Inside the change process: What is working and What is not

In a conference room attached to his office at Bombay House, the headquarters of the Rs. 35,500-crore Tata group, chairman Ratan Tata is talking about the transformation that he is putting his group through. We are at the end of a one-hour interview, which has dragged on for two, and it's been rough "most of the questions have been negative," observes Tata who has kept his cool so far.

The question that is facing him now is about the pace of change-whether the Business Review Committees (BRCs) the Tata Sons has put in place to bring accountability to group companies and speed up change are finding the going tough. Suddenly, he counters with a question of his own: "Tell me, whose job is to bring change in these companies ? Is it that of the boards of those companies, or is it the job of the BRCs?"

Simple query, which immediately puts in relief the way Tata sees himself-as the head of a holding company (Tata Sons) with substantial shareholdings (around 26percent each) in a collection of individual companies- rather than the head of a centrally-controlled, tightly-knit group of companies like the Reliance group, the AV Birla group or RPG.

In this framework, he can neither easily sack a recalcitrant CEO (the group has about 90 companies) nor force a management to modify its business plan. To do either he has to work on the boards of those companies and convince them of the need. If the boards didn't agree, Tata would have only one option left: sell his stake and exit, as he did in ACC. The ultimate punishment for non-performance in the Tata group, in that sense, is almost biblical: banishment from the Tata empire!

Of late, as financial performance comes under pressure, Tata Sons has been using all the levers of influence it has with increasing frequency. Over the last year, two CEOs have left Manu Seth, managing director of the Rs. 1,518.8-crore Tata Chemicals and Vijay Rai, managing director of the Rs. 1,442-crore Rallis India. Their places have been quickly taken-Prasad Menon from Nagarjuna Fertilisers in Tata Chemicals and Rajeev Dubey from Tata Steel in Rallis. They are now taking the cues from Tata Sons and its Group Executive Office (GEO) to shape up operations in their companies. In Tata Power, which is now bidding for four independent power plants, an executive director, Adi Engineer, has been made managing director.

The new appointments are only part of the story; there have been other kinds of action too. The group has sold its stake in ACC to Gujarat Ambuja, and the buzz is that divestments are about to pick up speed. Says Tata Sons executive director R. Gopalakrishnan : "If you dot all the events together there is a distinct strengthening of pace this year. But are we changing fast enough? Is anyone ever is?"

Creating greater cohesion: Good. Portfolio restructuring: Average. Financial performace: Room for improvement Issues Facing The group Change structure and process

• Some company heads and boards regard the Group Executive Office (GEO) and the Business Review Committees (BRCs) as an intrusion
• Ratan Tata or the GEO doesn't have the authority to sack or change managements
• Key decisions are often a cumbersome process of negotiation between company boards and group management
  

Human Resource issues

• Too many vacancies at the top in companies and also at the group level
• Most companies lack an adequate performance appraisal and talent spotting system
• Managers in the group are perceived to lack general management expertise
  

Performance issues

• Companies focused on turnover instead of profitability
• Attitudes a huge hindrance to bringing in a culture of shareholder value creation
• Recession a problem in certain core businesses like steel and commercial vehicles

Portfolio issues

• Thirty-odd businesses have to be whittled down to seven
• Contribution of services and brand-oriented businesses has to be increased
• Where organic growth is not adequate (for instance, telecom services and software services) the group has to be more acquisition driven

An early warning of these actions came in the first quarter of this year when Tata wrote letters to the managing directors of the 13 largest group companies, setting out the agenda for each one's future. The trigger for this direct communication from the chairman's office was an assessment of BRC meetings in late 1999. The BRC exercise helped categorise companies almost equally into slow movers, movers and non-starters on various parameters. Clearly, the progress simply wasn't good enough. Says Raju Bhinge, managing director, Tata Strategic Management Services (TSMG), a group thinktank: "The communication from the GEO is getting pretty intense. A certain momentum has set in."

About time, Group companies are supposed to meet financial benchmarks like a specified return on investment and economic value added and also establish market leadership (they have to be among the first three in their own industries), but few do. Tata shares have underperformed the stock market significantly. According to ASA, a stock market database, the BSE Sensex appreciated 46percent between January 1996 and December 2000, while the Tata group index appreciated just 7percent in the same period. Says Pradip Shah, chairman of IndAsia Fund Advisors: "Regrettably, the stock markets are not giving the Tata name the premium they used to."

Group profit margins have dropped from about 12percent in 1995-96-the high-point for the group-to 8percent, and return on invested capital from about 18percent to 11percent. It could be argued that most business houses focused on traditional industries have suffered equally in the same period. Says Amit Chandra, executive vice-president, DSP Merrill Lynch: "They are facing the same challenges that the rest of manufacturing India is." But that doesn't reduce internal pressures on performance. "Performance is our biggest worry," admits Ishaat Hussain, finance director, Tata Sons.

