On
pruning wasteful defence expenditure
The government
has announced that the defence budget is to be pruned following
the success of the first round of peace talks with the Tiger rebels.
Figures revealed by Deputy Finance Minister Bandula Gunawardena
show that defence spending will fall to Rs. 35.6 billion in 2003
from Rs. 51 billion this year.
Trimming wasteful
expenditure such as that on war is certainly welcome news to a country
that has suffered so much as a result of the fighting and been left
far behind by nations that are less well endowed in the race to
achieve economic prosperity. No doubt the government has no option
but to drastically prune unproductive defence expenditure given
an empty Treasury and pressure from foreign aid donors to spend
the little money we have on rebuilding a shattered economy and rehabilitating
the north and east.
But, in the
euphoria generated by the apparent success of the preliminary round
of peace talks with the enemy, a word of caution is necessary. It
should not be forgotten that what has held this country together
was the armed forces who have acquired considerable expertise, perhaps
second only to Israel, in fighting terrorism of the kind that the
world is only now becoming aware of following the cataclysmic events
of September 11, 2001. They can be regarded as among the most battle-hardened
in the world today with a wealth of counter-insurgency experience.
For years,
military top brass has been talking, mostly privately, of the need
to maintain a strong and modern military long after the Eelam war
is over, particularly to develop the ability to protect our shores
and maritime borders. Furthermore, we need to guard the economic
resources of the ocean that comes within our jurisdiction under
the international laws of the sea. There is considerable economic
wealth on the seabed that has the potential to be exploited.
The country
was caught off guard when the Eelam war intensified in 1983. It
now needs to maintain a modern, well-trained and well-equipped military
to ensure it does not get caught off guard again. Had the military
been modernised in the early stages of the war, this insurgency
might not have grown to its present level of intensity.
A good example
to follow would be the countries to which we turned for weapons
and equipment in the early stages of this war - Israel and South
Africa. Both were forced by circumstance to develop some expertise
in modern warfare and used their skills to build and maintain modern
military forces and establish thriving defence industries. They
are actually world leaders in some areas - unmanned aerial vehicles
in Israel and mobile artillery systems in South Africa. In fact,
it was Israel and South Africa that supplied us some of the small
arms, fast attack craft and armoured vehicles designed to withstand
landmine blasts in the early years of the Eelam war.
Likewise, we
too could make use of the experience and expertise that have been
acquired the hard way - e.g. in combating suicide bombers and in
small boat warfare. Already the rudiments of a fledgling defence
industry are in place - the sole dockyard in the island has been
turning out fast attack craft, albeit based on imported designs
that were modified with the experience of war, as well as landing
craft and offshore patrol vessels. The previous government even
decided to create a separate industrial zone for defence industries.
Despite years of talk by successive governments on building up some
defence industries to reduce our dependence on imports, nothing
serious has been done.
It is up to
our entrepreneurs and investors to take up the challenge and build
on the experience we have gained from this war and turn it into
profitable use. Industries such as boat building, the manufacture
of armoured vehicles, light aircraft and 'dual-use' technologies
such as electro-optical devices and communications equipment, and
even basic items such as uniforms are within the realm of the possible,
perhaps with foreign collaboration. These would generate much-needed
employment opportunities as well as earn valuable foreign exchange
if exported.
The weapons
procurement procedures also need to be more efficient and transparent
to ensure that money is spent wisely. For far too long this country
has been saddled with useless weapons and equipment acquired by
corrupt politicians, military officers and businessmen with the
connivance of corrupt businessmen out to make a fast buck. This
has to stop.
The economic
prosperity that the peace dividend is expected to deliver could
well enable the country to support a strong and modern military.
After all, the economy has shown a remarkable degree of resilience
throughout the war, although the July attack on the airport and
its impact on the economy could be said to have been the last straw.
We are not being
hawkish, merely practical, in advocating caution in reducing defence
spending or the need to maintain a modern military, preferably with
a supporting defence industry. A strong military is vital to protect
the fruits of the economic boom that we are told is now on the horizon.
It would be unwise to cut defence spending too much, too soon, and
emasculate the armed forces, especially when the war is not over
yet and the claws of the Tiger remain sharp.
Sri Lankan CEO under fire in the
United States
By Steve Hamm
Can Computer Associates CEO Sanjay Kumar over come jilted
investors, angry customers, and an SEC probe all at the same time?
