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More than a decade ago, Anil Ambani, the Indian billionaire industrialist, and Rajat Gupta, today senior partner emeritus at McKinsey & Company, went to see the head of the Indian Institute of Technology, Delhi.
They were keen to start a world-class management school, of the standard of a Wharton or London Business School, possibly under the auspices of one of the country's universities.
But what they heard when they reached the elite state-run IIT Delhi convinced them that working within the government education system was not going to enable them to set up quickly the institution they envisioned.
"As we started talking, the head of IIT Delhi told us about the constraints," Gupta says. "Anil Ambani said: 'This won't work - if we want to build a world class business school, we will have to do it on our own'."
The pair, with co-founders, seem to have achieved their aim - this year the Indian School of Business made the top 20 of the Financial Times' "MBA 2008" ranking of the world's management programmes for the first time.
But despite the ISB's success, with student numbers growing from 128 in 2001 to 416 last year, its output is a drop in the ocean compared with India's vast need for quality young management recruits.
Held back by government funding constraints, India's elite state-run management institutes have been slow to expand. This means that Indian businesses have had to become more innovative in how they source new management-quality talent.
Corporate India is expanding at three or four times the rate of gross domestic product growth of nine per cent. Yet figures in a study released last year by Meritrac, a skills assessment company, showed that, out of 1,389 business schools in India, only 132 were ranked "average or better" with the rest producing graduates that, by global standards, were not ready for employment.
Shortage
MeritTrac calculated that the schools were turning out 20,000 MBAs compared with a need for 128,000. "The growth in the number of B-schools and the number of graduates they churn out has not translated into an increased employable pool for India Inc to hire from," the study found.
A study by Hewitt, the human resources consulting and outsourcing firm, gave a more conservative estimate of the national shortage of management talent at 26 per cent.
But even this is having an impact on business costs, with junior managers, supervisors and professionals receiving pay rises last year of 15.9 per cent. This is two percentage points more than top management is receiving. "Middle management salary increases have started creeping up, too. This is largely as a result of a shortage of managerial and technical talent in India," Hewitt said.
Among those at the forefront of this battle is KV Kamath, chief executive of ICICI, the country's largest private sector bank. The group, with total staff approaching 500,000 across areas from banking to insurance, needs to expand its workforce by 25 per cent a year.
Yet, it has been suffering from industry-average attrition rates of about 21 per cent. ICICI used to recruit from the same pool of young management talent as its competitors - India's top universities and institutes of management, swallowing annual wage inflation of more than 12-15 per cent in its attempt to attract new graduates.
But after trying a variety of approaches, Kamath's human resources team approached him with a new idea - to tap the country's vast pool of talent in its secondary cities. These are capable people who for reasons such as lack of funds have not made it to the top universities or have been forced to pull out halfway through their education to support their families.
"We started getting letters from parents saying my child was a good student, we had good hopes, but could not afford to educate him. He had to work to support the family," Kamath says.
The bank designed a course by which students from these second-tier cities spend a year studying at university, at the end of which they receive a certificate, and then work for three years at the bank, eventually receiving a full MBA. From 100,000 applications, ICICI selected 1,000, who in February began their studies in Mangalore at a partner university. The programme promises to provide ICICI with a new source of talent at one-third the usual cost.
Kamath says the initiative will make ICICI "attrition-proof" by reducing staff turnover to acceptable levels. "I've seen around the world there are companies managed very well but it's difficult to find a company that has used human resources as a strategic tool. I think we are getting to that level," he says.
Whether ICICI achieves that through this course remains to be seen - India's smaller cities and hinterlands are regarded by every industry as the land of promise, but few firms have produced tangible results.
Yet, India will need to come up with these sorts of innovative human resources solutions if the country's economy is to continue growing at a breakneck pace.
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