That is not the only worry, though. Businessworld identified four key issues that the group will have to tackle as it steps up the pace of change-the governance structure that has been put in place to catalyse the transformation, the performance of individual companies, management of human resources, an the shaping of the business portfolio.

History of Change
Ratan Tata's first assignment at grou level was in 1983-when J.R.D. Tata was very much around. It was to prepare a blueprint for the group's restructuring. Written mainly at his mother, Soonoo Tata's hospital beside, the charter talked of much the same things: of cohesion, of having 'business policy groups' such as engineering, International business, hitech industries, consumer products, metals and services. Save for the creation of Tata Industries as the Investment arm of the group for new businesses, nothing really got done. In 1990, when liberalisation seemed Imminent, the group took a fresh look at where it should be. Entry into some ares such as telecom was decided on at the time.

Then in 1997, It hired McKinsey and, this time had a relook at everything. That's when issues of governance and business processes became apparent. The group decided to set up a central governing body, and draw up a set of criteria to decide which business would stay within its fold. A format for business review was also decided on. That was the birth of the Group Executive Office and the Business Review Committees, and it has been heat and grind ever since.

The Change Structure
Says an outsider associated with the group: "I don't think Ratan foresaw the amount of time the change structure would take to settle down. And the speed with which the environment is changing, he just doesn't have that luxury of time."

Two years ago, when Tata began re-inventing the group, a new governance structure was built around the GEO and BRCs. The GEO has four members now, including Tata himself, executive directors R. Gopalakrishnan and Ishaat Hussain, and director Kishore Chaukar-plus empty seats for another three. There are 13 BRCs, one for each of the leading companies, which together constitute 95percent of group profit and 79percent of turnover. Each BRC is headed by a member of the GEO, and includes the CEO and some board members of the company concerned.
In a sense, the BRCs are curious creatures, born out of the peculiar way the Tata group is structured. They have no statutory authority over the companies they oversee but, in effect, they are doing the job of the boards. But since the boards aren't effective and the Tatas cannot easily reconstitute them, the BRC is the only effective institutional mechanism they have to influence group companies. The BRC's role, as it is officially defined, is to 'question and suggest". Says Bhinge: "the BRC agenda is to make companies take cognisance of issues such as where growth is going to come from and what the competitive threats are."

Since the authority of the BRCs is nebulous, individual companies and their CEOs react to them differently. Sources indicate Tata Chemicals and Rallis refused to take cognisance of the BRCs and their CEOs often came to the meetings unprepared. Since one CEO was Darbari Seth's son and another, his one-time executive assistant, perhaps this example has something to do with history. (Darbari Seth's was one of the most influential satraps in the Tata empire before Ratan Tata became the chairman of Tata Sons.) But often, cooperation has been awkward for no reason, except that the CEOs running businesses for years resented a new command structure being foisted on them.

In theory, the relationship between the GEO, the BRCs and the companies is meant to be cooperative. In practice, it is seen by some CEOs as a group of outsiders trying to tell them how to think about strategic and competitive issues concerning their business. All members of the GEO, with the exceptions of Tata and Hussain, were brought in from outside the group. Confirms a Tata insider associated with the BRC meetings: "Acceptance of the GEO and BRCs was an issue for the CEOs."

An example is watch company Titan's foray into jewellery with its brand Tanishq. The GEO has been questioning the rationale behind this business decision since it has been pulling down Titan's return on capital. Titan refused to speak to BW, but is clearly pumping funds into Tanishq. Arun Maira, managing director, Boston Consulting Group, thinks the issue is ownership of change. "In any large organisation, if you get outsiders to run the change process, structurally it will make it more difficult because the heads of business will ask, how can you possibly know more about my business than I do? And if this works, who is going to get the credit? Especially if those who get the credit for the change will get more power and rise further in the organisation. It's a classic structural trap."

But there are examples of smooth cooperation as well. Says R. K. Krishna Kumar, managing director of Indian Hotels: "It was the BRC mandate that we associate the Tata name with the best properties and we have respected that." Adds. J. J. Irani, managing director, Tata Steel: "The group's will would prevail through good manners earlier. Now it can use its teeth also." There are many examples where the BRC process helped companies arrive at critical decisions quickly. For instance, Tata Engineering was grilled about its plans to cut costs (commercial vehicles market has been experiencing a slump) and a decision was taken to spin off its axle and gear-box division. In 1998, when the steel industry was at a low point and cash-flow for Tata Steel was a problem, the BRC arrived at a decision to get rid of certain investments-like the cement plant to Lafarge-to keep liquidity going. The small car project was questioned on its future product development plans and a decision was reached to get into a strategic alliance.

