Should Alpha Finance club distribution of its disparate financial products? K.L. Muralidhara of American Express, R. Pandey of Marico Industries, and R. Ravi of Alpic Finance discuss.

By R. Chandrasekhar

'The balance of power in the financial services sector hinges on two factors: the size of operations, and the quality of customer relationships,'' said Anil Roy, President, Omega Consultants. ''There is nothing new or profound here. But it is good to be reminded of the basics, particularly when you are changing course.''

Roy, a well-known corporate advisor, was addressing the executive committee meeting of Alpha Finance Ltd. Fifteen years since its inception, Alpha had grown to be a premier non-banking finance firm. It was now moving out of corporate finance-where demand had dried up because of the availability of newer, and economical sources of funds-and focusing on the burgeoning retail finance business. The move from a fund-based business to a fee-based business necessitated suitable changes in internal structure.

Roy had been invited by Alpha's MD, Sudhakar Menon to help navigate this transition. ''Let us review the existing structure so that we know where we stand,'' said Roy.

''We have four revenue streams at Alpha,'' said Menon. ''The oldest among these is a corporate finance division-handling merchant banking, leasing, hire purchase, and bill discounting. The second one is a stockbroking outfit that manages investment portfolios. The mutual funds division manages four sector-specific funds. We have a risk management and insurance wing, just set up in a joint venture with a German major. Each of these is an independent outfit with its own product development, operations, and logistics teams. The autonomy is driven by the regulatory requirements of creating firewalls between one business and the other. Of course, because of the focus it brings to each profit centre, it also makes business sense.''

''But not any more,'' said Ajay Shah, President, Alpha. ''There are several reasons why a consolidated structure for each business no longer makes commercial sense. The fact that we are moving out of corporate finance is only one reason. Look at our three other businesses. What is the core skill we need there? Distribution. We get a grip on our business, and on the market, once we have a grip on distribution.''

''A distribution system, in turn, derives its strength from a large customer base,'' said Raj Marwaha, Vice-President (Marketing). ''We have a total of five lakh customers at Alpha, of which about 5 per cent are corporates. Incidentally, the largest non banking finance company (NBFC)-we are the second-has eight lakh customers. We must grow this number in order to enjoy the benefits of scale. The existing structure will only give us an organic growth of 10 to 15 per cent per annum. What we need is a geometric leap-of 50 to 60 per cent-in the number of customers every year. Instead of selling each product individually to the customer, what we should do is cross-sell. We should bundle all our products-loans, investment products, safety products-and offer them from a single source. That will bring in new customers, and retain the existing ones.''

''In effect, what Marwaha is suggesting,'' said Menon, ''is that all distribution tasks should be demerged from individual business units, and aggregated into an independent business by itself. The new unit, to be headed by a CEO on the same lines as other units, will be responsible for the sales of all our business units while the marketing activities-like new product development, advertising, resource allocation, brand building-will be specific to each unit. The business unit owns the product, while the distribution unit owns the customer.''

''Here, we can learn from FMCG firms,'' said Roy. ''Some of them have centralised sales and logistics. The results have been mixed. A major downer is that margins tend to fall. Why? The mindset of a salesman is geared towards turnover, not profits. He likes talking big numbers. For him, a sale is basically something that has contributed to volumes, and only incidentally something that has an impact on profits. But the success of your initiative depends upon your objectives.''

''They are clear,'' said Marwaha. ''But let me deal with the focus on margins first. It is a matter of training. As long as there is a common understanding-right from the CEO of Alpha to the salesman in the field-on key business drivers of the company-you are on safe ground. Now, to the objectives of demerger. It helps Alpha develop selling competencies-like negotiating skills, the art of closing the deal, and relationship management-as an integral part of building a critical mass of customers and capturing them for life. It leaves the mainline business free to concentrate on product development.''

''But the major objective is to enhance revenue streams,'' said Vaman Bajpai, Vice-President (Systems). ''We can sell similar products from multiple providers-including our own competitors. It will be a value addition to the customer. We can use the channel to sell unrelated products-like mobile phones-for a fee. We can even build up back office capacity for processing insurance claims, say, for a fee. It is a world of opportunities out there.''

''Major groundwork needs to be done in the area of technology,'' said Menon. ''Alpha has been talking informally with three NBFCs to create a mega financial services outfit, through a merger. It will take a while. Would you suggest that we put our internal restructuring on hold till the merger issue is decided?''

''I don't think so. The merger will be between business units, which are, after all, separate legal entities. That need not preempt internal demerger. There are four considerations a firm should keep in mind whenever a change in organisation structure is planned. Does the new structure build enough management depth in the company? Does it help develop new competencies? Does it provide for cross-learning across business units? Does it leverage the company's resources fully? I think the demerger stands the test on all four counts,'' said Roy. And added, after a thoughtful pause, ''Or does it?''

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