGC Mittal Energy Services Ltd. – while ONGC owns a 49.98-per-cent stake in those ventures, with the balance held by investment firm SBI Capital Markets Ltd.
# Has teamed with Russia's OAO Lukoil Holdings and Total SA of France, paving the way for more deals in Africa and Central Asia. Mittal Investments also is getting into oil refining, recently announcing a $720-million investment for a 49 per cent stake in an oil-refinery project to be built by state-run refiner Hindustan Petroleum Corp. in northern India.

Mittal and ONGC
ONGC has had several prospective deals fall through, sometimes being outbid by others for new oil fields. ONGC's oil-and-gas portfolio outside India is thinly spread around the world, including modest projects in places like Myanmar, Sudan and the Russian Far East. That is where Mr. Mittal comes in. The joint venture gives ONGC a partner who is a specialist in deal making and who also has access to capital, thanks to his reputation on Wall Street. It “improves [ONGC's] ability to go into these overseas areas more effectively,” said Luke Parker of Wood Mackenzie, an Edinburgh oil-consulting firm. The partnership between Mittal and ONGC has plans to move further into energy trading and shipping, and it could stretch to 21 countries in coming years, according to the parties.

Mittal is venturing in Oil sector in a similar manner in which he, over the past two decades, built a tiny Indonesian metals mill into Mittal Steel Co., which will finalize its merger with Arcelor SA of Luxembourg this summer.

Because Mr. Mittal is a force to be reckoned with in the global commodities business, his moves are sending ripples through the oil industry. In spite of these apprehensions in the market, Mr. Mittal is quiet about his intentions. “The family is making investments to diversify the portfolio,” he said in a recent interview, declining to elaborate. “It is a very infant stage. There is nothing much to talk about.”

On the contrary, industry insiders don’t feel threatened by these initiatives. According to billionaire Wilbur Ross, who sits on the board of Mittal Steel of the Netherlands “I don't think that he is going to be able to consolidate the whole world's oil industry; that's a big bite even for him. I think he is doing it partly to help India and partly to make money.”

Any foray into oil comes with risks. While the steel business is cyclical – prices swing with the global economy – there is no business with bigger boom-and-bust cycles than oil. Today's lofty oil prices have inflated the cost of everything from older oil fields to new exploration licenses worldwide, boosting the entry costs for newcomers. If oil prices fall significantly – or crash, as they have after every other boom – it will be much harder to make money from Mittal's investments. Meantime, salaries and other costs have soared, pinching the biggest, most efficient companies, such as Exxon Mobil Corp., Royal Dutch Shell PLC and BP PLC.

There are some parallels between the steel industry of the 1990s and oil today. Like steel was then, oil today is poised for consolidation and is dominated in many countries by state-owned companies. However, the differences are formidable. When Mr. Mittal started building his steel business, many steelmakers were considered dinosaurs and could be bought cheaply. By contrast, the oil business is brimming with highly valued assets and pumping at near full throttle to meet today's demand.

Thursday, April 26, 2007

US Energy Trading Market

Market Size & Forecast

According to a report titled "U.S. Energy Trading," by technology consulting firm Celent

=> The U.S. energy trading market shrank from $1.8 trillion in 2001 to $1.3 trillion in 2002, but will approach $1.7 trillion in 2008 as banks and hedge funds pick up where failed energy merchants left off.
=> Energy trading grew at an extraordinary rate in the late 1990s, only to decrease dramatically in late 2001 and 2002 as Enron Corp. and other failed energy merchant firms collapsed.
=> About 17 percent of the energy trading market is traded electronically, with short-term natural gas contracts being the most heavily traded via this medium.
=> Celent estimates that electronic trading will account for 29 percent of the market by 2008.
=> As the U.S. energy trading market matures, the report found, banks and hedge funds should help drive solid, steady growth as market participants become increasingly comfortable using risk management tools.

According to Energy Insights, an IDC company

=> Energy trading in liquid hydrocarbons will continue to be robust, buoyed by high prices and increased volatility.
=> Trading in electricity and natural gas will recover from the post-Enron slump.
=> Altogether, Energy Insights forecasts the market to grow by 30% during 2002-2006, with oil and gas majors and financial service firms dominating the trading markets, but with asset-based traders - particularly in power - reengaging.
=> Further on the horizon, increased participation of financial institutions in energy commodity trading will bring program trading in 2008 to 2010.

Trends & Issues

Renewed interest from investors
The industry that Enron made infamous - energy trading - is springing to life again. Volatile energy markets and record-high commodity prices are prompting renewed interest from investors eager to play in the sector. That has pushed banks and a growing number of hedge funds to hire more energy traders and brainy quantitative minds to back their bets on energy prices. In Houston, New York and London, a scramble for top trading talent has ensued that rivals the cutthroat hiring frenzy of the late 1990's. "The whole market is hot right now," said Justin Pearson, managing director of Human Capital, a search firm based in London for energy traders. "Everybody is talking about expansion."

More sophisticated tools & platforms
Industry participants are now paying far more attention to counterparty credit risk, using clearing mechanisms such as the Intercontinental Exchange and the New York Mercantile Exchanges ClearPort platform. Price transparency has improved and banks and hedge funds have become increasingly prominent, providing desperately needed liquidity.

Banks playing an important role
With that revival come questions from some financial market analysts about whether energy trading will be better able to withstand another potential meltdown. While banks have stepped in with their superior balance sheets, credit ratings and trading skills to fill the liquidity void left by Enron, the latest ramp-up in trading has also been marked by an air of secrecy underscored by the proliferation of hundreds of hedge funds that are speculating on everything from crude oil to electricity in both regulated and unregulated markets. Many funds are being aided by investments from banks, which are also buying up distressed power plants and other remnants of the collapsed sector.

Investment banks are major players
Wall Street banks are notoriously fickle about their commitment to commodities trading. Two dominant players among banks, Morgan Stanley and Goldman Sachs, for example, participate in both the physical and financial energy markets and provide risk management products for clients and their own accounts. A number of other banks have also recently opened energy trading desks. Hedge funds and other speculators, meanwhile, have been drawn into the financial markets by the recent rise in crude oil, gasoline and diesel prices, as well as the long-term trend toward higher and more volatile prices for crude oil and petroleum products, among other commodities. In 2004, Goldman and Morgan Stanley earned about $2.6 billion combined from commodities trading, most of that from energy, according to Sanford C. Bernstein & Company in New York.

Top Companies with In-house Energy Trading Divisions

Sempra Energy Trading ® Corp. (SET) Wholly owned subsidiary of Sempra Energy)
Sempra Energy Trading ® Corp. (SET) is a full-service energy trading company - one of the largest in North America. It markets and trades physical and financial energy products: crude oil and refined products, natural gas and natural gas liquids, power, coal, emissions and ethanol. Sempra Energy Trading ® has more than 1200 customers worldwide. Our customer base includes most of the major oil, gas and power companies in North America, Europe, Asia and South America. Its high-volume financial transactions can involve over 100 billion cubic feet (bcf) of natural gas daily. That translates to approximately one half of all the natural gas consumed daily in the U.S. and Canada. SET is a wholly owned subsidiary of Sempra Energy, a Fortune 500 energy services holding company based in San Diego, California.

Chevron’s Supply & Trading
Supply & Trading manages Chevron's global supply chain, supplying crude oil and refined products to the company's global refining and marketing network. In addition, Supply & Trading markets aviation fuels, marine fuels and marine lubricants.

Supply & Trading plays a critical role around the globe, optimizing system assets, trading and marketing crude oil and refined products, and managing associated risk across the global supply chain.

Headquartered in Houston, it has regional hubs in London, Singapore and Cape Town. Crude and Products Supply & Trading conducts business in nearly 70 countries and trades more than 200 different grades of crude oil and petroleum products.

LITASCO (LUKOIL International Trading and Supply Company)
LITASCO (LUKOIL International Trading and Supply Company) is the international arm of LUKOIL for marketing, supply and trading. It is composed of various companies that are coordinated by and report to LITASCO Geneva, the Group's parent company. The LITASCO Group is made up of subsidiaries and branches in the United States, Netherlands, Sweden, Germany, Middle East,and Singapore. In total, the LITASCO Group is present in thirteen different countries.

LITASCO is one of the world's major traders of crude oil and refined petroleum products. The company's purchases and sales include spot, term, exchange and other arrangements such as swaps, and cover a wide range of locations and counterparts in order to optimize revenues while ensuring security of supply, flexibility and cost competitiveness. LITASCO deals with more than two thousand suppliers and customers, including all of world's major oil corporations.

The activities of the LITASCO Group are split into four main areas:
# Marketing and distribution of LUKOIL crude and petroleum products internationally.
# Supply and logistical optimization of crude oil to LUKOIL refineries located outside of Russia, and of petroleum products to the LUKOIL retail network in Eastern Europe, the Caucasus, and Baltic States.
# Entrepreneurial third party of crude oil and refined products from a global network of trading offices.
# International business development and coordination.

