Managing the Aditya ‘Value’ Birla megacorp

Subhadip Sircar

Mr Kumar Mangalam Birla, 33, even though the chairman of the Rs 27,000 crore A V Birla group behemoth, is still a archetypical representative of his generation. Like many in his age group, his index of dissatisfaction is very high. Not surprisingly then, in the last few years that he has been at the helm of the group, he has tried to implement a major transformational exercise across the group based on stretch targets and constantly pushing his managers to strive for higher standards of excellence.

But recently, even Mr Birla was pleased as punch when the group overshot his own expectations, registering a 43 per cent higher jump than projected in its value creation measure, cash value added (CVA). The CVA metric for the entire Birla group which stood at 200 in 1999-2000 jumped to 285 in 2000-01. It has been taken note of as a major achievement and Mr Birla himself admits, “ This is one subject that is very close to my heart.”

Drivers of Value Managing
With competitive pressures on the bottomline and the quest for greater creation of shareholder wealth, the A V Birla group was forced to do a rethink on how they can achieve these. Admits group company Indo Gulf Corporation managing director, Mr. Debu Bhattacharya,” The intensive competition forced us in the group to think differently. The need to create value for shareholders has become more pressing than ever before.” The other driving force, group senior executives believe, was that there was the perception that the Birla group scrips are undervalued. Group president (corporate human resources) Mr. Santrupt Misra argues,” One of the reasons for this is the inherent nature of the businesses we are in. Group companies Grasim Industries and Indian Rayon are multi-business conglomerates. So it becomes difficult to reflect their real worth. My feeling is that the average investor does not have time to track three or four businesses.”

Indeed, if these companies have been undervalued, then, there are all the more reasons for greater concern. Says Mr. Tejpavan Gandhok, country manager of Stern Stewart India, which specialises in value management consulting, “ Pro-active regulatory measures like improvements to the takeover code and other regulatory policies are making it easier for shareowners to boot out inefficient management.” As Mr Bhattacharya, who is also a member of the powerful Birla Management Corporation (BMC) board adds,” The judge moved from inside to outside.”

Embarking on ‘Project Together’
With all these external forces working on the group, the urgent need for greater creation of value and wealth was felt. The vehicle: the megacorp spanning 39 businesses recently embarked on an ambitious project “ Project Together.” Indeed, Mr. Birla in an internal document exhorts,” This initiative is our collective endeavour to have a singular focus on value-based management.” The group’s documentation on Project Together further adds, “ the idea is to make shareholder value creation an integral part of our lives—the way we think, the way we act, the way we measure and the way we reward performance.” There were key measures that are being used to measure the projected value creation that will happen when the new project will be implemented across the group.

Cash Value Added: A business creates value for its shareholders when it generates a return above the cost of capital. Profits are to be seen in relation to the costs of funds that generate them. It was felt that the group will use the technique of Cash Value Add (CVA) to create greater value. So, for example, CVA, by measuring the operating profit after deducting an adequate capital charge on assets, does exactly this. It focuses on the key aspects of value creation, asset-productivity, profitability and growth. The group zeroed in on Cash Value Added (CVA) after considering various other metrices. Mr Misra argues,” We found that CVA had a high correlation with shareholders’ return. Even if the performance is not reflected in the stock market in the short term due to market imperfections, the CVA matrix gives an indication of factors within management control— whether you are proceeding in the right direction or not.”

The group also considered other measures. “ We however felt that it was relatively less complicated and that people internally would be able to understand it better,” says Mr. Misra. “Traditional measures like ROI does not tell you what it costs to get the capital.One of the group’s problems was that it was asset-insensitive.” Mr Bhattacharya adds. However, inculcating the concept of CVA is not going to be easy across the board. “ It would be difficult for people below the management level to comprehend it,” admits Mr Misra. For exactly that purpose, the group has broken down CVA into various financial and operational variables.

