L&T restructures with ideas from peers

There's a bit of Tata and a bit of the AV Birla Group imprint on the entire business restructuring exercise of Larsen & Toubro.

India's top engineering and construction company has began its journey to decentralise operations by forming nine business divisions ('verticals') or 'virtual' independent companies (ICs). It is evident that in doing so, it has borrowed best practices from many of its global peers like General Electric or even from Indian conglomerates, with some of whom it has even fought corporate battles.

For example, all the nine new L&T verticals or the five group subsidiaries will have to shell out money or 'fees' to use the L&T mother brand. A move that will inevitably draw parallels with the Tata Group. In the mid-1990s, Tata Sons, the closely-held holding company for the group, had announced a royalty -a "contribution" or a "fee"-to be charged from all Tata Group companies for the use of the Tata name, either directly in the company's name or indirectly. The fee ranged from 0.25 per cent of the turnover (not exceeding 5 per cent of net profit) from blue-chip group companies to 0.1 per cent, depending on the brand leverage. Joint ventures where the foreign partner was offering its brand name gratis were exempted. L&T's management is yet to work out the contours of the fee structure. It will be for the new L&T Corporate Centre to finalise a formula. It may be based on each company's or division's turnover or to the extent it is leveraging the mother brand, said officials involved in the process.

This new corporate centre will be the central think tank for the company, overseeing inter-group operations, strategy and also brand custodian. This will be similar to the Aditya Birla Management Corporation Ltd (ABMCL), the group's apex decision-making body, providing strategic direction and also doubling as a centre of excellence for key group functions while assisting the board of directors.

J P Nayak, currently one of L&T's whole time directors and president (machinery & industrial products) will be heading the corporate centre. After his retirement on March 31, 2011, he will continue as an advisor. Helping him will be P R Kothari, executive vice president, corporate strategy and change managament. "We will be building a team, some even fulltime, for the corporate centre. This centre will assist the board members and keep and oversee certain key groups on a more holistic basis. The board does not get to monitor the activities on a daily basis," Nayak told Business Standard.

Optimising synergies through key account management and shared services will be the other area of focus for the centre. Many clients will be common for a number of these newly formed divisions.

"We will have to ensure that the group synergy does not get lost if verticals (divisions) work in silos," added Nayak.

Like brand usage, most of the services offered by the corporate centre will have to be paid for over a period of time. "Brand value and communication activities will be paid services from the beginning. We may even charge for corporate strategy in future as well," said Nayak.

The rationale is simple: If the endeavour is to make each vertical independent and eventually even explore unlocking value, then a payment system has to evolve as well.

Each of the ICs may not start paying immediately but L&T officials say the "exercise to extract value even for the brand or other services is a work in progress".

The fundamental difference between the royalty fee of the Tata Group and that of the L&T group will be fundamental, say analysts. Tata Sons, holding company of the Tata Group, charges the fee in the former, while L&T is not the holding company of the diversified engineering conglomerate. It acts as a 'hybrid holding company', with operating companies and subsidiaries under it.

"Tata Group has distributed leadership. There are several listed companies under the fold and Tata Sons is a shareholder. But L&T has no other listed companies," explained a group official who did not want to be named.