In all, four BRC meetings have been conducted for all 13 companies so far. Till the third meeting, Ratan Tata was chairing all 13 presentations. But due to time constraints, the companies are now divided between the two executive directors, Gopalakrishnan and Hussain. Gopalakrishnan heads the BRCs for Rallis, Tata Chemicals, Tata Engineering and TEC. And Hussain heads the BRCs for Voltas, Forbes Gokak, Tata Consultancy Services, Tata Steel and Tata International. Tata himself is the BRC chairman of Tata Tea and Indian Hotels, both headed by Krishna Kumar.

There are supposed to be four BRC meetings in a year, with an agenda attached. The one in April focuses on performance related to the past year; the July one discusses a draft five-year plan: the October meeting finalises the five-year plan and makes a preliminary one-year plan and the January meeting finalises the one-year plan. It has taken sometime for these meetings to get to the desired level of depth, though. Says a Tata manager. "In the first meeting the strategic plans were an extrapolation of their present situation. There were serious gaps in terms of evidence of strategic thinking. It was obvious that the companies needed help."
Should Tata and the GEO be pushing harder for change in resisting companies? Easy to answer, tough to execute. Sources indicate that the removal of Manu Sheth and Vijay Rai required extensive mobilisation of support and networking on behalf of Tata and Gopalakrishnan (the BRC chairman) with the two boards. Hussain is still to make such radical changes in the companies where he heads the BRC. One thing for sure: if the group is to move up the performance scale, there is a lot more questioning and pushing that the key shareholder, Ratan Tata, has to do.
Performance Issues Says a director on the board of one of the BRC companies: "Performance is the point of change. It's suicidal to drag our feet here."

There's one statistic that reveals the stunning gap between expectations and performance in the Tata group. In 1995-96, eight of the 13 BRC companies had returned on invested capital that was higher than their weighted average cost of capital. By 1999, that number had come down to five. The attitude of company managements towards performance issues was "indifferent and inconsistent," said an exasperated Tata in a presentation he made at the Annual General Management Meeting (AGMM) early this year.

(Between February and March every year, Tata and certain GEO members travel through six cities, addressing 700 managers on issues of common concern.) Tata identified the reasons for this in this manager: inadequate target setting, a tendency to rationalise shortfalls, poor measurement against targets and undue importance to turnover.

At the company level, the circumstances that they find themselves in are diverse, and so are the levels of management responsiveness (see page 44). Tata Steel, for example, has been a high performer in many ways. It has been consistently slashing costs and now hopes to become the lowest-price producer of steel in the world by 2001. Right now, its cost of production is $188 per tonne, slightly higher than that of Korean company POSCO.

Tata Engineering is reeling from the recession in the commercial vehicles market, and the less-than-expected sales of Indica- the hope was that the company would sell 150,000 cars a year by 2000, but the current figure is 85,000. But in the midst of the gloom, Tata Engineering has been notching up significant successes cutting costs-last year, they saved Rs. 200 crore from expenses. When Ravi Kant took over as the executive director of commerical vehicles a year ago and wanted to hive off the axle and gear-box plants, he had some serious convincing to do. The logic: raising the return on investment. Says Kant: "A year ago, this kind of appreciation of finance was not there even at the top levels."

In the first half of this year, Tata Engineering made a loss of Rs. 142 crore on a turnover of Rs. 3,749.91 crore. The passenger car unit (including the multi-utility vehicles) was spun off into a separate business in March and has just achieved cash breakeven. The Rs. 1,700-crore project is now about 10,000 cars away from the break-even point. Analysts have been quick to describe the small car project a burden, but Rajiv Dube, general manager, Tata Engineering, disagrees: "We have a 9percent market share in the passenger car segment, launched five products in seven years. All our products are strong brands and are amongst the top three in their segments. I'd say we meet the criteria of being a Tata company."

Under a new CEO, Rallis is rationalising its agrochemical product range to focus on products with a higher margin. Its key concern is reducing debt which has touched Rs. 335.92 crore. Tata Chem. is pulling out of senseless diversifications like Shudh detergent and cement, and is now cutting costs to become the world's lowest-cost producer of soda ash in three years. Right now, it is struggling to keep its head above water as the Indian market is swamped by cheap Chinese imports.
TCS is struggling with the mammoth task of taking an organisation of 14,000 employees up the value chain. Moving from legacy systems to e-business solutions is the only way to increase shareholder value. Forbes Gokak might well be a candidate for sell-off after its clean-up act. It has investments of Rs. 74 crore stuck in associate and group companies and a small step was taken by the divestment of its stake in Goodlass Nerolac. Voltas has been selling assets (chemical plant and white goods business) and is re-looking at getting back into the brand game with a new line of ACs.

Clearly, many of these companies have a long way to go before they even come close to meeting any of the Tata benchmarks for staying in the group. But the complexity of the task and the fact that the group can't-or won't-push as hard as it would like to, has interfered with progress. Even in a company like Tata Engineering, which Tata himself chairs, it has been a tough task pushing the concept of return on investment to the senior staff.

Human Resource Issues
Admits Prasad Menon, managing director, Tata Chemicals: "Retaining and hiring people is a worrisome priority for us."