Koch Supply & Trading
Koch companies have interests in and access to major international trading regions in the United states, Europe, Asia and the Middle East. Koch Supply & Trading companies offer customers innovative risk management tools and help businesses worldwide manage margins, cash flow, grade spread and inventory, as well as provide supply, trading, technical and operating services.

Products traded by Koch Supply & Trading companies include:
# Petroleum & chemicals: crude oil, petrochemicals such as benzene, toluene, mixed xylenes, paraxylenes and styrene; diesel, jet and residual fuels, and intermediate feedstocks such as naphtha, vacuum gasoil and straight run fuel oil.
# Risk management products: structured risk management products such as derivatives, cross-commodity and other hedging products.
# Natural gas & gas liquids: natural gasoline, butane, ethane, propane, olefins such as ethylene and propylene, and plastics.

Active on a number of international exchanges such as NYMEX , LME, IPE, SPCEX, NYBOT, CBOT, CME, EUREX, LIFFE

AEP Energy Services (Subsidiary of American Electric Power Company, Inc.)
AEP Energy Services, Inc. is a national energy company engaged in the marketing and trading of energy commodities and related services. Specifically, the company analyzes and projects current and future market clearing prices for various energy commodities; trades energy commodities and associated financial instruments in both regional and national energy markets; and, markets energy supplies and related services to both the wholesale and large industrial segments of the energy market. AEP Energy Services, Inc. is a wholly owned subsidiary of American Electric Power (AEP), one of the nation’s largest investor owned utilities.

Duke Energy Trading and Marketing (DETM)
Duke Energy Trading and Marketing (DETM) is a joint venture in which Duke Energy Corporation has a 60 percent interest. DETM markets natural gas, electricity and other energy-related products to a wide range of customers.

Southern Company Energy Marketing (a unit of Southern Company)
Southern Company Energy Marketing is jointly owned by Southern Energy Inc. and Vastar Resources Inc. Southern Company Energy Marketing provides energy marketing, risk management and financial services and other energy-related commodities, products and services to customers in North America. Southern Energy’s parent company, Southern Company (NYSE: SO), is one of the largest producer of electricity in the United States.

Shell Trading (US) Company
Shell Trading (US) Company is a corporation that acts as the single market interface for Royal Dutch Shell companies and affiliates in the United States. It became operational in August 1998 and has offices in Houston, TX (headquarters); Dallas, TX; Denver, CO; Midland, TX; and San Antonio, TX; and has an affiliated Shell Trading company in Calgary, Alberta. Shell Trading Highlights:
# Buys and sells more than five million barrels per day of hydrocarbons
# One of the largest physical traders of hydrocarbons in the United States
# One of the world's largest energy trading company

Its portfolio includes the buying and selling of physical crude oil, finished products, and feedstocks, as well as trading various paper products, both on exchanges (The New York Mercantile Exchange and The Chicago Mercantile Exchange) as well as over the counter. Through its operations, Shell Trading (US) Company buys and sells more than five million barrels of hydrocarbons per day in physical markets, making it one of the largest petroleum supply organizations in the United States and the world. Specific businesses include acquisition, sales and trades of domestic crude oil and products; lease crude oil acquisition and marketing; marine chartering; and risk management services.

Reliant Energy Securities & Commodities Trading Center
The company has a wholesale energy trading and marketing business that ranks among the top five in the U.S. in combined electricity and natural gas volumes and has a presence in most of the major power regions of the U.S. It also has power generation and wholesale trading and marketing operations in Western Europe. The Reliant Energy Trading Center is located on the first floor of the Jerry and Kay Cox Graduate Business Center. The facility seats up to 40 students at computer workstations. It is outfitted with two Bloomberg terminals, four independent LED projectors, a SMART Technology system and two drop-down screens. The center also features the Kiodex Risk Workbench, a state-of-the-art trading and risk management platform.

Some other major players that operate in energy & commodities trading on various exchanges are:
• El Paso Energy
• Totalfina Elf
• Continental Power Exchange
• Calpine Corporation
• Exelon Corporation
• Dominion Resources, Inc.
• Southern Company
• Constellation Energy Group, Inc.
• Mirant Corporation

Top Companies from Financial Services Sector
• Deutsche Bank AG
• Goldman Sachs
• Morgan Stanley Dean Witter
• SG Investment Banking
• Bank of America
• American International Group

List of Exchanges for Global Commodity Trading
• Chicago Board of Trade
• Chicago Mercantile Exchange
• Euronext.liffe
• Kansas City Board of Trade
• London Metal Exchange
• Minneapolis Grain Exchange
• New York Mercantile Exchange
• New York Board of Trade
• Winnipeg Commodity Exchange

For a list of other commodity exchanges, please click on the following link:

List of online Commodity Exchanges
IntercontinentalExchange, Inc. (NYSE: ICE)

APX Inc.

Enporion, Inc.

Petroleum Place, Inc.

Human Capital Trends in Global Automotive Industry

In order to understand some of the major human capital issues, challenges and trends prevailing in Global Automotive Sector, I conducted a comprehensive research on the web and found some interesting findings by renowned firms like Spencer Stuart, McKinsey Global Institute, Watson Wyatt and Egon Zehnder International.

Listed below are excerpts of some of these findings:

Study 1: Changing Face of Leadership: Insights from Auto Industry (Spencer Stuart)

Required Leadership Skills
=> Alliance and partner management experience: Alliance and partner management is rated as the most important functional experience for general management to possess, the highest of all the experience categories. Automakers increasingly are relying on strategic alliances and partnerships and in order to ensure that their organisations strike beneficial alliances and partnerships, automotive leaders must be highly knowledgeable about the industry and its complex networks, understand the forces that are driving industry change and have a strategic mindset.
=> Operations experience and results orientation: Roles in operations, manufacturing and quality assurance provide exposure to a broad cross-section of the company and the opportunity to lead large and diverse teams. These roles also are great training grounds for future senior leaders as CEOs are spending more of their time on operational issues, particularly as many of the prime targets for cost reduction are in the operations side of the business.
=> Strategic orientation and innovation leadership: Automotive companies must continually reinvent themselves to take advantage of new market opportunities and maintain long-term profitability. The CEO needs to be able to recognise those opportunities and drive innovation in the company. Automotive leaders must have a passion for challenges, seek innovative ideas within the organisation and externally, and be willing to make bold moves. Automotive leaders also must possess the skills of an entrepreneur. They should be able to identify solutions for issues related to organising processes, pull together the right team, create value and ensure that everyone in the company strives toward excellence and reliability.
=> Finance and capital allocation experience: The challenges of streamlining costs while maintaining R&D investment require that automotive executives be financially astute. They must lead efforts to vary costs, be thoughtful about capital spending and free up resources that do not provide competitive advantage. 12% of survey participants ranked finance and capital allocation as the most important functional experience for senior general management during the next 5 years.
=> International experience and a global perspective: Automotive leaders must have a truly global perspective and be culturally and intellectually flexible. More than one-third of survey respondents cited global perspective as a critical competency for automotive leaders. This includes being sensitive to cultural differences and having a keen ability to identify and leverage international opportunities.
=> Team-leading skills, people development experience: Another recurring theme that emerged from this survey is the importance of strong team-building and effective people development skills. These include exceptional communication and interpersonal capabilities, internal networking skills, people management and team leadership experience, and the ability to choose the right team and get the maximum from it.

Where are the leaders of tomorrow?
=> Just 15% of the executives we surveyed indicated that “attracting top talent” was one of their company’s top-three strategic priorities. When they do hire external candidates, the majority, 55%, said their organisations recruit within the automotive industry.
=> Top talent from other industries can help by injecting new and creative ideas that can break the traditionally insular industry out of old patterns; improve the talent pool; and supply specialised knowledge in areas such as supply chain management, marketing, turnarounds, change management and electronics.

Succession Planning
=> Most companies are doing some succession planning and talent development, but the commitment to and quality of these programs vary. More than half of the respondents said their company does an average job of succession planning and talent development, while 17% felt that their organisation’s talent development and succession planning programs meet or exceed best-in-class standards.

Quotations from Industry Leaders
“As automotive companies are likely to build alliances with companies anywhere in the world, executives must be sensitive to the cultural differences that can foster mistrust. Especially in Asia, you have to be authentic and credible and keep your promises. You have to try to achieve win-win situations as often as you can. In each culture, you must learn the symbolism that builds trust.”
- Dr. Juergen Behrend, Chairman, Hella KG Hueck & Co.

“Not only are most of the cost-reduction issues facing automotive companies driven by operating issues, but working in operations also is the place where one learns the most about leadership, given the large numbers of people involved and the closeness of the contact with people who are working on day-to-day issues and who are fundamentally running the company.” -- Rodney O’Neal, President & COO, Delphi Corporation.

