Today, I read in my newspaper that Mr. Ramlinga Raju, Satyam Computers Founder Chairman had been sentenced to 7 years of rigorous imprisonment and a fine of INR 5.5 crore.
While working on a book on Business Ethics, I had the opportunity of studying the case. What struck me and generally goes unreported is that Satyam used to get deals at 2-3% of margin. This meant that with such a thin margin, Satyam in its peak was able to outbid competitors but it was having much less real cash at hand compared to its size.
The low-margin is an addiction. It gets into your nerves as you find your more ‘elite’ competitors defeated and there comes a temporary adrenalin rush. The reverse effect happens in spectrum auctions where the winner very soon finds itself in existential crisis. Call it by whatever name : overstretch, lack of prudence, flaw in judgment, this is an addiction. This is generally not seen as an addiction because it comes dressed up in a very holy garb : cost effective.
The psychology of a business operating at a very thin margin for growth remains very tense because of lack of buffers. Nature and any system will go into an unstable equilibrium unless there are buffers. A family which has brought the dream home by overstretching itself that it may find little left for relaxed living that the house, family or both may implode.
A business will be psychologically tense because the weapon of cost effectiveness is very potent but the venom while overused will weaken the corporate body itself. There are certain insects which die once they sting once. The sting does its job but demands a heavy price for the entity that exercised the lethal option.
A business might start its first foray into unethical and grey areas when it neither knows how to increase margin or addicted to growth while using price as the only differential.
Satyam’s Chairman Mr. Raju, in spite of all the later events was a historical man in India’s IT campaign. He was a first generation enterprise builder and he was partially responsible for bringing Hyderabad into global IT map, if not in the global map itself.
However, low margin proved to be one of the significant factors in designing the fatal course the organization took.