One of them is the Value Driver Analysis (VDA) which is an exercise that helps to break down CVA into various financial and operational variables for each of the businesses. Once this gets off the ground, at a later stage, a separate reward linked incentive mechanism is also in the offing for the non-managerial staff.

Implementing ‘Project Together’
To implement the project, it was decided to principally have a three-pronged strategy. One, use a strong reward mechanism. Second, have a disincentive technique for under performance. Finally, hone and build up the people capabilities through a series of human resource development initiatives.

In the implementation process, the group was advised by two consultants from Boston Consulting Group (BCG). Additionally, a senior consultant from Germany who had implemented the scheme in a large chemical company assisted the A V Birla group.

From the beginning, there was commitment from the top. Mr Birla and Dr Santrupt Misra was involved closely in the project from the beginning. Another group of 12 key top managers formed the Project Together Committee. These included Dr Debu Bhattacharya, Mr B N Puranmalka, Mr D D Rathi, Mr Sushil Agarwal and Mr Sanjay Loyalka.

Elaborates Mr Misra,” The whole process from concept to rolling out involved nine months. We did a lot of modelling concepts with BCG. We decided to achieve an incremental CVA for each business.” It was planned to have a budgeting mechanism to achieve the targets. Documents were prepared on the CVA mechanism. In fact, mock exercises were also performed including constructing cost and revenue trees.

Rolling In A Reward Mechanism: One of the recommendations was to build in a long term reward mechanism. Thus it resulted in the Long Term Incentive Compensation Scheme.(LTICS)

After the initial stage of buying in all the key people to the project was completed, it was then decided to set targets. Since the largest accountability is at the top management, in the first year, the reward mechanism was limited to the directors. It was then extended to profit centre heads and functional heads of large groups covering around 250 people.

Experts believe that CVA as a macro measure makes sense only if implemented at a certain managerial level. Thus the LTIC scheme intends to cover around 300 senior managers.

Interestingly, the reward mechanism works something like this: If a person has achieved the target, then he will receive 20 per cent of the reference salary above your average compensation. The reference salary is the average salary of that level. The LTIC can extend up to 50 per cent of your reference salary. Beyond target, it is at an accelerating rate. Thus the individual can get up to 50 per cent of the reference salary.

Creation of Bonus Bank: The group has also developed the unique concept of a bonus bank. This, it is expected, will help build a long term vision and discourage short term thinking.

For example, if through the reward mechanism you earn Rs 99, the payout is Rs 33 in the first year. The remaining Rs 66 in banked with the company in two equal instalments of Rs 33 each. However, if in the next year, the individual destroys value, then the amount is debited from his account. If an individual leaves the organisation, he loses 50 per cent from his bonus bank.

Today, it is estimated that most of the major businesses that include cement, fibre, aluminium and copper have been able to achieve their targets.

Building People Capabilities: As part of Project Together, the group is also working on several human resource development initiatives.

These include people capability development, organisational structuring and innovations in compensation.

The group has also built in the Hay’s technique which will help chalk out roles and accountability for employees. The entire exercise covering 9,000 employees is expected to be completed by February 2002. These initiatives will look at several areas including even building a common internal language. Further, it will see the embarking upon of a major career planning exercise. As part of these initiatives, the group recently conducted a survey in July 2001, amongst the top 200 executives in the group.” We received 110 replies. The results are encouraging,” Mr Misra adds.

However, as Mr Gandhok of Stern Stewart points out, the quest for improving shareholder value is simply not to get the metric right. Says Gandhok, “ There should be a genuine, emphatic commitment from the top, especially the chief executive. Besides, value-based thinking should be integrated in key decision making processes, make managers think long term and act like owners by tying improvements to incentive compensation.”

Clearly, the group is now attempting to redefine it’s commitments to all its constituents: the shareholders, customers and employees. The group will now have to ensure that its value-based management initiatives will deliver long term and sustained share holder returns and continued corporate growth.