Tata Tea: EVA in a tea cup via @tatacompanies

It was the preoccupation with the here, the now and the future that drove Homi Khusrokhan, managing director, Tata Tea, to embrace EVA. "An organisation that measures business performance purely in accounting terms will fall into the trap of taking decisions on the basis of impact of profit, a myopic way of running a business, rather than impact on wealth, a measure that forces one to think of the long-term consequences of every decision made," he says.

Setting the stage
Dissatisfied with traditional accounting measures, Mr Khusrokhan had asked Stern Stewart to do a diagnostic study on value in Tata Tea. The aim of the study was to see whether information systems focused on value and enabled good decision making, and which areas had to be addressed in order to create positive value. Also, the value chain was not sufficiently de-aggregated to show where value was being created and where it was being destroyed.

Later, Tata Tea started the measurement phase. This involved training its finance personnel in the adjustments to be made in the accounting figures. The company steering group decided on how many and which EVA centres should be created within the company.

The EVA process was made possible through a workshop on plantation economics. The workshop was designed to provide a method for treating each plantation as an asset, with the value of the discounted value of future earnings from the teas produced at that plantation evaluated at auction-equivalent prices. The method looked at plantations as units of production that are capable of generating alternative streams of revenue, depending on inputs, agronomic practices and prices. This outlook allowed people to make choices on the basis of financial outcomes rather than gut feel.

Tata Tea has started building EVA as a key performance indicator in the balanced scorecards, so that the performance-management system centres around EVA. "The minimum number of such balanced scorecards will be nine, one for each of the EVA centres," explains Mr Khusrokhan. "Since EVA is influenced by decisions made within the centre, the impact of these decisions will be tracked on the balanced scorecards for the EVA centre." The idea is to identify where the value for the stakeholder is being created. The company will test its first cut medium-term three-year business plan on this metric, and determine whether the plan delivers the required future growth value. If not, it will have to reexamine some of the strategies.

Changing for the positive
Mr Khusrokhan adds, "People generally think that only strategic decision making influences EVA. In fact, quite a few day-to-day operating decisions impact value creation and future cash flows. EVA is not just about capital budgeting or major acquisitions." EVA does not bear fruit instantly. "We must be realistic. The plan is to improve EVA year-on-year. We need to generate incremental positive change and ensure that were moving in the right direction."

Implementing EVA was not easy for Mr Khusrokhan and his team. They needed to change mindsets and beliefs that were once held dear. For instance, brands became "captive to plantations" and the choices open to the company were narrowed down. Dependencies were created between plantations and brands, and these became difficult to sever. All own-plantation teas are substitutable and have a value that can be easily ascertainable. No unit of production can be awarded a realisation that is higher than its true economic rent.

To make the right choices, one needs to de-aggregate the value-chain and determine where value is being created and where it is being destroyed. The EVA-based way of looking at plantation values at the auction-equivalent price of the teas produced, rather than the aggregated realisation that can be got out of a brand is a better and more correct way of looking at the true economics of plantations, asserts Mr Khusrokhan.

As far as human resources are concerned, training in the new methodology will be the greatest challenge. "Our finance people must think of themselves as business managers and guide the decision-making process correctly, in addition to controlling the books," says Mr Khusrokhan.

Empowering employees
By creating EVA centres in the organisation, Tata Teas top echelon is moving away from a top-down decision structure. The company wants to break problems into constituent parts. The job of the plantation EVA centre is to maximise the value of plantation assets. The nine EVA centres are supported by EVA-measurement points, which will aid the spread of the methodology. The North India plantation operations are collectively an EVA centre; individual plantations like Powai or Chubwa are EVA-measurement points.

The importance of shareholder value creation is the most important learning for the management. "Bringing a long-term perspective to decision making, and not being a slave to todays profits and tomorrows reports and results is crucial if the shareholders interests are to be served in the longer term," says Mr Khusrokhan. Improving decision making and forcing a focus on the longer term are the other important lessons that EVA can teach a management.

What the future holds
Mr Khusrokhan expects a momentous change from EVA implementation. Speaking of benefits to the Tata Group, he says, "The most significant benefit that the group can derive out of the EVA methodology is an improvement in the quality of strategic decision making within individual group companies." If correctly implemented, an EVA culture can become a way of life within the organisation.

Other articles on EVA:

	TCS: Double clicking EVA
	Tata Steel: Rolling Out EVA
	Tata Sons: Courting EVA

Tata Tea: EVA in a tea cup

Tata Tea started building EVA as a key performance indicator in the balanced scorecards, so that the performance-management system centres around EVA