At this year's AGMM the multimedia presentation had a video clip of managers from various Tata companies talking about change. Person after person stated that the group needed to be a far more energetic in implementing change, far more decisive and much more reactive while grabbing new business opportunities. Unfortunately, a lot of other managers have communicated this message with their feet. Although exact numbers are unavailable, sources indicate that the group has been losing managers at the junior and middle management level. Top management is worried.
Says one ex-employee of Tata Steel: "It's a great place to work because there is no other organisation in this country that has the potential to offer you that breadth of work. But it's also a frustrating place to work because everything is moving so slowly. I just got bored." It's an unfortunate situation to be in since the Tatas are expanding into many new businesses-airlines, telecommunications, passenger cars-which require immense managerial depth.

The problem starts right at the top. There are at least three vacancies in the GEO that are yet to be filled, including the one created by the departure of executive director Manav Bose who used to head the HR function. In Tata Steel, J. J. Irani is due to retire in July next year, but is keeping his cards close to his chest about who will eventually succeed him. The lack of high-level general management talent is visible across the board. Says a former Tata employee: "Managers here are usually functional experts. They are not trained to have general management skills."

Gradually, the group is trying out solutions to these problems. One is revamping the training programmes at the Pune-based Tata Management Training Centre. Another initiative is to identify an 'A team' and create a career track for them. Based on a loose set of parameters, the larger companies in the group were asked to identify potentially good managers below the age of 50. A rough cut of 75 was thrown up. Says Gopalakrishnan: "We threw in our net and came up with a catch. And now are seeing if the net can be redesigned to be more effective."

Some personnel moves have been made on the basis of this exercise. Jamshed Daboo, an ex-Titan man, has now become chief operating officer, leisure hotels, Indian Hotels. G. Madhavan, earlier with Tata Industries is now in-charge, Tata Internet Services.

However, there's Pandora's box waiting to be opened at the group level. One of Bose's contentions was that the group should restructure its pay scales and structures and introduce employee stock options and performance bonuses even in Old Economy sectors like steel and power. Tata Steel has taken this suggestion on board, but progress elsewhere is stunted. Tata Steel's cold rolling mill, for example, has none of the legacy systems of the older company. The hiring, the reward system and the hierarchies are totally different. The 450 people who run the mill- all of them are computer-literate-have a constant and a variable component in their salary. The constant component is marginally lower than that of an average Tata Steel worker, but the variable factor is enough to compensate him about 1.2 times higher. Could other companies move in the same direction? They could, but Tata argues that companies need decent evaluation systems before putting incentive plans in place.

Portfolio Review
"We will acquire businesses where we can," says Kishore Chaukar, managing director, Tata Industries.

Exiting business is where the group has made the most progress in the last-two years, although Tata disagrees. Says Tata: "In my view it has not made sufficient progress in cleaning out the portfolio, it has not made the kind of progress we would like to make... you will see a lot more happen. "In relative terms, he's probably right-30-odd businesses need to be cut down to seven core areas. But in absolute terms, the most perceptible progress is here.

Some of the intra-group transfers include transferring Tata Steel's power mill to TEC; the agrochemicals business from Voltas to Rallis; and the cold rolling mill from Tata SSL to Tata Steel. Businesses have been exited with the same quiet efficiency: pharmaceuticals (Merind), Cosmetics (Lakme), cement (ACC), and paints (Goodlass Nerolac). Similarly, the Tatas have quit joint ventures: Titan Timex (watches), Tata Lucent (communications equipment) and Tata Timken (bearings).
With the clean-up act in control, the challenge now lies in cracking the new businesses. However, the Tatas are not banking on organic growth only. Says Chaukar. "I think we are very open to acquisitions. That's pretty clear by our strategy in the telecom services business." TCS is prowling for acquisitions in the e-commerce area-as is Indian Hotels in the hotel industry. The point of the Tetley acquisition this year was to use Tata Tea as a sourcing point for the global tea company and introduce Tetley products in India. That acquisition gave Tata Tea scale and brand.

The overall agenda? Says Irani: "The group is far too asset-based. We need to increase our turnover in the services business." The group sales target for 2002-03 is Rs. 62,000 crore, up from Rs. 35,500 crore in 1998-99. About Rs. 4,800-crore turnover and Rs. 600-crore PAT is expected to come from the services business (Indian Hotels, Tata Finance, Tata International) by financial year 2003. Communications and Tata Infotech) will add another Rs. 8,600 crore in sales and Rs. 1,300 crore in net profits by 2002-03.

The backbone for this business will be provided by Tata Power, which is working with BCG to execute its broadband plans. The strategy is to use its right of way in Mumbai to Place 400 kms of fibre at in investment of Rs. 300 crore. Subsequently, the plan is to trade in the fibre. Says Adi Engineer, managing director, TEC: " We are addressing the communications business as a group." For instance, running commodity exchanges, in areas like steel, hospitality, auto and retail, is a revenue opportunity. Tata Engineering's e-business initiative is being done by Tata Technologies.