“Automotive certainly companies need a CEO with vision, capable of anticipating the business cycles and managing through continuous reorganisation. The CEO needs to be one who squeezes the cost structures, constantly challenges the internal structures to find better ways, keeps the pressure high and stimulates the organisation to move — even physically.” -- Emanuele Bosio, CEO of Sogefi

“International knowledge and sensitivity can be cultivated even while without living abroad. It doesn’t matter if one has actually been a resident for years in a country or not; you may stay two to three years in a different country without developing a real global vision, because today we need to interface with many cultures and several different countries.” -- Daniele Pecchini, CEO of Comau (Fiat Group’s subsidiary)

“People management and team leadership are first and foremost, and then business acumen, of course. But, more and more important is the capability to understand cultural differences. The world is our market today.” -- Bernhard Mattes, CEO of Ford Germany

“Credibility and influencing skills also are essential when dealing with external audiences. The most effective leaders are those with balanced egos who are able to talk about their failures as well as their successes. They are able to talk to the investment community with candor, blending details about what they do right with areas in which they need to improve.” -- David Rayburn, President & CEO, Modine Manufacturing

Study 2: The Emerging Global Labor Market: The Demand for Offshore Talent in Automotive Services (McKinsey Global Institute)

Auto Job/Labor Market
=> In 2003 the auto sector employed approximately 3.1 million people worldwide. In 2008, this number is projected to be around 3.4 million employees, which represents a CAGR of 2.1 percent. Two-thirds of this employment is in the manufacturing and assembly of vehicles. When considering all employment in the auto sector, the theoretical maximum for globally resourced labor is 11 percent, which translates to 371,000 jobs in 2008.
=> The Original Equipment Manufacturer (OEM) automotive sector shows extremely limited adoption of globally resourced labor in the services elements of the sector. Currently, only around 1,200 service jobs (or around six in every 10,000 developed world workers) are offshored; by 2008, that number is projected to grow to around 4,500 (or around 20 in every 10,000 developed world employees).
=> A key trend among OEMs in the sector is to integrate teams of professionals across functions. This trend is a result of the perceived effectiveness of face-to-face real-time problem solving. Although small functional groups (e.g., R&D teams working on specific engine components) can theoretically be carved out and moved to remote locations, it is a process that would have to overcome significant concerns over quality (either real or perceived), cost (as small groups necessarily lack economies of scale), and the risk of component or vehicle designs being stolen by local producers.

=> The consolidation of the biggest automakers has resulted in a reduction of employment in key OEMs in the sector over the past five years. DaimlerChrysler, for example, moved from 416,501 employees in 2001 to 362,063 in 2003; General Motors shed 36,000 jobs in the same period. Going forward, some further (though more limited) head count reduction is anticipated as carmakers extract any remaining synergies from recent consolidation activity.

Study 3: Human resource issues for globalising automotive suppliers (Watson Wyatt)

The increasing globalisation of automotive suppliers poses challenges for their human resource management. To understand these challenges, the Michigan Transportation Research Institute teamed with Watson Wyatt in a study of fourteen large, international suppliers.

Summary: Suppliers are building many off-shore facilities in developing nations, particularly in Asia and Eastern Europe. Identifying the right mix of local personnel and expatriates in staffing these sites has been a tremendous challenge for these organisations. Suppliers' HR departments assist with recruitment, retention, and deployment (RRD) and the long-term workforce planning needs, but too often have only a subordinate role in that process.

=> Estimating human capital needs: Part of estimating human capital needs is determining costs of various categories of local employees in off-shore locations. Data on such costs are becoming more available, so HR departments can make approximate projections of labor costs. These costs can change rapidly, however.
Lesson: Globalisation exposes automotive suppliers to more competitors. Bidding among them for local employees drives up compensation considerably. Some decentralisation of human resources decision-making, even in suppliers that are otherwise centralised, is key to successful workforce planning for estimates of local worker availability and skill, and estimates of necessary compensation.

=> Sources of local managers: Recruiting successful local managers is difficult as well as the sources of such local managers are thin. Generally in a number of large suppliers, responsibility for recruiting local managers now rests with global human resources offices. But these firms may still recruit production workers at the local level for off-shore plants.
Lesson: Coordinate global and local HR offices, so that local production workers who aspire to management are known, and so that the company can build career paths for ambitious local employees.

=> Company growth and employee retention: The firms we studied are all growing, in considerable part through mergers and acquisitions. From an HR perspective, issues related with M&As, especially when the headquarters of the firm and the acquired company are culturally dissimilar. In addition, employees of the company being acquired, fearing layoffs, may resign.
Lesson: In making off-shore acquisitions, prepare for the possibility that the most able local employees may be the ones most open to competitor and customer job offers.

=> Importance of expatriate assignments: Survey respondents stressed the importance of good deployment of managers to satellite operations. Off-shore experience is critical in developing excellent leaders. This is especially beneficial to certain functions.
Lesson: Expatriate assignments are valuable in helping to solve the problem of executive succession.

Study 4: Globalization: foreign postings on the increase (Egon Zehnder International – GAI)

Companies are sending more managers abroad than ever, but minimising their costs, reports The Economist. According to a recent survey by Mercer, the number of international transfers from headquarters has increased at 38% of firms over the past 2 years. Yet expats, now often referred to as international “assignees” or “secondees,” are getting fewer allowances than in the past, notes the magazine. To cut costs, many firms are only expatriating employees without families. Others are offering expats “commuter” assignments that involve working abroad during the week, especially in Europe. As a result expats now tend to be under 30 or over the age of 50, with women accounting for 13 percent, up from 8 percent 5 years ago.

In a reversal of the foreign posting trend, managers from developing countries are increasingly being sent to developed countries for a spell at head office before being promoted. Having locals in top jobs can be a major competitive advantage in some countries. Yet finding local employees to replace expats is often tough and the latter are sometimes unwilling to train their successors, warns the magazine. In a sign of the times, more managers are being posted abroad without the guarantee of a job to come home to. Yet despite harsher conditions and fewer perks, foreign postings remain an attractive path to career advancement, the magazine concludes.

Knowledge Management in Pharmaceutical Industry

Knowledge Management – An Introduction

Knowledge Management is simply one of many tactics that organizations can adopt to improve their performance. Knowledge management is not new: the first time that a scientist documented the exact procedure used in an experiment and shared it with colleagues was a form of knowledge management. Knowledge management sounds like a new term for data management or information management, the focus of bioinformatics. It is not. Knowledge management is a systematic, organization-wide effort that: -

=> Recognizes that it is the employees of the organization - scientists, engineers, sales representatives, technicians, and executives - who have profound and deep understanding of the data, information, work processes, competitive environment and societal context that contribute to organizational success
=> Promotes the creation, preservation, transfer and use of that knowledge in order achieve organizational goals and objectives
=> Supports and rewards the creation and dissemination of knowledge in a collaborative, non-individualistic manner
=> Controls and protects knowledge from leakage outside the organization.

Knowledge management involves an intentional effort to stimulate the sharing and use of knowledge, instead of relying on ad-hoc and informal knowledge sharing activities, while at the same time keeping the knowledge secured within the organization and it's selected alliance partners. While knowledge management efforts often entail investments in advanced information technology tools, knowledge management is more than IT projects. Knowledge management is about changing the way that employees create, share and use their knowledge, so that the organization retains and builds upon the knowledge. It is the cultural aspects of transforming individual-held implicit knowledge to organizational-shared explicit knowledge that distinguishes knowledge management from bioinformatics.

Reasons Leading to the Failure of KM
As with other high profile initiatives that have gone before, such as business process reengineering, knowledge management is attracting its critics and various initiatives have stalled or failed. The setbacks can usually be traced to one or more of the following factors:

Knowledge management is seen as a quick win - One of the trickiest aspects is to create a culture where knowledge is freely shared within an organization. Such a culture change is not an overnight job.

Too much emphasis is put on technology - While there are a growing number of excellent knowledge management tools, such as document management, concept mapping and visualization, intranets and intelligent agents, technology is only an enabler. The knowledge it conveys needs organizing, for example through knowledge maps.

Over-ambitious in scope - Some of the most effective corporate-wide initiatives start as selective pilot projects. The pilots are used to develop understanding, build capabilities, and derive lessons for a wider roll-out.

Inappropriate skills - Good information management skills, of the information science / library type provide an essential perquisite. Good networking and facilitation skills are also important. Many knowledge management teams do not have sufficient breadth and depth in the range of skills needed.

Lack of leadership - Like any significant new initiative knowledge management needs business champions and top-level commitment. A senior executive at knowledge initiative had stalled. “We know what to do, but don’t do it”. It was only when the top management team committed their own time, and formalized it as a core activity, that the program moved forward.

Knowledge Management in Pharmaceutical Industry

Pharmaceutical companies need knowledge management solutions that allow users to store, analyze, interpret and share information as part of coordinated processes. They must also provide ways to collect and manage diverse information, and use it effectively to support decision-making. This means not only text documents, but also non-text files such as molecular structures, gene sequence alignments, images, results tables, entry forms and other information. It also includes links to key internal and external resources, discussion items, key e-mails, external search results, and status and summary reports.

The sheer volume of information companies must wrestle with in the course of developing new drugs. Advances in biological and chemical research techniques have caused an explosion in raw data by several orders of magnitude. This compels companies to obtain automated analytic systems to deal with such large portfolios of data. It has also placed a priority on developing and offering timely access to summary information. This requires a range of knowledge, project and portfolio management tools that promote deposition, sharing and coordination, such as: workflows, task lists, intelligent agents, portals at the personal, project and departmental level, advanced query tools, intranet spiders, etc., all of which can be tied together as part of an integrated knowledge management solution.

