Case Study: The Case Of Hubs And Spokes

CASE STUDY
The Case Of Hubs And Spokes

By R Chandrasekhar

The Case Of Hubs And Spokes Synopsis: There are wheels within wheels. And hubs within groups. Or so thought G. Ramachandran, the retired CEO of a public sector company. So, when Vivek Shivdasani, the patriarch of one of the country's largest family groups, asked him for help in restructuring his empire of diverse businesses, and making working in the group attractive for professional managers, Ramachandran immediately thought of the hub. Or hubs-each incorporating businesses that were, in one way or another, related-and a corporate centre, which he ended up heading. Which came as a surprise to him. Or did it? Nagarjuna Group's M. Siddiqui, Tata Group's M. Bose, Jindal Vijayanagar's S.K. Gupta, and Ernst & Young's S. Parikh debate the future of the SD Group, its new structure-and Ramachandran. A BT Case Study.

The tender coconut water tasted surprisingly sweet. As he took another sip from the Wedgwood crystal glass, watching the sun disappear over the moderately-polluted skyscape, G. 'Ram' Ramachandran, 62, idly wondered how much it was going to cost him at The Mumbai Princeton. Rs 150? Rs 250? Whatever it was, he was quite sure it wouldn't really pinch his host. Not when he had been nominated to The Daily Noose Global Richie Rich List for the tenth time in as many years.

For the moment, though, Vivek Shivdasani still hadn't surfaced. Ominous. In the years that he had known him, Ram couldn't remember a single occasion when his host had been late for a meeting by even 5 minutes. The Chairman of the SD Group Worldwide was a stickler for schedules-a trait that he remembered about him since they had first met in 1987, when Ram himself had just taken over as the Managing Director of IRPL, India's largest refinery in the public sector. That was when Shivdasani, with the confidence that comes with success, had offered him the CEO-ship of a company he had just taken over in India. Ram had, of course, refused.

Few people had heard about this Group then. Vivek, 59-and his brothers, Vimal, 54, Kamal, 52, and Amal, 49-were known only in the Tamil film industry as they had quietly financed a series of blockbusters, like Natpukaage, Nattu Kaavalan, and Ulle Velliye. Even then, The Daily Noose had estimated that the Shivdasanis had a net worth of almost Ł45 billion. Most of that had come from their mysterious trading operations in the Far East. After a sudden coup in the country they were using as their operating-base, the brothers decided to move their wealth to safer havens. While Vivek and Vimal had settled in Paris, Kamal had moved to Zurich, and Amal, had been deputed to head the group's fledgling operation in India.

In January, 1987, the Shivdasani family had made its first big home move. As part of its privatisation programme, the Italian government had decided to divest its stake in a number of commercial enterprises. Among the many global investors who lined up were the Shivdasanis, who managed to pick up a 51 per cent stake in the Indian subsidiary of Costa, the Italian truck-maker. This gave them immediate control over Vishal Costa, India's second-largest manufacturer of commercial vehicles, with a marketshare of 25 per cent. It was a month later that Ram had received his first call from the eldest Shivdasani...

''Excuse me, Sir.'' Ram's reverie were interrupted by a bell-boy, who had suddenly materialised by his side. ''Mr Ramachandran?'' He nodded, and was handed a cordless telephone. It was Shivdasani, calling on his mobile. ''I am terribly sorry. My meeting at The Maya stretched on far longer than I had imagined. And I'm now stuck in an awful traffic-jam. I hate to say this, but my driver says it will take us a couple of hours to reach The Princeton...''

Before Ram could reply, Shivdasani had already worked out a solution: ''Why don't you go back home? If it's okay with you, I'll catch you there for about an hour.''

Actually, Ram preferred not to bring his business associates home. Especially on Saturdays. However, this week-end, his wife, Lalitha, and the two kids were away at her sister's place at Chinchwad in Pune. What's more, he recalled, Shivdasani had wanted to discuss something urgent with him. ''That's fine. Why don't you have dinner with me?,'' he asked, knowing that his cook, Murugan, would be able to rustle up a quick meal for them.

''Okay. I really wouldn't mind a home-cooked meal,'' replied a relieved Shivdasani.

When Shivdasani finally stepped out of his white Mercedes-Benz E660 at Sterling Apartments on Peddar Road, it was past 9 p.m.. The Saturday-night revellers were out in big numbers, zipping past in their fast cars. But his own feelings weren't so upbeat. In his 40 years as a owner-manager, he hadn't worked as hard as he had in the last 5 years. Of course, the results were there for everyone to see: the SD Group now had a turnover in India of Rs 8,000 crore, with interests in telecommunications, transportation, pharmaceuticals, and consumer durables. And, unlike other business families, all the 4 brothers still enjoyed great relationships with each other.

Yet, in the last 3 months, Shivdasani had, suddenly, begun to feel the strain. He was now sure that he had underestimated the challenges of managing a conglomerate as diverse as theirs. Despite his closeness to his brothers, he had now begun to feel not just a little jaded, but also lonely. He had many advisors, but he depended on a handful of friends-like Ram-to gain that perspective he so badly needed to give his businesses that added momentum. Still, somehow, decisions made at the top in days seemed to take weeks, even months, to be implemented.

Ram never tired of telling him what he thought was the problem. ''Transparency and empowerment are the bedrock of modern management. You're simply too closed. You don't give your senior managers enough autonomy.'' Shivdasani now had to grudgingly admit that he was, perhaps, right. Last week, Kunal Rathore, the Managing Director of ConCable, his cable TV business, had left to join an arch-rival, CustCable. At the traditional exit-interview with Shivdasani, he had admitted that he had been frustrated at having to wait for clearance for every little decision from one of the 4 brothers.