Sanjay Kumar
was on his best behavior. Through winter and spring of 2002, as
corporate scandals erupted across America, the CEO of Computer Associates
International Inc. (CA) appeared determined to cast the embattled
software powerhouse as a model of corporate virtue. It was no easy
sell. After a decade of white-hot growth, CA had become legendary
for its convoluted accounting, outsize executive handouts, and a
take-no-prisoners approach to customers. Still, the 40-year-old
Kumar toiled to turn over a new leaf. He coddled customers and worked
to clear up accounting questions. He overhauled the board of directors,
long considered a rubber stamp, even bringing aboard a former chief
accountant of the Securities and Exchange Commission. Was this a
new, spic-and-span CA for the post-Enron age? Not quite yet.
On July 24 Kumar
stupefied investors and corporate-governance experts alike. After
a week of negotiations that ended after midnight, he dished out
$10 million to end a proxy challenge from Texas entrepreneur Sam
Wyly. It seemed the bad old CA had reared its ugly head. "Technically,
it's not greenmail, but they paid somebody to go away," says
Ted White, director of corporate governance for the California Public
Employees' Retirement System. CA justifies the deal as a legitimate
means to end a management distraction-which drained precious time
for Kumar's turnaround effort. But the company can't wash off the
odour of scandal. These days, it's operating under the noxious cloud
created by Enron, WorldCom, and Adelphia.
Does Computer
Associates deserve a place among such scoundrels? While no one at
CA has been indicted, the Long Island-based company is under investigation
by the SEC and the U.S. Justice Dept. for alleged accounting irregularities.
Frayed relations
CA has a long road to fix a host of frayed relations. Its 50-plus
acquisitions fed dizzying growth that sometimes topped 30% per quarter.
But the resulting layoffs left hundreds of former employees seething
from coast to coast. CA used the fact that its products were vital
to customers to get them to agree to massive new contracts, critics
say, and paid little attention to customer service. That left customers
feeling roughed up and angry. "CA bullied and cajoled. They
screwed the customers for every cent they could get out of them,"
says a former CA sales manager.
Now, Kumar's
a CEO on the spot. He runs a widely distrusted company in an era
where trust is suddenly worth more than growth. What's more, in
a depressed tech market where companies count heavily on loyal customers,
Kumar has to deal with disgruntled buyers who are all too happy
to postpone software updates. The upshot: Kumar is now reaping a
bitter harvest from the '90s.
The imposing
job facing Kumar is to rebuild CA. He says he's out to change the
very nature of the software giant, from the way it adds up numbers
to the way it deals with people. The question is whether the pencil-thin
Sri Lanka native, who was promoted to CEO two years ago, can remake
a company so much a product of his own DNA. For 15 years, he stood
shoulder to shoulder with founder and current Chairman Charles B.
Wang as the two forged a hard-edged corporate culture focused on
creating growth at all costs.
And for a time,
Wang and Kumar succeeded beyond their wildest dreams. In the go-go
market of the '90s, CA emerged as a global tech titan-the world's
third-largest software company. Annual revenues hit nearly $7 billion
by its fiscal 2000, net profits approached $700 million, and the
company's 40% operating margins rivaled those of Microsoft Corp.
In the business of managing mainframes and computer networks, CA
was king. Kumar wants to recapture CA's glory days. And, to do so,
he has to improve the company's standing with customers, investors,
and employees. "We have to change and consistently behave differently,"
he says. In his five-year drive to revamp CA for the new decade,
Kumar is striving to create a gentler giant. The path to growth,
Kumar says, is to cozy up with customers and develop products they
want to buy. It used to be all about landing the big deal. Now,
"it's about the customer," he says.
Customer
care
That's a common refrain these days, but Kumar's backing it
up with resources. He has set up a 650-person customer-care organisation
and launched annual customer-satisfaction surveys, tying the pay
of 500 senior executives to the results. And he has visited dozens
of customers to get back in their good graces. He's humbler now,
offering apologies for past missteps and new flexibility in the
way customers buy software.
For growth,
Kumar is banking on those same customers. Once they're feeling friendlier,
and a bit richer, he plans to sell them loads of new software. Monster
acquisitions are out. Instead, Kumar is developing products in-house.
In the next 12 to 18 months, he plans on delivering a new generation
of software to handle wireless communications and Web services-which
automate communications between Web sites.
To smooth out
CA's see-saw earnings, Kumar rejiggered the company's accounting.
In the past, CA recognized software-licence revenues immediately
after a deal was concluded. That left it vulnerable to end-of-quarter
misses. The new, so-called ratable model recognises software-licence
revenues over the life of a contract. There's less risk that the
delay of one or two large deals will torpedo a quarterly-earnings
report.