Life science companies, collaborative software tool vendors, and industry consultants all seem to hold out great hope for this something call knowledge management. The reason is simple: With such massive data overload in the life sciences, companies realize it is to their advantage to find better ways to deal with and use this information. To use knowledge as a strategic advantage, life science companies take one of three broad approaches, which can be generically described as follows:
=> Help scientists know what's already been done and by whom
=> Extract information, relationships, or new insights from existing diverse data sources
=> Capture the expertise and intellectual property of scientists

One approach in using knowledge management is to give researchers a means to better understand what's already been done and who did it. A number of knowledge management projects aim to provide scientists and managers with tools that help them stay informed about what is going on within the company. This helps prevent researchers from duplicating a completed experiment or following a nonproductive path that has already been rejected. The worst-case scenario — one that happens far too frequently — is for a researcher to spend six months eliminating a particular drug candidate, only to find that a colleague had already drawn the same conclusion. Informing researchers that a co-worker is interested in the same topic is one way to avoid such duplication. Such an approach can also reap other benefits — namely, timesavings.

Need for Knowledge Management in Life Sciences Industry

The only sustainable competitive advantage of a pharmaceutical or biotechnology company is the organization's ability to efficiently create, protect and commercialize new intellectual property. Leadership in the pharmaceutical and biotechnology industry is less and less about day-to-day clinical testing, manufacturing or sales. While many pharmaceutical companies have extensive expertise in those functions, similar expertise can obtained by contracted out to specialized organizations as CROs.

The key competitive advantage for firms is the research and development of new intellectual property that forms the basis of successful research, manufacturing and distribution activities. New intellectual property not only includes the development of new chemical entities that can become INDs; it includes manufacturing techniques, regulatory compliance programs, marketing program design, and so forth. The active sharing of the knowledge held within the organization is essential if new intellectual property is to be quickly commercialized and with have a high degree of commercial success. Reducing "time-to-market" depends on knowledge management. At the same time, knowledge management is necessary to avoid repeated explorations of dead-ends - unless knowledge of failures is shared, failures are repeated.

US Food and Drug Administration Regulations
One of the biggest factors is regulation. For just one new drug, a company must maintain enormous volumes of information -- documents, research data, clinical trial records -- over an extended period of time. These millions of files have to be carefully managed in accordance with strict rules governing electronic information, whether they are included in submissions made to the FDA or simply kept for possible inspection by the Agency. The FDA's regulations cover good practices in laboratories, clinics and manufacturing facilities. While these "predicate" rules were written with the assumption that key information would be in paper form, increasingly this material is electronic. Accordingly the FDA developed the 21 CFR Part 11 regulations, to give the industry some ground rules for moving from paper-based to electronic systems, but the rules are complex in interpretation and implementation. In order to comply, companies are being driven toward centralized repositories for managing information to ensure consistent, compliant ways of developing and using information across an enterprise.

Globalization of R&D
Globalization of research and development requires collaboration across time zones and language barriers. The explicit focus of knowledge management on the sharing and use of knowledge can act to bridge diverse research and development teams. Few industries span the world in their research activities, as does the pharmaceutical industry. Lead synthesis, identification, validation, animal testing, formulation, and human testing can occur in a variety of nations. Sharing of knowledge also has applicability to manufacturing and marketing. The need for global uniformity in good manufacturing practices requires that personnel involved in that aspect exchange ideas to assure the highest quality production. While marketing channels differ across markets, knowledge from one market can have applicability in other, if only to avoid costly errors.

High Turnover of Human Capital
The pharmaceutical and biotechnology industry is in a period of rapid change, and employee turnover is increasing due to new opportunities. It is also important that organizational knowledge does not leave with an employee - the control aspects of knowledge management can act as an additional safeguard. High turnover of skilled scientists and other experts requires knowledge management in order to retain the key output of professionals: their own increase in knowledge from working within an organization. Every time a professional leaves an organization, they take with them the increase in their own knowledge that occurred during their tenure. Unless active steps are taken to extract that knowledge, synthesize and share it, so that it can be used, organizations lose the most important aspect of an employee's contribution.

Challenges for Knowledge Management Solutions
While the industry is driving the development of new knowledge management solutions (And finding better solutions to choose from), the industry's biggest challenge is increasingly the user. Many of the human-factor challenges (and costs) of moving to a knowledge management system come from the industry's long dependence on paper and paper processes. Pharmaceutical companies have very detailed, document intensive processes and approval procedures which, when combined with strict FDA rules and the common human-factor challenges, are a bad mix in a very high-stakes game. The biggest issues are proper use of systems to ensure compliance and user acceptance.

Access Rights
Pharmaceutical companies must have to ensure that only authorized and expected people can access records, and that any actions that they take which impact the records in any way are captured in an audit trail. When it comes to electronic signatures, FDA rules are very strict, so companies must carefully manage who can apply an electronic signature through workflows and password authentication to apply a signature. But they must also make sure that management staff understands that an e-signature is equivalent to signing in ink. Password policies should require that staff acknowledge this. In addition, a system that adds an image of a manager's signature to a record, while not required under FDA regulations, reinforces that message. The other major factor is the tendency for employees to write down their passwords, and sometimes share them with colleagues. Rigorous password policies are a necessity to prevent this, but companies must find ways to constantly reinforce the message with employees.

Shift from Paper to Electronic Records
Paper continues to play a significant role, despite the pervasive use of computers. Most people prefer to print out a large document before they read it. This common tendency among office workers has enormous implications for pharmaceutical companies. Companies must make sure they are carefully managing paper copies to avoid unauthorized or inappropriate use. They must also educate employees to make sure they recognize that a printout is not an original record. PDF format is widely employed, since it is possible to overlay watermarks that users cannot remove (e.g. defining document status, effective and expiration dates, etc.), and control whether the document can be changed or printed. Another solution is to consider new encryption techniques, which can prevent screen capture, while continuing to provide access controls on locally saved electronic copies. In this way, all electronic copies of a document, whether in a repository or saved on local computers, can become unreadable at a defined time, for example, when a new version is released.

User Friendliness
Critical information comes from the lab, so pharmaceutical companies must ensure that it's easy for lab workers to use and contribute to a knowledge management system, while working in their unique environment. Systems must offer features that allow workers to add data by simple drag-and-drop, or preferably by automatic agents that capture key information and transfer it to the system without extra effort. Ultimately, these workers have to recognize that depositing information into the system is part of their job, like using a lab notebook. But systems can be designed to offer lab workers added value to encourage use of the system. For example, a comprehensive listing of hyperlinks to all available databases and application tools is helpful, but this can be extended by providing online discussion groups and training manuals. A lab protocol repository covering standard and company lab methods and procedures may also be attractive to lab workers, while also serving corporate goals. This would include being able to find methods used by other workers in the company to accomplish specific experimental tasks, and ways to search for recognized experts across the company.

Finally, the most important challenge is user acceptance of a knowledge management system. If pharmaceutical companies are going to have a uniform, regulatory compliant system for managing information, they must succeed with user acceptance and it starts at the top.

IBM System Journal

Tuesday, April 24, 2007

Human Capital Trends in Energy, Oil and Gas Sector

Energy is one of the most essential and most visible industries in the world. So it is not surprising that in today’s increasingly complicated world, political volatility and economic struggles have a significant impact on petroleum and natural gas companies. After several years of lackluster hiring, oil-and-gas exploration and production companies are drilling for executives who can help discover new fields or extend the life of existing fields. Industry employers also are hiring senior finance executives and experienced technical professionals, such as geologists and engineers. Analyzing these trends from executive search industry’s perspective it can be concluded that all these recent developments and macro-economic factors affecting energy and utilities sector are going to create an immediate requirement for experienced and talented leaders to tackle these issues. Eventually, executive search and HR consulting firms will get new opportunities from all these developments to consolidate their positions in a sector which till date was quite unexplored.

This article takes into account all these industry trends and macro-economic factors and analyzes the underlying opportunity for Executive Search, HR Consulting, Management Appraisals and Talent Management services in this sector.

Leading executive search firms are consulting with a number of utilities to identify senior managers with the skills necessary to lead their organizations’ transition to the competitive market. The industry requires leaders with deft management skills, international experience and the ability to navigate politically charged situations. This is especially critical as companies expand operations to capture growing reserves in countries such as Russia, and reach new markets, most notably in China.

Instability in Oil producing regions
As many of the world’s main oil producing regions are unstable, petroleum and natural gas companies require leaders with the financial and technological expertise to monitor and reduce their organizations’ risk and liabilities.

Following factors are forcing companies to look overseas for new finds.
# Domestic reserves are dwindling,
# Oil and gas prices have risen at the wellhead, making exploration and production more profitable.
# Rise in prices also boosts overall company valuations, making it more expensive for companies to grow through mergers and acquisitions.