K. Krishnamurthy, chairman of JM Morgan Stanley Dean Witter, the investment bank associated with the Tatas for several years, says there's reason why change at the Tatas looks slow: "The group is so large and has so many issues to sort out that any progress looks faint against this backdrop. I think they are doing a good job under the circumstances." Maybe they are-but there is just so much more to do. Says Gopalakrishnan when faced with the charge that things could move faster: "It's not the revolutionary form of change with all the bells and whistles. But deep down we are getting where we want to go." Assuredly they are - but the questions is, how long will it take them to get there?

How They have Fared
1. Tata Steel
Level of change: High
Change of management: Dr. J. J. Irani became MD in 1992 and Ratan Tata took over as chairman in 1993.

One of the stars of the group, Tata Steel expects to be the world's lowest-cost steel producer by next year. The only company in the group to have won the JRD Quality award, it is in the process of attaching a value to each competency in the organisation. With the modernizations plan complete and the cold rolling mill up, the Company has the breathing space - and the cash flows - to think ahead. It plans to push the chrome alloy business and look for new investment opportunities. Irani is facing some criticism for inadequate succession planning (he retires in June 2001).

2. Tata Engineering
Level of change: High
Change of management: Ratan Tata became chairman in 1988. Ravi Kant became exec. director of the commercial vehicles business in 1999

Wrestling with a recession as well as the demands of the small car project, the Company is passing through its toughest patch. The small car project has just reached cash break but the issue of future direction is still unresolved. The Tatas deny any plan to dilute equity though they are looking at alliances to leverage the small car platform. The CV business is focusing on cutting costs. With its long-term competitive position on a decent footing (entry barriers are high), the fate of the small car project will decide the Company's return to profitability.

3. Tata Power
Level of change: Low
Change of management: Ratan Tata took over as chairman in 1988 and Adi Engineer became MD in August 2000

The three power companies - which together make TEC the country's largest private power producer-have just been merged last month. The Company went without a CEO for six years till Adi Engineer, one of the four executive directors, was promoted to managing director this year. Since then, the Company has turned very proactive. It is negotiating the acquisition of four independent power plants. It is also competing with Reliance for a 74percent stake in Power Grid's national backbone plan. Plans to spend Rs. 3 billion in the next few months to convert its 400 km network across Mumbai into a broadband one.

4. Indian Hotels
Level of change: High Change of management : Krishna Kumar took over as MD in 1997

ONE of the few companies that started on its rejuvenation drive early on, right after Ajit Kerkar's ouster. The group had a clear mandate for it: associate the Tata name with premium hotels and get out of other properties. The Company has been gradually divesting property - like the St James Court in London. It is also one of he few companies in the group which is actively executing its global ambitions. The bid for the Caryle hotel in New York is to be decided any day now.

5. Rallis
Level of change: Low
Change of management: Rajeev Dubey took over as MD in 2000

Rajeev Dubey, a TAS man, took Vijay Rai's place just two months ago. The Company has a tough restructuring ahead. Its first priority is to get rid of its Rs. 335.92-crore debt, reduce working capital requirements and the interest burden. But its real challenge is future direction. How will it continue to compete?
Rallis is rationalising its pesticide product range to focus on more profitable products. Says Dubey: "We are taking a hard look at long-term strategy and focusing more on profits instead of just turnover." Its second priority is to look at strategic alliances in the business. Globally, the business of agrochemicals is becoming increasingly RandD-led and has been driving MandAs. Rallis will need strategic alliance inputs to survive the onslaught of foreign competition like Monsanto and Bayer.

6. Tata Chemicals
Level of change:Low
Change of management:Ratan Tata became chairman in 1994 and Prasad Menon took over as MD in 2000

PRASAD Menon, the two-month-old MD has a single-point agenda for Tata Chem. make it the lowest-cost producer of soda ash in the world. By next year, the market will see an overcapacity of 1 lakh tonnes after Nirma's soda ash production is commissioned. That makes cost competitiveness critical. As far as the fertiliser business is concerned, all depends on future government policy. Menon has taken some key decisions - like selling the detergent brand (Shudh) and the cement plant.

7. Forbes Gokak
Level of change:Low
Change of management: N.A.

AMINI-group within a company, this is arguably one of the most directionless of the BRC companies. The Company has three main businesses - textiles, shipping and engineering. The company hasn't been able to achieve leadership in even a single one and profitability has been slipping. Needs to restructure its financial investments and change business focus to improve shareholder value. It has investments worth some Rs. 740 million in associate and group companies. The major investments are in Forbes Shipping and Eureka Forbes. While the Eureka Forbes business is expected to stay as branded businesses is a thrust area for the group, it is unclear how shipping and textiles fit in. Says Ishaat Hussain, executive director, Tata Sons: "They are still wrestling with the question of where they want to be."