As Shivdasani stepped inside the portals of the building, the rain suddenly thickened. He hurriedly walked towards the fancy elevator doors but, just as he was about to press the button, they opened. A white-haired man, with penetrating eyes, stepped out, almost bumping into him. As their paths crossed, Shivdasani knew he had seen him before. Ah!, he said to himself, wasn't this Anil Madhok, who had just signed up as the CEO of the Supreme Group? In fact, when he had bumped into its promoter-chairman, Deven Chitangia, at the Bombay Gym the previous month, he had confessed that he was finding the management of his conglomerate tricky. And was looking for a Group CEO. A week later, one of the business magazines had carried the scoop of how the Chitangias had ensnared Madhok, a top-notch transnational CEO, to come on board. They had also hinted that his compensation would be a whopping Rs 1 crore a year.

Personally, Shivdasani wasn't sure that adding a new layer in the form of a Group CEO was really the answer to his own problems. What was required, he believed, was a template that would cover all the aspects of managing a well-diversified conglomerate-such as a system to facilitate the tapping of cross-company synergies. In the last 4 weeks, Shivdasani had raised some of these issues with his brothers. ''You know,'' he had explained, ''our family's third generation is too young to take over. They are still in college. And I want to dissociate myself from day-to-day management, and strengthen our cadre of professional managers. Only this will help us achieve leadership positions in all our businesses by 1999. As I've reiterated, time and again, our Indian operations must grow from Rs 8,000 crore to Rs 25,000 crore in 5 years from now.''

Moreover, Shivdasani knew that, being the patriarch, he would, sooner or later, have to take the call about whether he ought to confine the role of the family to being strategic investors in their companies. Or not. After all, if each of the companies was to deliver greater economic value, he would have to hand over management control to professional managers, and concentrate on border-line responsibilities. These were all difficult issues to resolve.

He wondered if Ram would have some of the answers. Over the years, he had come to lean heavily on his clinical mind and near-brutal frankness. Even though Ram had turned down his first offer, he had kept in touch with him. And, when he had retired 5 years later, Shivdasani had invited Ram to come on board as an advisor.

Murugan brought in the coffee. Dinner was over, and Ram could feel his eyes threatening to shut. But he knew that what Shivdasani was about to say was important. He leaned forward to concentrate.

''What I'm proposing-and this is something I've discussed with my brothers-is that we create an organisational structure built around hubs and spokes. All the 15 companies of the group will be regrouped, informally, into 5 business hubs. This grouping will be on the basis of synergy in terms of factors like products, customers, distribution-channels, manufacturing-capacities, and technologies. As we see it, there are 5 hubs possible. One, a Transportation Hub, which will comprise automobiles, auto ancillaries, and air-cargo. Two, an Infotech & Telecom Hub, which will comprise infotech, entertainment, and telecom. Three, the Infrastructure & Power Hub, which will comprise power projects, and the operation and maintenance of power plants, roads, ports, and refineries. Four, a Life Sciences Hub, which will consist of pharmaceuticals, bulk drugs, pesticides, and agro-chemicals. And, five, a Durables Hub, which will comprise television and white goods...''

''What you are proposing is, basically, to create Strategic Business Units, isn't it?'' interjected Ram.

''That's right, and I wanted to pick your brain about the viability of this structure,'' replied Shivdasani.

Ram took another sip of the coffee Murugan brewed so well. ''I think it will work,'' he said, ''but there are several things that you need to do to ensure that. First, you must decide whether the hubs will function as profit-centres or not. Ideally, they should, but that creates scope for conflict between the CEOs of the individual companies that constitute each hub. Second, you will need to create another layer to manage the hubs. I've met each of your CEOs. They zealously guard their territories. But it is vital, for the sake of better governance, that we make the CEO of the largest company in each hub take on the additional responsibility of heading the hub. He would report directly to you on all the companies and issues in that business...''

Shivdasani's eyes lit up: ''That will give me more time to focus on policy...''

''I also suggest that the group set up a corporate centre in Mumbai. It should have a complement of full-time professional managers, drawn from the group's companies, in each of the functional areas. The centre will conduct an overview of the group's activities, and supervise corporate initiatives, like culture-building, fine-tuning measurement-systems, people policies, media relations, and treasury functions. I've even thought of a name for it,'' continued Ram. ''We could call it SD Group Management Services, and register it as a company under the Companies Act, 1956. What you really need is a full-time CEO for SDGMS...''

That night, even as Morpheus played hide-and-seek with him again, Shivdasani began to think about the hub concept. He was glad Ram had found no glaring faults with his ideas. But he knew much depended on his ability to find a Group CEO who could energise the group, and bind the diverse businesses into a tightly-run conglomerate. His brothers and he had always been a bit wary of allowing their professional managers to call the shots. A Group CEO would have to walk the tightrope between carrying the family and getting the CEOs' support. Where would he be able to find such a man? And, even if he did, would the family grow to trust him?

By morning, Shivdasani had decided that Ram was, really, the only man for the job. But he chose to wait till about 7 a.m.. Then, he nervously dialled Ram's residence, somehow confident that his friend would not turn him down a second time...

POSTSCRIPT: Ram eventually agreed to taking over as the Group CEO. Even as he did so, he voiced his doubts about the Shivdasanis' ability to let go. He made it clear that he would not keep all the brothers informed about every small decision he made. Shivdasani agreed. And got all his brothers to do so too. Reassured about his autonomy, Ram buckled down to the task of getting the CEOs of the group's companies to participate in initiatives that would share best practices and leverage synergies. One year later, the hub-and-spoke system seemed to be working even though the layer of management it added had slowed down decision-making. That was beginning to worry Ram-and Shivdasani.