"Companies want to add more through the drill bit than by trying to acquire," says Richard Preng, managing director, global energy, in Houston for recruiter Spencer Stuart. Domestic oil-and-gas companies are clustered in Texas, Colorado and Oklahoma, so U.S. demand is strongest in oil-and-gas centers such as Houston, Denver and Oklahoma City, notes Michael Saunders, a recruiter with the Energists, a Houston-based search firm, who describes hiring activity in these cities as "quite buoyant."

Start-ups and Smaller exploration companies are springing up in major centers
Smaller exploration companies springing up in major centers also have become a hiring force. These companies typically are founded by oil-and-gas executives who have left larger players either voluntarily or as part of a layoff due to mergers or reorganizations. They're then seeking funding and teaming up to start organizations that will tap or explore reserves that aren't profitable to the oil-and-gas behemoths but can be lucrative ventures for smaller, more nimble organizations. Often, the goal of the founders is to build value quickly and then sell the new company. Their game plan is to build up the company and then sell it, so they aren't concerned with hiring feedstock for the future.

Demand is moderate to good for senior exploration executives with strong technical and international backgrounds and good track records of discovery. Small- to midsize U.S. or foreign oil-and-gas exploration companies need such executives to fill VP, SVP, or International VP of EandP roles.

Energy sector could see more mergers in '07 / Production and access challenges may drive growth
Industry experts feel that energy sector could see more mergers and acquisitions to counteract difficulty in gaining access to oil and natural gas and higher costs of getting it to the surface. Analysts expect more mergers in 2007, particularly with increased competition from state-owned oil companies that can make acquisitions unfettered by investor pressure for near-term increases in earnings or cash flow.

Fadel Gheit, an oil analyst with Oppenheimer and Co. in New York, said many oil companies are in prime financial condition with clean balance sheets and billions on hand. But he said the challenge to maintain production - let alone increase it - in the face of rising costs and competition for access could prompt companies seeking growth to go shopping. This year companies largely pumped up or streamlined asset bases with multimillion-dollar deals to buy and sell portions of each other's holdings. Such deals often involved interests in oil and gas fields in North America and the Gulf of Mexico or access to unconventional resources such as oil-soaked sands in Canada or oil shale in the United States.

"They're just seeing an increasingly challenging reinvestment environment," said Dan Pickering, an analyst with Pickering Energy Partners in Houston. "Access to foreign jurisdictions is tougher, competition from national oil companies is hotter, and host governments from across the world are extracting more money to participate." Simmons and Company International, a Houston-based independent investment bank, said in a recent research report that so-called organic replacement of reserves - or ability to replace reserves on their own rather than through acquisitions - was less than 100 percent in the last two years and likely to remain "relatively meager for some time to come." Simmons estimated that oil majors would generate $245 billion in cash flow and asset sales in 2007, and have $80 billion of that available for stock buybacks or acquisitions. Simmons also speculated on which companies are likely acquirers or likely to be acquired.

E.g. ConocoPhillips closing on its $35.6 billion purchase of natural gas producer Burlington Resources.
Anadarko Petroleum Corp. bought Kerr-McGee Corp. and Western Gas Resources for more than $21 billion to increase its North American footprint, particularly in the Rocky Mountains and the Gulf.

Statoil, Norway's state-controlled oil company, announced plans to buy offshore energy and oil operations of Norsk Hydro, Norway's largest publicly traded company. The $28 billion deal, expected to close in the third quarter of 2007, will create the world's largest offshore operator, surpassing Royal Dutch Shell.

It is speculated that potential acquirers would include Irving-based Exxon Mobil Corp., the world's largest oil company, which can best afford an all-cash deal, "but appears to be patiently awaiting one of its large peers to be selling at a steep enough discount to make the plunge." The report also noted that San Ramon, Calif.-based Chevron Corp. has spare cash as well, and Houston-based Marathon Oil Corp. has said it's seeking a Canadian oil sands partner.

CEO Movements in 2005
In 2005, 48 CEO positions changed in the energy sector (including utilities), according to Chicago-based Challenger, Gray and Christmas, a human resources consulting and research firm. Twenty-one of the CEOs retired; 12 resigned or stepped down; and 15 moved on to other companies or pursuits.

Demand for Talent in Energy Sector
Trends in the occupational structure of both mining and the utility sector:
• Employment is projected to decline especially in skilled trades and, to a lesser extent, in administrative, clerical and secretarial, transport and machine operatives and elementary occupations
• For sales and personal service occupations, small increases are expected
Replacement demands of both mining and utility sector:
• Until 2012, there is a replacement demand of (in total) 12,000 staff in administrative, clerical and secretarial occupations
• A number of other occupational groups such as personal service and sales / customer service occupations will experience growth of over 50% of current employment levels over the decade
• Managerial, professional and associate professional occupational groups are all projected to require replacements amounting to 25-35% of current employment levels.

“The oil and gas sector is probably better compensated than most other industries, [and executive] pay tends to be higher for companies in this sector than in other industries,” according to Steve Cross, business leader for executive remuneration in the Houston office of Mercer Human Resource Consulting. (See April 2005 Mercer report, “The Wall Street Journal/Mercer Human Resource Consulting CEO Compensation Survey.”)

Talent and Experience requirements
Attractive candidates typically have 15 to 20 years of experience, with at least five years in management and a few years' working overseas, says Lue Gates-Weiss, an independent oil-and-gas industry recruiter in Houston. "The last two years have been pretty dismal, but now companies are assessing possible expansion," says Ms. Gates-Weiss. "Optimism is increasing on the hiring side." Ms. Gates-Weiss says she hasn't seen pay offers increase much for recruited executives, but compensation is rising for employees. In 2003, exploration and production (EandP) companies planned to give executives raises averaging 5.2% and exempt employees raises averaging 4.4%, according to a survey by Effective Compensation, a pay-consulting firm in Lakewood, Colo. Among the 70 surveyed companies, about 95% had short-term bonus programs for executives, managers and professionals.

Demand for Exploration Executives increasing
In larger organizations, top exploration executives are in demand to help find and oversee discoveries in foreign countries and regions, says Ms. Gates-Weiss. They must have experience negotiating for concessions, such as agreements regarding how discoveries might be shared and operated, with foreign governments for single countries or entire regions and continents, such as Latin America or Africa. "They also need a strong technical foundation plus management skills to give them commercial acumen," she says. A vice president in charge of exploration might earn a salary ranging from $200,000 to $300,000 plus a bonus, she says.

Opportunities for Outsiders
Changes in the CEO office, the Sarbanes-Oxley Act of 2002 and the complexity of financial reporting in the oil-and-gas industry also are generating searches for senior financial executives. While new hires for exploration, production and other technical positions always need strong direct-industry experience, oil-and-gas companies occasionally hire finance executives from outside the industry from sectors that typically are stronger than in the oil-and-gas industry in other areas, such as investor relations.

Technology Leaders Needed
The technology executives sought are those who can help EandP companies gain an advantage by using modern exploration technology, says John Westropp, a principal with Christian and Timbers, a New York-based search firm. He is seeking a new CEO for an early-stage company that has developed proprietary technology for the industry. Candidates should have excellent leadership and management skills, plus experience in getting major oil-and-gas companies to adopt new technology. Cash pay for the position will be about $300,000 annually, plus equity.

Demand for technical contributors -- geologists and engineers -- also is high as new EandP start-ups build their teams, says Mr. Saunders. The scarcity of skilled professionals is helping to keeping pay healthy for such candidates. A senior technical professional can negotiate an annual base salary of about $130,000 to $140,000, says Mr. Saunders.

Recruiting crisis in energy industry
While the public frets about high gasoline prices and disruptions by rusty pipelines, one of the biggest threats to future energy supply lurks in the personnel departments of oil and gas companies.

An industry expected to deliver a 50 percent increase in energy supplies by 2030 faces this expanding demand with a shrinking pool of available talent. The industry is on the verge of losing a whole generation of professionals who are reaching retirement age, creating a huge vacuum of talent and no experienced replacements. Finding and retaining qualified talent is a management problem that could turn the situation into a serious operating crisis for many companies.

This assessment comes from Damon Beyer, a Houston partner with the New York consulting firm of Katzenbach Partners. The statistics project a grim scenario for an industry that has long paid too little attention to succession planning, retention, training and recruiting.

# More than 500,000 petroleum jobs were lost between 1982 and 2000 in the United States, from a high of 860,000 in 1982.
# The average age of workers in the oil and gas industry is 49, while average ages in other technology-focused industries hover in the 30s.
# Enrollment in critical U.S. undergraduate programs, e.g. petroleum engineering, fell 85 percent from 1982 to 2003. Only 1,000 graduates are expected this year.
# A quarter of U.S. employees in the most scarce exploration and production skill sets will be eligible for retirement by 2009.
# By the end of this decade, there will be a 38 percent shortage of engineers and geoscientists and a 28 percent shortage of instrumentation and electrical workers.
# The most skilled -- and most critical -- jobs are now the hardest ones to fill. Asked to name the biggest skill gaps, executives of 22 leading energy companies named petroleum engineering (77 percent), and geology, geophysics and engineering analysis (73 percent each).


Thursday, April 19, 2007

Why India is “the investment story of the century”

Excerpts of an interesting article published in Moneyweek on the investment scenario in India.