Kumar has also
launched a major overhaul of the board of directors. He expanded
the board from eight to 11, retiring several veteran members and
adding seven new outsiders, including a former chief accountant
of the SEC, Walter P. Scheutze, and a Harvard Business School corporate-governance
expert, Jay W. Lorsch. The board this spring adopted term limits
and appointed a lead outside director.
But all the
while, dual federal probes hang over his head. As president for
eight years and CEO for two, Kumar is responsible for the way the
company kept its books. He went along with CA's long-standing revenue-accounting
policies, including double-counting certain revenues when the company
renegotiated long-term contracts. When CA changed its practice at
the beginning of fiscal 2001, it retroactively reclassified revenues
for the previous five years, slicing a hefty $2.5 billion off the
total. And that's just one thing the feds are looking at. Kumar
denies the company has done anything illegal. But if CA is proved
to have violated rules or laws, he could be ousted.
Still, with
all his problems, Kumar holds a trump card. The company he runs
is an immense thicket of software properties, offering up 1,200
products in half a dozen markets-much of it the result of CA's buying
binge. Indeed, Kumar's supporters argue, it could take a very long
time for an outsider to get up to speed.
Sticking
with Kumar
That's one reason the board says it's sticking with him. Lewis
S. Ranieri, CEO of Ranieri and Co. and CA's lead outside director,
who has been on the board for two years, says Kumar is the man for
the job because he's making progress in customer relations and corporate
governance under difficult conditions. "I don't know who did
what to whom before I came, but for the two years I've seen, he's
the antithesis of the old CA," says Ranieri. When confronted
with some of what his critics have to say during breakfast recently
in Manhattan's Grand Hyatt Hotel, Kumar defended himself fiercely.
"I have nothing to hide. I'm not in the bunker," he said.
He denies that he did anything illegal and stresses the progress
he's making. "I have a five-year plan, and we're two years
into it," he says.
Kumar acknowledges
that CA behaved poorly in the past, but he blames the problems on
underlings. "Our sales force was very successful, and it gave
rise to some bad behavior," he says, adding: "Much of
what went on, the top of the company had no idea." At the same
time, he's unapologetic about the controversial $1.1 billion stock
grant made to the company's three top officers in 1998-with 30%
going to him-even though investor outrage forced the trio to give
back about half of the stock.
Ethnic crisis
Through all the stress and controversy, Kumar remains unflappable.
Perhaps it's a result of growing up under duress. A Tamil born and
raised near the ethnic killing fields of Sri Lanka, he recalls one
morning in 1974 when his family awoke in their home in the capital
city of Colombo to discover that four men had been tied to nearby
lamp posts and shot dead. Kumar says his parents brought him up
with Horatio Alger-type values. His mother, a teacher in a Montessori
school, and his father, an animal-husbandry researcher, pushed Kumar
and his two sisters to work hard and speak their minds. The family
was middle-class, but they lived in a five-room house that flooded
during monsoons. When violence erupted between Tamils and Sinhalese,
the family fled to the U.S. Kumar was 14. They arrived in Greenville,
S.C., with just $80. "My parents moved here so my sisters and
I would have opportunities. They gave up everything they had,"
he says.
In the faded
textile town of Greenville, Kumar had to adapt to a new culture.
He remembers that on his first day of high school, he went to the
cafeteria at lunchtime and noticed that all of the blacks were in
one line, the whites in another. Since he didn't belong to either
group, he went without lunch. That night, his mother advised him
to pick the shortest line each day. So that's how Kumar coped.
Software was
the young Kumar's ticket out of the backwaters. In high school,
he spent untold hours in the computer lab. He dropped out of Furman
University in Greenville-and gave up his early dreams of being a
doctor-to start a small software company of his own, which he gave
up after his partner died in a car crash. He later landed a job
as a product manager for UCCEL Corp, a Texas software company that
CA bought in 1987. When he met Charles Wang, Kumar found a teacher
who could take him places. Within a year, Wang brought him from
Texas to Long Island to be his assistant. "I saw he had a tremendous
future," says Wang. "I tested his skills and leadership
ability. The more he could take, the more I would give him."
Wang put Kumar in charge of planning, then acquisitions, and made
him president in 1994. Although Wang had built CA from the ground
up, even carpeting the first offices himself, it was the team of
Wang and Kumar that fashioned CA's bare-knuckle culture in the '90s.
They encouraged sharp disagreements. Favored employees were encouraged
to come up with new ideas and run with them. "It's a thunderously
great place to work if you like extreme challenges and opportunities,"
says Mark Stabler, who was CA's senior vice-president for global
marketing until he left in 2000 to join a rival.