8. Voltas
Level of change:High
Change of management : N.D. Khurody took over as MD in April 1997

Voltas was one of the first to start off on the restructuring tack but still hasn't been able to decide on future direction. Has revamped operations to concentrate on core strengths-air-conditioning, refrigeration and engineering. Has hived off non-core divisions like chemicals and white goods. To regain its old glory, it has launched new products and beefed up its dealer network from 300 to 500. The Company is re-evaluating its present strategy of supplying refrigerators only to other players, Adspends - which went up from Rs. 4 crore to Rs. 10 crore in 2000 - indicate that it wants to be back in the branded business.

9. TCS
Level of change:
Medium Change of management: N.A.

With 14,000 employees on its rolls, the sixth-fastest growing IT Consultancy in the world admits it can't seem to find the right kind of people to propel growth to levels it would like. But it also points out that the problem is endemic to the industry. Detractors say that TCS still hasn't shaken off the services mindset. They hold that TCS didn't quite move up the IT value chain. Recent noises emanating from the Company indicate that it is betting on e-business and products. More pertinently, that it is not averse to inorganic growth.

10. Tata Tea
Level of change:
Medium Change of management: N.A.

INDIA"S largest tea producer was in the news last year for its $271-million acquisition of Tetly. It was the first major overseas move for the Tatas, although some feel the price paid was too high. A large part of the Company's efforts are focussed on integrating the two companies. The Tetly acquisition gives the Tatas international brands. Also, Tetley plans to use Tata Tea as a sourcing point. Tata Tea's polyester pouch tea has wrested market share at the expense of Hindustan Lever. The long term agenda? Says Krishna Kumar vice-chairman of Tata Tea: "We want to do to Unilever in the global market, what we've done to them in the "Indian Market."

11. Tata Infotech
Level Of Change:
Low Change of management: N.A.

AGAIN a sundry mix of businesses - hardware sales, training, software consulting. A question mark hangs over its future direction. In a booming industry, the Company reported a fall in revenues. Operating margins have plummeted from 14.5percent in the previous financial year to 4.5percent, and PAT has fallen 74percent. The only business that did well was systems integration.

12. Titan Industries
Level of change:
Medium Change of management: N.A.

TANISHQ seems to be the major source of friction between company management and the Tata group. It was a languishing brand (five years of losses), but has now been repositioned and is expected to make profits by next year. On the watches front, it is clear that reducing assets is the only way to increase shareholder value and, therefore, an outsourcing model is being tried out. Its own contribution will be in the form of branding, design and distribution. The challenge: handling the unions as outsourcing increases.

13. Tata International
Level of change : Low
Change of management : N.A.

IT's trying two levels of change. First, the Company's own re-direction. Second, Tata International's role in the group. Here the arrangement has always been ad-hoc but now it is trying to see if it can leverage its international contacts to market Tata products. In the domestic market, it plans to launch leather accessories. The big question: why is an export house getting into retailling?

Cover Story Interview
RATAN Naval Tata has had more than his fair share of challenges during his 10 years as Tata Sons chairman. He's had to fight with recalcitrant chieftains of his myriad businesses, bring in a degree of coherence to his sprawling but disjointed group, and above all, prove his mettle against the ghost of J.R.D Tata. Currently, Ratan Tata is tacking his biggest challenge yet - making the Tata group a more focused and better perfoming entity. He spent two hours with BW Editor Tony Joseph and Assistant Editor Radhika Dhawan to discuss how his latest battle is going.

In the Tata group, one often hears the phrase 'evolutionary change, rather than revolutionary change.' Do groups have the luxury to change in this manner, particularly when the environment around them is changing at such a rapid pace?
We in the Group Executive Office (GEO) coined this term evolutionary change because in some ways we suffer from this tremendous dilemma brought on us by our companies. Change is seen to be needed, and fast, so long as it does not affect me. We want to see change but if you suddenly tell me that I am the Company that has to go, or has to be cut in half, or three of my businesses have to be hived off, then all of a sudden, the very person who made the noise about change is now saying, 'you don't have to do this.'

And we as the GEO have faced that kind of resistance coupled with many cries of demoralisation and so on. And so we have been trying to work with managements and make them fall in line with the focus we have, and assuring them that they will not wake up one morning and find that they are not a part of this group.
Before you start this exercise you need to go through the creation of a 'comfort zone', of letting everybody feel that this 100-years-plus group hasn't decided from the next day to undertake a change in which 10 companies are suddenly taken out. Those of you who have been around know the trauma that we went through when we rid ourselves of Tomco.

There is one question that your competitors, and people who have been forced to leave the group, ask. Tell me one thing that Ratan Tata has achieved as chairman. What would be your answer to them?
I would never seek to answer what achievements I've accomplished. There are too many rivals and critics that would have something to say, so I would never be the one to defend.