After October's 11% correction, investors are wondering whether it's safe to jump back in to India. In valuation terms at least, the market looks reasonable on a prospective p/e of 15, below its long-term average, according to Jacqueline Aldhous of Forsyth Partners.

But the key point to remember is that while there is always a risk of further slides, trying to time downswings means investors will miss out on “a slice of a secular bull market” that could run for 20 to 30 years, says David Fuller on

The long-term story is certainly compelling. Aldhous points out that, thanks to India's highly educated and English-speaking population, the country is growing its presence in key global service industries, such as IT and pharmaceuticals.

But perhaps the most encouraging part of the story, says Stephen Roach of Morgan Stanley, is the potential for a strong long-term boost to consumption - a crucial prerequisite for sustainable growth and a feature lacking in most of the developing world, which depends largely on exports.

Private consumption already accounts for 64% of Indian GDP, and with banks concentrating on mortgage and credit-card offerings and rural reform set to boost real incomes, consumption could rise even further from here.

India has the “balanced growth foundation that China would die for”: China's growth is skewed towards exports and fixed investment, but India, says Fuller, is “the investment story of the century”.


Tuesday, April 3, 2007

Private equity to drive 2007 Merger and Acquisition (M&A) activity

Excerpts sourced from Law Times

2006 set a record for mergers and acquisitions worldwide. Deals totaled $3.79 trillion, 38% higher than in 2005, and 55 of the transactions were valued at more than $10 billion each, according to data from Thomson Financial. Europe was one of the big players, registering 39% more deals than in 2005 for a total of $1.43 trillion. The U.S. came in at $1.56 trillion, 36% higher than the year before. Private equity firms were major movers in this trend, responsible for 20% of global M&A activity and 27% of activity in the U.S., according to Thomson.

According to KPMG, the value of all M&A deals in Canada during 2006 hit US$173.6 billion, rising 26 per cent from 2005. The top five deals accounted for one-third of that activity or US$60 billion. They included:
• Xstrata PLC's US$18-billion acquisition of Falconbridge Ltd.
• Cia Vale do Rio Doce SA's US$1- billion acquisition of Inco Ltd.
• Barrick Gold Corp.'s US$10-billion acquisition of Placer Dome Inc.
• Goldcorp Inc.'s US$8.7-billion acquisition of Glamis Gold Ltd.
• Arcelor SA's $5.2-billion acquisition Dofasco Inc.

What will be the situation in 2007
Torys LLP, Blake Cassels & Graydon LLP, and KPMG LLP have all weighed in with studies examining upcoming mergers and acquisitions activity in 2007. They expect activity to increase and predict that private equity deals will play a more prominent role in capital market activity this year.

In the past two years, U.S. private equity firms have raised more than US$357 billion and Canadian firms have raised more than Cdn$7 billion. The markets are awash in private equity waiting to be deployed.

"Private equity firms have already become a bigger player in deals. The Blakes study found that 5.4 per cent of deals in 2005 involved private equity. By the third quarter of 2006, that had grown to 14.1 per cent."

The proliferation of private equity players means there are more bidders at the table. While deals used to attract two or three offers, now there can be as many as 10 parties expressing interest. Each one requires legal representation and for the party selling the asset, it means competitive bids and upward pressure on valuations — a good thing for the seller and a not so good thing for the buyer.

In its study, Torys notes that private equity will have growing impact this year in various areas. The first is going-private transactions. As public companies look to get out from under daunting market regulation, private equity is the savior.

The amount of private equity capital available and the fact many firms are banding together to do "club" deals — where they join forces to bid and pitch deals — means the size of a going-private transaction is almost meaningless.

Torys also expects pension funds to continue to invest more of their assets in private equity. That will spur them to do their own deals and they will also play a more prominent role in club deals.

Demographics are another factor giving rise to private equity deals in the coming decade. The first wave of baby boomers is hitting their 60s and those who have built successful businesses need to start thinking about an exit strategy. They will either have to pass the company down to their kids or sell out to management, a competitor, or an investment bank.

So what industries will be hot in 2007? For that we can look to the Blakes study. Its respondents felt that M&A activity of all types will rise in the coming year. The hottest sector will remain energy, followed by mining, and industrials and manufacturing.

The latter category will be a sweet spot for business law firms of all sizes, as the study notes that transactions in this sector tend to be in the US$20- to $150-million range. One-third of the Canadian investment bankers surveyed predict that deals in the industrial and manufacturing sector will attract more interest from foreign firms.

As for technology and telecom, interestingly, U.S. investment bankers are more optimistic than Canadians about the prospects for technology and telecom companies. Twenty per cent of U.S. bankers expect it will be the sector with the most consolidation, whereas 40 per cent of our investment bankers predict it will be the industry with the least amount of consolidation.

Monday, April 2, 2007

US Mortgage Outsourcing Market – India’s Perspective

Mortgage Outsourcing- an untapped sector that holds a relatively higher potential in the off shoring business is the buzz word today. The interest rates blooming and the real estate market being a ‘bubble’, mortgage lenders and home owners now experience a tough time. The home owners find it difficult to pay off their dues and consequently it imparts a negative effect on the business of the mortgage lenders. Mortgage outsourcing has emerged as the perfect solution for both the home owners and the money lenders.

Analyzing it from an industry’s perspective, it clearly reflects that many BPO organizations are gradually realizing the urgency to focus on niche verticals, which ideally is an outcome of the increase in competition in the low end BPO space. The ‘Top Core Players’ or big players in the mortgage businesses are now venturing in outsourcing by operating through their own captive units or planning outsourcing deals through outsourcing vendors.

With the bloom of different verticals in the Indian BPO segment, a vertical that remains relatively untouched and with immense potential is the Residential Mortgage banking market in the United States. According to NelsonHall, a consultancy, the total annual value of such outsourcing contracts around the world is about $10.9 billion, with about a third of that in America alone. However, a small proportion of that is being sent offshore. “But as costs are mounting, the Indian outsourcing industry's lobby - mortgages have become ripe for off shoring”, says Sunil Mehta of NASSCOM.

Mortgage Process in USA

North American Banking and the US mortgage industry, both going through a consolidation phase have acted as a catalyst to the growth in opportunities for the BPO sector. In terms of automation and outsourcing in the whole banking chain, mortgage has always been a low priority. However, as a result of rising interest rates and stiff competition, Mortgage banks now seek the ITO and BPO sectors as long term strategic tools. Besides this, the biggest challenge in any consolidation is the integration of processes and functions. However, the success of consolidation invariably is dependent on the pace of integration of organizations.

This being a very resource and cost intensive process, banks may seek the help of external experts to assist them through their consolidation phase by taking up their outsourcable processes. This in turn reduces the burden on internal resources and helps the bank to focus on its core competencies.

The driving force here is cost. Higher interest rates eat away at the money-spinning business of refinancing outstanding mortgages, slash business volumes and squeeze margins. India, being a low cost destination happens to be appealing in terms of investments. India is emerging at a very high pace as a mortgage manufacturing hub with its strong competitive advantage over other economies like China, Canada and Philippines.

The US Mortgage Banking BPO Market in India

The US Mortgage Banking BPO Market in India is expected to bloom very fast. Currently, this industry employs a fair amount of 7500 people in this sector. According to a research report "BPO Opportunities in the US Residential Mortgage Market" by the Trinity Business Process Management and Avendus Advisors, the offshore addressable BPO market size for the US residential mortgage ecosystem is in the range of $6 billion to $7.4 billion. The existing mortgage-processing BPO market in India is approximately $150 million.

The market indications suggest that the range of processes presently being outsourced or would be sent overseas in the near future by mortgage lenders could primarily curtail three areas of the mortgage processing life cycle, from acquisition to origination to servicing. However, today the most mature market in terms of outsourcing is mortgage servicing. Loan processing is another area which can fetch in up to 50% of cost savings if off shored to destinations like India.

Acquisition is another domain with great potential, particularly in areas such as analytics and lead generation. Other sections of mortgage industry which presumably will extend opportunity to outsourcing organizations will be the brokers. Industry experts expect lot of activities happening in area of lead generation and end to end loan processing. Andy Efstathiou, of NelsonHall, says the main impulse behind outsourcing in the industry as a whole is not so much cost-cutting as shifting from a fixed cost base to a variable one: the contracts give companies more flexibility to scale up and down as volumes vary.

According to Trinity's VP, sales and marketing, Francesco Paola, the future growth of BPO will be driven by an increased focus on domain-specific vertical processes that provide not only cost savings, but other long-term benefits in the areas of productivity and capacity management for the client. Analysts say that labor costs constitute a significant portion of the overall costs that mortgage banks incur in servicing clients. Offshore outsourcing is expected to generate cost savings in the range of 30-50 per cent. Industry experts say that the US mortgage banking BPO market in India will grow to approximately USD 1 billion over the next five years.

"We estimate that the US mortgage banking BPO market in India will grow to approximately $1 billion over the next five years," Paola says. This represents a market that would grow at a CAGR of over 50 percent in five years. Trinity believes that there would be huge opportunities in the mortgage outsourcing business for at least two years.