Purgatory
Deeper down, the organisation wasn't a happy place. Every year,
managers shook up the sales force, reassigning as much as 60% of
them to new accounts. That meant starting from scratch with customers,
year after year. Some employees lived in fear of being punished
for making mistakes. "If you're not one of the 200 people in
the organisation who have the power to effect change, it can be
a miserable place to work," says a former CA executive who
was part of the company's in-crowd. "If you made a mistake,
you'd be fired or demoted. We called it spending time in purgatory."
Kumar defends
CA's Darwinian culture. "The company demanded performance,"
he says. Yet he is remodeling the old CA into a place where employees
have more say and less turmoil. Last spring, during the annual reorientation
of the sales force, only 2% to 3% of the staff switched customers.
In April, Kumar reorganised the company into five business units,
each with its own product-development and marketing teams-and with
plenty of once-scarce autonomy. While Wang relied on a few trusted
lieutenants to run the company, Kumar has assembled a team of 14
people who report to him.
These days,
Kumar spends much of his time tending to customers. He patches up
things personally with companies that were frustrated with CA, such
as KeyCorp Ltd. (KE ). "They were treating us like a captive
customer," recalls K. Wade Tolman, executive vice-president
for enterprise technology at the Cleveland-based bank. "The
only time we saw the account team was when we had a contract to
be renewed."
While Kumar
blames much of CA's customer woes on an overaggressive sales force,
interviews with former employees show that Kumar himself was sometimes
in the thick of things. He attended a meeting of CA executives at
the company's Kirkland (Wash.) offices in December, 1999, when they
decided to get tough with the Albertson's Inc. (ABS ) grocery chain.
For nearly a year, Boise (Idaho)-based Albertson's had resisted
inking a multi-year contract that included a heavy dose of new software.
It simply wanted to renew licences for mainframe software it already
owned, according to three former CA sales people. But CA had plenty
of leverage to push for the bigger deal. Most of Albertson's licences
had expired. That meant CA could ask the grocer to turn off computers,
the lifeline of its business. With that powerful threat in hand,
the executives decided to put the squeeze on the grocer.
To win over
customers and investors, Kumar has to prove to them that he has
fully taken control from Wang-who was seen as CA's tough guy. Board
members say Wang has adapted to his new role, gradually giving up
operational duties and now mostly advising Kumar. But former employees
question whether Kumar has truly taken charge. "I'm not Charles's
puppet. I'm my own man," says Kumar, sounding exasperated at
the suggestion.
Still, Wang,
as chairman, looms over him, which adds a level of complexity to
his job. During the proxy battle in 2001, investors pressed Kumar
to add independent voices to the board-the board that Wang had built.
The task called for delicate diplomacy. Out of deference to Wang,
Kumar talked with board members behind the scenes and urged them
to press governance issues at meetings so he didn't have to confront
the founder directly, according to a board member and another source
close to the board. Kumar acknowledges that he talked to board members
individually about governance but denies he was trying to avoid
confronting Wang.
Diplomatic
finesse
Kumar's diplomatic finesse wins him high marks from the board.
They also credit him for passing on one of the perks that many CEOs
seem to take for granted: the company loan. Kumar has never asked
for one. In fact, when UBS (UBS ) in February called a $46 million
loan he had taken out to cover the taxes on his 30% share of the
$1.1 billion executive stock grant, he didn't ask the board for
a bailout-even though the value of his stock had been whittled down
to $27 million. "He took a shot in the head and smiled,"
says Richard A. Grasso, chairman of the New York Stock Exchange
and a member of CA's board until he resigned in August.
Amid all the
flack Kumar gets from investors and former employees, he is eager
to be seen as a good guy. Asked how he explains the government investigations
and proxy fights to his two daughters, he tells this story: "My
older daughter (age 12) read one of the ads that Wyly put out. She
said, "Why are they saying these bad things?" I explained
what a proxy fight is about. She said, "Are you going to say
bad things about him?'" I said, "No." She said, `Good.
That's very Quakerly of you.' She goes to a Quaker school. Then
she pats me on the back and walks off."
Clearly, Kumar
has made an earnest stab at changing how his company operates. But
in this unforgiving climate, CA's poor reputation with customers
and investors is going to be difficult to overcome. The outcome
of the federal probes is the wild card for Kumar. Horatio Alger
virtues taught by his immigrant parents have played a key role in
his successes. But the investigations will reveal if financial misdeeds
also played a part in his rise to wealth and prominence. If so,
all of Kumar's toil will be for naught, and his story will have
a dark ending so familiar in this era of capitalism.
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