Let me put this differently. You've been chairman of the group for almost 10 years, What, in your view, are the most important changes that you have brought about?
In the last 10 years the group has moved to greater focus, to some of the New Economy areas, which it did not have before. I has increased its activities in IT, telecom, the car business - which I consider to be a great achievement, though my critics might think differently.

The other thing that has been an uphill ask - and probably not as visible from the outside as it is from the inside - is the fact that this group is not a group. Earlier it moved in different directions and a great deal of effort has been made to create some commonality and uniformity in its thinking so that the group can stand together more than it has in the past, while at the same time protecting the autonomy of the Companies.

Two years ago, a new structure, was put in place to facilitate the change process with the creation of the GEO and Business Review Committees (BRCs). In the course of researching this story, the feeling we got is that there has been a certain degree of resistance and awkwardness in accepting the structure. Has this whole structure worked according to your expectations, or do you propose any more changes?
No, I think it has worked. Many companies and CEOs have commented that this exercise has forced them to look at their long-term strategies. Many of them didn't have long-term strategies. But the most important issue that we really have to grapple with is what the Company is going to do in the future, how globally competitive it really is, or in the view of the GEO, should it be a part of this group, or merged with another company or should it be a candidate for sale.

Doesn't this raise the question of ownership of change? Here you have a situation of a group of outsiders telling a company that they should do this or do that. Why should they do it?
I will tell you why. What is the GEO? The GEO is just the representative of the major shareholders, so, it is not a bunch of outsiders. The GEO is, in fact, a part and parcel of the executive committees of those boards. It's just that the GEOs have often never had anybody to question them. So yes, in some cases there will be resistance. And you will probably find the resistance more from those who haven't been doing well.

If you take an overall look, the group has made fair progress in two areas: In acquiring greater cohesion and in reshuffling its business portfolio.
In my view, it has not made sufficient progress in cleaning out our portfolio. It has not made the kind of progress we would like to make. Initially, like I said, this would take a lot of time and then you will see a lot more happen.

But from the point of view of the shareholders, they are looking for returns, and if the group isn't delivering them then what's the point of this exercise?
That's quite true but it's not fair to say, fr instance, that India is where it is because of the reforms or that the shareholder value is because of the GEO or restructuring. If you just take a company like Telco, for instance - and I am not denying that Telco is going through very difficult times - and if you look at who the major sellers of huge chunks of shares are, you will be surprised to find that it is the UTI, and that could do nothing but drop Telco's price.

I thought it was the FIIs who were selling the shares, but it was not -it was the UTI. I was shocked and surprised. I can understand that somebody would want to shift their portfolio by a gradual changeover and invest in IT, but if you unload a huge amount at one single point of time then I don't understand it because it would hurt them too. So, all I am trying to say is that not all loss of shareholder value is caused by open market perception.

If you look at indicators like return on invested capital or profit margins, there has been a steep decline since 1995-96, which is seen as the best year for the group.
I am not going to defend this but if you look at the percentage drop, have you looked at the drop in the stocks in the IT area over the last year? You will find that it has been more than in the brick-and-mortar stocks.

Basic industries have gone through a horrible, horrible decline. Tata Steel has been an exception but other companies have been affected. Having said that, it has to be conceded that not everything is an external issue, there may well be internal issues too, but certainly it has not been that we have been declining in a market that's growing.

Is it that companies are not delivering because they are not necessarily doing what the group wants them to do? For instance, Titan. It has gone into the jewellery business but, we understand, the group did not want that. Or take Tata Chemicals: should the group have waited so long to replace the MD?
It's always easy to make comments in hindsight. It is easy to react in a knee-jerk manner but it is perhaps best that you make changes when you have solutions. Very often we have a situation where we have a dearth of people at the top. There has been resistance to inducting people from outside because the group has tended not to do that in the past. So, when one has a situation where a company is doing badly, you have the responsibility of ensuring that what you do will contribute to a turnaround and not take it from the frying pan to the fire. And when you see you don't succeed, you make a change.

In hindsight, you can say this should have been six months before or a year before and it is easy to do that when you are not carrying that responsibility. When you are, you need to ensure that your decision is not wrong. I am not referring to Tata Chemicals per se but regrettably when you are doing some restructuring, there are always some elements among the 'targeted groups' who say that you are not doing the right thing.

But does it make it more difficult when you have outsiders trying to induce change?
You referred to the case of Titan going into the jewellery business and the GEO's -you called them outsiders - contrary view on this. Ideally, where is this kind of issue to be discussed and debated? Should the BRCs be raising this issue? It's the board that should raise this question because that is where the requisite authority is that is where the CEO takes his directions from. Today, one of the weaknesses of the whole structure is that the boards of the companies have to be concerned with the businesses of their companies more than they have been in the past. If anything, the BRC is more a catalyst to bring to the surface what they think is necessary. The BRC has not been passing any orders.