According to NASSCOM, India in particular is poised to benefit from a huge rise in "mortgage-process outsourcing" in the next few years - worth anything from $100 million-$150 million to $3 billion-$7 billion a year.

Authors: Nishith Srivastava & Shruti Bose

Potential market trend in Supply Chain sector in India - Supply Chain Process Outsourcing (SCPO)

Article on "Supply Chain Process Outsourcing (SCPO) in India"
Published - September 15, 2005 - SupplyChainDigest Newsletter - Logistics Edition

Importance of supply chain in India can be gauged from the fact that logistics cost is in the range of 10-12% of our GDP. As per the recent CMIE database, over Rs. 1,00,000 crores of total capital is tied up in inventories in industrial sector. This is close to 22% of aggregate industry sales. Besides this, all the industry brands are already in the Indian SCM sector.

Amidst a continuously growing market, as a next step, Indian organizations are looking or can look for new options like collaboration and coordination with their supply chain partners in US & Europe. Several key dimensions have emerged in the recent times namely - information integration, workflow assimilation, technology assimilation, synchronization, and trust to make supply chain integration.

Now coming to the topic on whether traditional supply chain jobs in planning & execution could be moved to India, I feel that following aspects/processes can be moved/outsourced to India.

1. Information Integration: Processes like shared demand information, inventory status, capacity plans, production schedules, promotion plans, demand forecasts, and demand schedules etc.

2. Workflow Coordination: Streamlining workflow activities among supply chain partners could be made possible by workflow coordination of a host of activities encompassing procurement, order execution, engineering change, design optimization, and financial exchanges.

3. Technology Assimilation: Entire supply chain integration can be based on a platform of technology-enabled network solution for sustained future prosperity. Supply chains should access the market through both physical channel and cyber-based channel to serve the needs of the consumer. Both channels should accentuate e-Commerce features to distinguish the supply chain in the eyes of the customer. Thus, all these cyber-based support can be easily outsourced to India.

4. IT based tools for Synchronization: IT Companies in India are already creating customized IT solutions for Supply Chain Industry in US & Europe, which are used in various phases in a Supply Chain network in these companies.

In a nutshell, I feel that the entire process of Supply Chain Management can be outsourced to India except the actual delivery part. Companies in India can emerge as a back end support for all the activities starting from planning to execution i.e. setting up the virtual infrastructure (technology based), providing back end support for the operations and finally handling the execution. Factors like low-cost & IT expertise would act as a catalyst to make this concept a reality.

However, as there has been a concern on outsourcing due to BPOs and emerging KPOs, companies and their executives would certainly not accept this concept right from the very first day. This concept is going to face lots of obstacles and barriers but it’s the call of the wave - no company could deny this fact that this move could save lots of money as well as enhance their supply chain network.

I am quite sure that very soon this vision will become a reality and India will be a hot destination for Supply Chain Process Outsourcing (SCPO).

Available online at

Trends in Biotech/Pharma Outsourcing Industry

The increasingly global nature of the pharmaceutical/biotech industry endorses Outsourcing, as most companies tend to exploit the market by gaining competitive advantage. Pharmaceutical companies with little or no experience have realized that mastering the entire skill range within an industry is not viable. Moreover, flexibility is becoming increasingly important within the industry. As a result, companies have started focusing on their core competencies in which they can add greatest value. The growth of the pharmaceutical contract service industry in recent years has led to a significant increase in the number of services and functions available for outsourcing. The cost pressures have led to pharmaceutical manufacturers reassessing their financial situation and, in the wake of the resulting downsizing trend, to the development of a contract service industry specifically targeted at the pharmaceutical industry.

The growing importance of small pharmaceutical and biotech contractors is increasing, with representation of small pharmaceutical and bio-pharmaceutical companies in the client mix. Although the 40 largest pharmaceutical companies account for two-thirds of industry R&D spending and produced most of the commercially approved products, most view outsourcing as only a tactic to overcome near-term capacity shortages. In contrast to the Big Pharma players, smaller companies offer opportunities for strategic relationships that are more stable because of their limited in-house capabilities. Their dependence creates opportunities for contractors to secure equity or royalty positions that can boost financial returns. Moreover, maturing biotech pipelines and accelerating licensing activity are generating more opportunities in this segment.

2001 was a robust year for most publicly traded CRO’s and contract manufacturers, with many companies able to turn losses into profits and show revenue increases of 20% or more compared with revenues in 2000. POMA Sourcing Survey (2001) indicates that contractors can anticipate another good year in 2002, although growth rates are not expected to be as strong. As we move into 2002, some trends that accelerated in 2001 are likely to reshape the outsourcing industry during 2002.

Outsourcing R& D: The modern pharmaceutical market though approves Outsourcing, doesn’t seem satisfied with the fundamental and strategic correlation between the need for resources and Outsourcing. Rightly so, Outsourcing should be a long-term strategy at the planning stage rather than being a reactive measure to circumstances. Talking about R&D units in the pharmaceutical/biotech industry, the leading companies are the CROs (Contract Research Organizations). Estimates by Datamonitor reveal that the CRO market was worth $4.6 billion in 1998, accounting for 22% of global $20.9 billion ‘development’ expenditure. 60% of this revenue was generated by clinical services, and 40% by non-clinical services. Frost & Sullivan estimates that R&D expenditures across the biotech industry would surpass $50 billion by 2005. This is expected to result in a proportional increase in the CRO market size. A survey conducted by Datamonitor has pointed out that most pharmaceutical companies believe Outsourcing to be the most effective method for limiting R&D costs.

The Need for Outsourcing: Analysts at Frost & Sullivan suggest, that with sophisticated technologies around such as high-throughput screening that are becoming a progressively more important part of the drug development process, companies are seeking outsourcing partners who will be able to provide superior technology and launch quality products in the market in a short span of time. Pharmaceutical companies today recognize the need to leverage in-house resources with specialized, competent partners particularly in the following:

-> Research in Biotech Industry
-> Development in CROs (Contract Research Organizations)
-> Manufacturing in CMOs (Contract Manufacturing Organizations)
-> Distribution in Co-marketing & CSOs (Contract Sales

Consumer empowerment is one of the main forces transforming the pharmaceutical industry. The trend toward individualized health management will create enormous opportunities for manufacturers and service providers within the pharmaceutical industry by enabling them to enhance their traditional offerings and to exploit entirely new market spaces. The key factors that lead companies to look for outsourcing of their work can be categorized as follows: the search for efficiencies in the drug development cycle, extending a company’s capacity, consolidation of the pharmaceutical industry, access to specific therapeutics expertise and globalization of the market within Europe and the USA.

As outsourcing in the industry matures, pharmaceutical manufacturers should select their outsourcing partners strategically and consider their partnerships to gain competitive advantage. As a result, pharmaceutical companies will ‘focus on total cost of doing business and look at ‘long-term needs and partnerships’. Effective partnering and outsourcing will however require trusting relationships and highly interactive programs.

The Future of Outsourcing: However, many challenges exist for the successful implementation of outsourcing within the pharmaceutical industry. The industry is characterized by inherently high risk; only one in 5,000 compounds actually becomes a product, commercial drugs cost $300 million to develop, and less than 50% of new products return the development cost. Tight governmental regulations compound this risk. Unlike other industries, there have been no transformational developments to drive outsourcing—even marginal performers can succeed. An immature contractor segment also characterizes this marketplace.

These forces are reshaping Pharma; they are the forces behind the consolidation of the industry, the growth in the number of alliances and the increase in outsourcing. Such changes are also contributing to the growing divergence between what Pharma companies need to achieve and what their employees want.

Datamonitor believes that centralized outsourcing departments will have to manage a portfolio of outsourcing agreements in the future. Such agreements will range from low technology, distanced agreements to strategic alliances, depending on the function being outsourced. The drivers of CRO market growth to 2003 will be increasing R&D costs, the launch of biotechnology products, continued M&A activity, and increased confidence in the quality of services provided by CROs. Analysts at Datamonitor also predict a consistent growth of 15 – 20% of the CRO market until 2003. The use of contract manufacturing is expected to increase in the future, as companies rationalize their manufacturing facilities, many of which currently operate below capacity. In the future, pharmaceutical manufacturers will attempt to move towards direct distribution as the role of large pharmacies for both payers and manufacturers becomes more established. It is believed that the true virtual pharmaceutical company is not a realistic proposition in future, although a virtual subsidiary to a large parent company may offer significant benefits.

Originally Published in CanBiotech BioMed Outsourcing Newsletter: Volume 1, Issue 1, September 2002
Trends in the biotech/pharmaceutical outsourcing industry

The Future of Chinese Logistics Industry

Interview published in on "The Future of Chinese Logistics Industry".

Question: The Chinese Government is keen to develop standards for the logistics industry. How do you see this impacting the industry in China? What does it mean for smaller companies in China who are still developing and defining their services and operations?

