Large EPC firms usually do not have manufacturing facilities of their own. This is the trend world wide. They outsource all equipment supplies and fabrication work. Having built up expertise in handling large ac projects, Umang should now consolidate its areas of strength. There is little merit in clinging on to skills that have lost their edge-even if they have helped build Umang as an organisation in the past. Times are changing and Umang will have to move with the times. That is the only way it can safeguard its future.

Own manufacturing simply does not have relevance in the context of not only the expertise acquired by Umang in EPC, but also of the proposed JV with Fredrick. In fact, own-manufacturing might now be a handicap on three grounds. One, Umang would be forced to buy components and equipment from its own captive source and forfeit the price, and delivery advantages available in the open market. Two, the assurance of a captive customer would provide no incentive to a manufacturing unit to improve efficiency, reduce costs, and enhance product quality. And, finally, the company may become inward-looking, losing all initiatives to look for alternate sources of supplies.

The apprehensions raised about the tie-up with Fredrick are normal. They are a natural consequence of a degree of uncertainty about the future, an inability to let go, and a sense of comfort with the predictability of the past. These are change-management issues. They must be handled firmly but compassionately. Training, re-skilling, multi-skilling are some of the options that Paliwal should pursue. But I am not sure if redundancy of people is as big an area of concern as it is made out to be. In any case, it is good to have some employee turnover. It helps bring in new skills and new energy to the organisation, particularly when it is in a transformation mode.

Umang should go ahead with the proposed JV. The alliance brings focus to the company's operations. It enables Kohli and his team to concentrate all resources on strengthening the core skills in project management, and not manufacturing which does not add much value. The JV also gives Umang access to the latest technology. True, technology may not be much of a differentiator in ac manufacture but the opportunities for improvement-in design, engineering, building, layout, ET AL-are limitless and Fredrick can provide the technical support in all these initiatives.

After sales service is clearly a growth area. One can, in fact, see a possibility of this activity being spun off into an independent profit centre. Kohli and his team should develop and nurture such focus areas within the company. Jobs should be driven towards pockets where they can be done cost-effectively. That is the key to managing an EPC business. And given the proposed JV with Fredrick, I am sure Umang is on the right track.

Dhruv kohli has it all figured out. He is clear about the way forward for Umang. But before taking a final decision on the viability of the alliance with Fredrick, he should revisit the basics together with his team. Consensus is important. Clearly, Umang is in an industry where there are no entry barriers, and competition is fierce. The quality of products and services is perhaps the only differentiator. It is noteworthy that customer expectations are on the rise, thanks to increasing globalisation. The major strength of Umang appears to be an ability to handle large projects, which contribute to more than 80 per cent of its turnover. This must be leveraged fully to build and enhance shareholder value.

The supply over-hang is indeed an excellent opportunity to review internal operations and look for areas for productivity improvements. The scope for cost reduction needs to be examined in detail. The objective is to ensure that by the time demand picks up, Umang is in a better position to take on competition as a leaner and fitter organisation. This is the time to work towards that objective.

This is also an opportunity, in my view, to break the company into two separate entities. One which focuses on manufacturing and selling of ACs and fridges through the dealer route or directly through its own retail outlets. The management of this company can then evaluate clearly the extent of value the manufacturing operations are building into the final product and how well the marketing function is realising the same. Based on that, the company should evaluate the need for a manufacturing JV (to improve the value addition at the manufacturing stage) or for some kind of marketing alliance that can add value to activities related to logistics, sales, promotion, and brand building.

The second company should concentrate on project management and execution where the company has solid strengths. This company will then have flexibility to source from Umang or any other supplier to deliver the best value in any contract. With the current strength in mind the need to enter into a JV can be evaluated and a more equitable arrangement can be worked out based on the value brought in by each partner.

Doing so will help preserve and build on Umang's current strengths and competencies. It will also preserve the brand identity. More importantly, it will make employees see the logic behind the restructuring. It becomes easier to manage the soft issues raised by some of the senior managers of the company.

Dhruv Kohli would do well to convince his direct reports that inaction on the part of Umang, and not the alliance with Fredrick per se, would be the real death trap. Forming an alliance is better than sharing the market with a formidable competitor like Fredrick.

Fredrick brings to the table brand value, technical expertise, strong R&D, better technology, and, perhaps, more staying power. Umang brings local market penetration and relationships, an excellent technical team, efficient business practices, and front-end people of outstanding personal repute. Both parties would be interested in a tie-up, and it will soon boil down to negotiating attractive alliance terms.

The nature of the alliance can range from a simple contract manufacturing arrangement to things like joint product development, joint project execution in international markets, combined distribution in the retail side, and co-branding.

A deal with Fredrick will provide Umang access to new technologies that will help it remain competitive. Umang may not be geared to independently support R&D investments in air purification technology, variable speed compressors, and environment-friendly materials. If the deal with Umang falls through, Fredrick would be forced to find another Indian partner, who could well prove to be suboptimal.

In entering into any transaction with Fredrick, Umang should ensure a long lock-in period, rather than a year-to-year perspective, and move according to a pre-determined transition plan. This could mean starting with a manufacturing alliance for one of its plants, adding more plants, moving to a marketing and distribution alliance, and finally a full merger. Such a phased move will allay the concerns of Umang's management team and build more confidence in the manner in which the combined strengths of the two organisations are being harnessed and also, in particular, how the careers of the senior managers are being shaped.

The other risk is of under-selling the company's strengths and being marginalised as feared by some of the direct reports. This can only be tested by the results of the negotiations and the price obtained for various services.

Moving into the service-end of the value chain is a non-issue. In fact, this should be a high priority for Umang. It is a natural, more profitable, and less volatile extension of customised product sales. It locks in customers, especially those whose needs are unique. The risks involved are primarily diversion of technically skilled personnel from sales to service, and addressing a stringent customer service requirement which may have parameters such as speed of response. Umang may not be culturally tuned to a service attitude-its people may well be carrying a ''technical'' chip on their shoulders. Kohli would have to personally lead the charge into the services business.

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