Where are business executives most optimistic about IT spending, hiring, and other business issues? Not surprisingly, it's in India and China, according to McKinsey & Co.'s latest global survey of business executives, its second in a new series of worldwide polling. The survey, which polled 5,500 corporate leaders around the world and was released last month, showed that while executives have curbed some of their optimism from the survey's first iteration, in January 2004, they still plan to increase hiring and IT spending. Optimize contributing Web editor Howard Baldwin spoke to Lenny Mendonca, a McKinsey director who worked on the survey, to get his reactions to the results.
Q: What surprised you most about the results of this latest survey?
A: I actually wasn't surprised. I expected things to get better, but I'm from Missouri, so you have to show me things are getting better. The results were consistent with conversations I'm having with executives around the world. What I found encouraging was that, despite everything going on in the world [with the war and oil prices], executives are maintaining confidence and optimism, and they're translating that more and more into spending. When we did the survey, we were starting to see some signs of spending and hiring coming back, and this confirms this on a broad global basis. It's particularly upbeat in India and China.
Q: With IT budgets increasing, what kinds of projects are getting the most attention?
A: When we asked what the most important consideration in IT investment was, the highest percentage, 27%, wanted to deploy technology to increase sales and revenue, while 21% wanted technology to improve customer service. To me, this means companies are more focused on growth and improved decision making rather than cost reduction or security. You start to see people feeling like they're investing to grow, spending on items that are revenue-oriented, rather than investing to control or maintain costs, or to work their way through a difficult environment. That's encouraging to me.
Q: What do you think are the biggest pitfalls of expanding activities—whether through offshoring or investment—in India?
A: Interestingly, respondents to this survey who were from India were more optimistic than those who weren't from India. They were confident about India's economy, but they were less upbeat than the last time. We did this right after the installation of the new government, so they're still upbeat that their economic liberalization would continue.
As to your question, there's nothing that's without risk. If you're not managing the relationship in India, whether it's your own employees or an outsourcing company, there's risk. You can't sustain your price/cost differentials forever. Having said that, though, my sense is that there's an increasing interest in India that—ironically—has been encouraged by the press talking about how challenging it is. It causes more people to ask more questions.
Q: Given that it's easy to run a managed economy during expansion and not so easy during a contraction, what are your concerns about the economy in China?
A: The response from Chinese business executives was probably the most starkly different in perspective [from the first survey to the latest one], depending on where you are in the world. About 95% of the people in China were confident, whereas 7% in North America were confident. The truth is in the middle. Economies that grow that fast don't grow linearly. The average U.S. executive's understanding and familiarity with the practicalities of what's going on in China is abysmal. Is the U.S. missing the boat? There are people who believe China is an important source of talent and are worried about the competition, but it's a very early view of what you really should do about it, especially from a U.S. perspective.
Q: What should executives do?
A: There's barely a business in the United States that won't have competition or the opportunity to participate in the growing marketing in China. But I'd bet less than a quarter of executives have thought much about it. They need to understand who the emerging companies are. Think hard about five years from now, what the scale of its economy will be from the market opportunity—that is, the people who'll buy—not the sourcing opportunity. How can you benefit, not just react?
Q: Were there any concerns that showed up?
A: There were some [concerns] around pricing, because of commodity price pressure and a sense of rising inflation. There was a sense that people will face real pricing pressure going forward. In the survey, 9% planned to decrease pricing, while 25% expected to increase pricing but modestly. Reading between the lines, most executives feel real pricing pressure and real competition. They won't have dramatic leeway to raise prices. And that's good, because competition is good. Companies will have to work toward real sales productivity, not price increases.