Nishith: In the last 2-3 years, Chinese government has shown a positive inclination towards the logistics market by introducing favorable programs. The government has displayed a continuous focus on strategic issues like globalization and building infrastructure to facilitate the formation of a nationwide transportation and distribution network in the Chinese mainland. Recently, the State Development and Reform Commission and the State Standardization Authorities have issued a plan for the development of logistics standards for 2005-2010, setting the goal of bringing the 300 standards into line with international standards. From 2005-2006, the country will formulate general benchmarks and standards urgently needed. From 2007-2008, standards for logistics technology, information, quality of service, safe operation and statistics will be worked out; and from 2009-2010, standards for innovative integrated service and related supporting standards will be charted out.

On the technological front, the Chinese government is also working towards setting up standards in RFID and plans to coordinate its efforts with those of the International Standards Organization. Setting up of Golden Card Project is seen as a major step in this direction. It is one of the government-endorsed Golden series; the general target is to develop smart cards as a method of payment for 300 million Chinese in 400 cities within 10 years.

Now coming to your question on how these initiatives will impact the logistics industry in China, I feel that it would take at least 2-3 years to streamline the direction and once that is done then Chinese Logistics Market will start benefiting from these initiatives. According to me, the biggest beneficiaries would be the companies in retail & manufacturing sector (sectors with highest growth rates in China). Adoption of Logistics Standards & Logistics Modernization will be the key components in future growth of the industry.

From macro-level, this in turn will attract more companies to come into China and use the services offered by the market owing to their comfort level with International Standards. RFID will give China the infrastructure to make industries more competitive, thereby contributing to the larger economic growth.

At the micro-level, all these developments & initiatives will push the plane of the logistics industry in China from the initial stages to one that is comparable with the ones in developed market economies. New standards in Chinese Logistics Market will also aid in improving the overall quality of services and offer a platform to match their standards with the International Standards - China will be able to invent applications & services that have value in the world market. Another major development could be an increased co-operation between government initiatives and enterprise operations to introduce self-regulation within the industry.

Bigger players will have to make changes in their business models in order to further consolidate their positions, but the larger beneficiaries would be the smaller companies, which are still developing and defining their services & operations. As they are still in their infancy, they can easily adapt to the ongoing trends and specialize accordingly. To survive in this competitive environment and comply with new standards, these smaller companies would be able to grow gradually & carve their niche by specializing in customized multi-functional value-added services as their mainstream activity. This in turn will lead the emergence of at least 4-6 new big 3PL/Logistics providers.

Question: What are the key value-added services that logistics providers in China need to address? What will be the value-added services that move the industry forward in the next 12-18 months?

Nishith: Some of the major value-added services which can be offered by these providers could be bar-coding, in-facility inventory handling, vendor management, multi-country consolidation, customs brokerage, slip sheet operation, warehousing, factory inspection, sample handling and special packing lists etc.

From an overall perspective, my pick from the lot, which can move the industry forward in the next 12-18 months could be an extension from B2B-oriented procurement, production and sales through to services focused on the needs of the end-users. RFID would certainly be a significant area for the next few years. The forthcoming times are bound to witness an era of e-business and supply chain with a greater reliance on the supply chain theory, hi-tech support and investment capital.

Question: How would you rate the quality of Supply Chain Management in China? Can global standards for SCM be developed alongside the infrastructure in China - or do you expect that innovative SCM practices are lagging behind?

Nishith: China doesn’t have the same infrastructure, which US or Europe have. Its density of land transport systems is just 22 percent of what you find in the United States and many of its roads are either unpaved or in poor condition, which slows down transit times. Companies complain of insufficient integration of transport networks, high transport costs, information technology (IT), and warehousing & distribution facilities. Outside of the main economic centers, the logistics segment tends to be of low quality and with little technological competence. I feel that the growth & development is unevenly distributed. Government is pushing companies to concentrate on interior locations, so let us wait and watch how the picture changes.

There are several other issues such as in-consistent regulations, high level of Chinese Bureaucracy, poor training at practical as well strategic level, under developed domestic industry and domestic trade barriers, which impact the entire scenario.

As far as the rating on the basis of current situation is concerned, I would give an above average rating in comparison with other developed markets but would certainly like to hold and watch how things turn-up in near future. Overall, Chinese Supply Chain Management outlook has bright prospects and gradually it would become a major enhancer for the Chinese GDP. The domain is expected to grow at a compound annual growth rate of 33% up till 2007, according to some recent estimates.

Question: What do you see as the greatest challenge (area for improvement) for the transport + logistics industry in China over the next 12-18 months?

Nishith: Regulations, culture, weak infrastructure and an undeveloped industry are just some of the problems being faced by companies. Without a basic understanding of the country, its markets, its logistics sector and potential partners, doing business in China is impossible.

I feel that in the next 12-18 months, due to initiation of government programs and focus on IT applications, companies will be faced with new challenges 1) to comply with the new standards 2) of bearing additional costs to integrate new IT applications in their business models 3) to customize & introduce new value-added services and 4) due to emergence of new players which will encourage more competition in the market.

Question: What do you see as the exciting new opportunity for the transport + logistics industry in China over the next 12-18 months?

Nishith: Chinese Logistics/Transportation Market has seen spectacular growth over the last few years and has bright prospects in the near future. All these growth opportunities are due to on-going liberalization of the market, entry of MNCs in Chinese market and acceptance of its services in the global economy.

I feel that in the next 12-18 months, most of the growth will be consolidation-driven. Although, there are more than 18,000 registered companies, which offer logistics services in China, there are very few or may be no companies, which offer nationwide distribution services. In one of the industry papers I found that no single logistics provider commands more than 2 percent of the market. This clearly proves that the overall Chinese Logistics/Transportation market is very fragmented. I feel that from this point onwards, Chinese market will be driven by consolidation or more precisely M&As. Customer demand for greater efficiencies of scale, breadth of service offerings and network coverage is growing and this in turn will prove to be a major driver for the future M&As.


About Me

Nishith Srivastava comes from a Business Research & Strategy Consulting background and has worked in close association with renowned VC firms and management consultants from top consulting firms worldwide. In a span of 8 years, Nishith has worked with some of the renowned research, analytics and consulting companies like RocSearch Ltd., RNCOS, Heidrick & Struggles Inc. and Egon Zehnder International.

Nishith started his career with RocSearch Ltd as a Research Analyst. Within 2.5 years, he was handling most of the company’s client facing and strategic roles such as Research Manager and BD Manager. He helped RocSearch in building partnership with renowned consulting and research companies in the US and Europe. After RocSearch, he joined ‘Research & Consultancy Outsourcing Services (RNCOS)’ as Head of Research and Business Development. Within 2 years, he helped the firm grow from a start-up level to a team of 35 employees. Today RNCOS is one of the most popular Indian companies in report publishing and technical writing.

Nishith’s stint with Knowledge Management started with Heidrick & Struggles where he joined as a Business Analyst in their Shared Services Research Center in New Delhi. In this role, he initiated and established the Supply Chain Practice that involved setting up Knowledge Management processes for SCM practice, creating new products and research services etc.

After Heidrick & Struggles, Nishith joined Egon Zehnder International to set up KM and research services on a global-sourcing model in their Knowledge Management Center of Gurgaon, India. He identified research and KM needs of the firm and then transition these processes to this center. He also proposed an in-house Knowledge Management system for the firm’s intranet.

After EZI, Nishith joined Cortaal Global, a Strategic Consulting and Human Capital Advisory firm headquartered in Singapore as a Strategy Consultant. In Cortaal, his responsibilities included
# Setting up the operations of Cortaal in India and spearhead the Indian operations of Cortaal Global
# Growing the scope of business in India with a future growth into the neighboring regions like the Middle East and South East Asia.
# Developing the business of Strategy Consulting & Human Capital Advisory services like Recruitment, Executive Coaching and Training and HR Consulting with a prime focus on Talent Strategy.

Nishith worked with Sheffield Haworth as Research Director. He helped in setting up an offshore knowledge centre for one of the largest executive search firms specialising in financial services sector.

Presently, Nishith is heading the strategy team for international clients (Asia Pac and SEA countries) at Digitas, India that offers strategic marketing consulting & advisory services for developing innovative and impactful marketing solutions for prospective as well as existing clients. Digitas is India's and South-East Asia’s biggest marketing services and digital marketing agency. He developes marketing programs for clients to get the best possible return on their marketing investments (ROMI) using various digital and BTL programs.

In terms of specialties, Nishith specializes in setting-up offshore (India) research / knowledge management / shared services centers for global companies (exeuctive search specially). In terms of industry exposure, he has worked across various industry sectors like Industrial/Manufacturing, IT, Financial Services, Life Sciences, Supply Chain, FMCG & Retail Sectors. From product specialization perspective, Nishith specializes in creating reports like Industry Analysis Reports, Market Research Reports, White Papers, and Analytical Reports like SWOT, PEST, Porter, Feasibility Studies, Competitive Analysis, Consumer & Technology Trends, Marketing and Business Plans etc.

In the next 10-12 years from now, he aims to become a Strategic Consultant in one of the top 5 consulting firms or he would be running his own Management/Strategy Consulting Company from India - - a company which could compete with Big 4 Consulting firms on a global basis. He intends to do the same in Indian Consulting sector which Laxmi Mittal did in Steel Industry.