My question was also in the context of time. We are waiting for a process to go through when in many cases it is clear there is a management failure.
I don't mean to be argumentative but one of the questions that has come up in the context of the structure that the Tata have is: who really has the mandate to change the management? There is only one company that actually has put it on paper that it is the Tatas who have the right to appoint the chairman or the MD. In all the other companies, it is a kind of a vague area.

Is it something that you have asked for?
No, but it is something that should be there. Today, in fairness, the major shareholder - if it were to be transparent and pass the test of governance - can only do this through the board where it has its representative. There is not right to remove or the right to appoint - it is not written anywhere. Tomorrow, if someone chooses to question the Tatas removing X or Y from a company that bears its name but where it has a 20percent stake and maybe two representatives on the board, someone may easily question what right the Tatas have to do that just as someone may question why it didn't try to do that earlier. All I am trying to say is that from the outside, it is easy to take that view but there are some real problems inside which we have to resolve.

Under the JRD arrangement, each company was run by satraps but there was also a strong element of entrepreneurship. You have removed many of these satraps but you haven't put in strong enough incentives in those companies for people to regard them as their companies from the entrepreneurial point of view-say, like stock options.
What have I removed that has taken away the strong entrepreneurial spirit?

You have essentially told them these companies are not their own.
Tata : But they were not their companies even earlier.

Yes, but they were allowed to behave like they were.
You talk of incentives. In fact, most of our companies have gone to their shareholders with resolutions for stock options. Recently, there has been a view in the group, which warrants attention and which has slowed down the stock options process. This is to look at EVA (economic value added)-related incentives. Most of our companies will probably have one or the other before this (financial) year is out.

Is this an issue: that while systems and processes are embedded to ensure that the group companies conduct their business ethically and professionally, there is a need to impart more of an entrepreneurial spirit?
No. Again, I hate to say this, but this is the view from the outside. There are very fundamental lapses in companies that don't even have good employee evaluation systems in place. The stock options issue may be very important with a few employees, but down the rank and file the more important issue is if a company doesn't have good evaluation systems to give merit where it's due and remove deadwood. If I could say that there's an area where the GEO has not acted fast enough, it's really in the direction of revamping HR practices to the level where they should be.

I think in fairness, stock options look fine, and they are fine if you want them as the means to attract somebody to a company, but finally you ought to be able to give options to people on the basis of performance. That means that you have selected that performance in a truly objective manner.

Tisco is generally regarded as a star performer. What distinguishes it?
I think Tisco has done an excellent job, and much of the credit should go to Dr. Irani and his top team which is driving change in a very committed manner. Many of the other companies haven't shared that commitment. One of the things that Tisco has done is to take very seriously the Tata Business Excellence Model, which developed out of the GEO exercise. Also, Tata Steel has really gone after reducing its process costs and, of course, being in a commodity business it has been able to maximize production and drop prices through the bad time-you can't do that in a product company like Telco. Now that the market for commodities are building back, it has been able to capitalise on those gains. But I think the main driver in Tisco has been the tremendous commitment that the top team had.

To take another issue, what business reasons can there be not to take TCS public?
There may be tax issues. I don't know if you are aware that if you make capital gains profit on 10percent of TCS, the tax that you will have to pay will be calculated on the basis of the capital gains on the entire equity of TCS. If I create a subsidiary, then the capital gains cascades to the whole company even though you have not actually gained value on the whole company. If you look at that, then it, in effect, wipes out all the gains. There are no issues on not taking TCS public but equally you ought not to take it public because that's the way the wind is blowing.

Let met put this differently, even if you find this somewhat irritating. Would you say that the Tata Sons chairman will have the same power in holding the group together if TCS were not in it?
It is irritating to me because what power does TCS bring that is holding the group together? What money does TCS bring that is helping hold the group together? Yes, TCS is providing a cash flow which many of the companies are unable to provide but what power does it provide? TCS has always been there, it is something that was created by Tata Sons; it isn't something that somebody gave us by accident. We grew the business so why are we being accused of holding on to it for the sake of power? When the management agency system lapsed, we created this consultancy service, we grew this business to be the largest software consultancy in the land.
The hold that the chairman of Tata Sons has on Tata companies comes from its holdings in them. You may say that the holdings partly came from TCS earnings but TCS is a part of Tata Sons; it was created in the 60s but it has come into prominence now because it has become a fashionable issue. Would you have told us, say in the 70s, to take it public? It has become a big thing today, which is fine, but we also have to think whether 10percent of TCS is too much for the Indian market. So, there are a host of reasons which we have to contend with but the reason you ascribe for us not taking it public is not fair. I think the issue is: do we feel that we are standing in the way of TCS' growth? The only issue that is valid is that if TCS is not a company in its own right we have to find a way providing those employee incentives that it would otherwise have and that's something we are addressing seriously. And in all fairness, this is an issue for the people who are there compared to those who are working for companies with stock options.