Cover Story: The New CEO Centre

In the decentralised corporation, where the Corporate Centre neither dictates strategy nor manages operations or allocates resources, it has to add value in completely different ways. By co-ordinating instead of controlling. By seeking corporate synergies. And by distributing its activities all over the corporation instead of hoarding them at the core.

An existential crisis threatens the core of the corporation, demanding a new response from the CEO. He must decide just what role the Corporate Centre of the multi-business conglomerate must play today in order to add value to the activities of the individual business units that he has spun out of his monolithic organisation. From diversified groups to multi-divisional companies, from sprawling business empires to multiple-product and -brand players, they are all being haunted by the compulsion to find a reason for the Corporate Centre to exist. The answer, however, does not lie in revisiting the older responsibilities of the Corporate Centre and adapting them to cope with contemporary needs. On the contrary, the future of the Corporate Centre lies in re-inventing itself for the new paradigm of business. And only the CEO can do that. By creating the New CEO Centre.

The urgency to redefine the role of their Centres is already visible in the restructuring moves of many CEOs who preside over diversified business empires. The trigger for most of them is the necessity to bypass the conglomerate discount that diversified groups suffer from in the perception of investors and the stockmarkets--a discount that affects their financing abilities. It is the New CEO Centre that is, rightly, taking on the responsibility of converting the liability of a diversification-heavy group into a synergy-driven conglomerate. Thus, Ratan Tata is remoulding the Tata Group Centre as a wellspring of corporate strategy for the entire group. Anand Mahindra is rebuilding the Centre of the Mahindra & Mahindra Group as a synergy-seeking allocator of financial and human capital. Adi Godrej is using his office as a portfolio management centre to orchestrate the Godrej Group's different businesses. Dhirubhai Ambani is creating a Corporate Centre to manage the diversifications of the Reliance Group into businesses like petroleum-exploration and telecom. And Kumar Mangalam Birla is crafting a CEO Centre that will bring about alignment between the strategies of individual businesses.

It is not difficult to see why the traditional Corporate Centre is perceived as adding no value: it has been robbed of its original mandate. Strategy is best conceptualised and executed at the point closest to the customer--which is not at the Corporate Centre, but in the business units. Operations are too diverse to brook central control, which, in any case, cannot ensure the employee ownership that now drives all activities in the successful corporation. Goal-setting has devolved to the level of individuals, economies of scale are flowing away from centralised activities, and whip-cracking has been replaced by self-motivation as the driver of individual excellence. In its original form, therefore, the CEO's Office is snared in suspicion and susceptibility--from line-managers and to anachronistic practices, respectively. The empowered, independent business units view it as an interfering busybody which does not help, but impedes, while the CEO himself can gain no insight from his staff. Says Niraj Bajaj, 44, Managing Director, Mukund Iron & Steel: "The biggest lie in the world is that we are from the corporate office and we are here to help."

And yet, none of this is necessary. The new business environment may have done away with the need for top-down strategy and the command-and-control approach. But its complexities--visible in the increasing competitiveness, the globalisation of opportunities, the converging of industries, the blurring of borders between sectors, the rapidly changing technologies, the faster innovation cycles, the tougher markets, and the information explosion--are demanding a new set of responses from the corporation. These, ideally, should come from the CEO's Office rather than from the business units. The primary reason: the replacement of the simple, linearly-configured multi-business group with a more complex non-linear structure. Earlier, the successful conglomerate comprised virtually independent business units with no interaction between them, supported by centralised corporate functions. Today, with those centralised functions pushed down to the units, co-operation and sharing of resources between the business units have become important. Here, knowledge, capital, expertise, people, and even products and processes flow seamlessly back and forth between different businesses. And the complexity this has engendered has created a new basket of responsibilities for the New CEO Centre--that of managing this flow. This is the kind of role, for instance, that the Management Council of Mahindra & Mahindra (M&M) has reserved for itself following the grouping of the businesses into Strategic Business Units. It focuses on managing the centralised support functions, long-term visioning, and providing strategic inputs. Says Harsh Goenka, 41, Chairman, RPG Enterprises: "It's about time that Indian businesses started thinking seriously about the kind of Corporate Centres they have. We too had a hotch-potch 3 years ago, but now the roles are clearly marked out."

Crucially, the New CEO Centre in this inter-dependent corporation is a virtual one. It is not a hub around which the units are arranged like spokes. On the contrary, it is actually a bundle of activities which do not have to be conducted in one physical location, or out of one office, only. Thus, the CEO's Office is nowhere--and everywhere. Its functions are scattered across the corporation, being performed by the individual or group of individuals best equipped to do a particular job. And within this paradigm of distributed leadership, the New CEO Centre primes the corporation for cutting-edge strategy, best-in-class operations, and innovation-led business. Says Madhukar Shukla, 45, Professor (Organisational Behaviour), XLRI: "Just as centralised mainframe computers have given way to networked PCs, the Corporate Centre should act as the server to support the networking among companies."

Staying out of the business of the individual units, therefore, the new CEO Centre uses its perspective to effect co-ordination between them for the sharing and transfer of resources--including knowledge, best practices, people, and finance. It creates an appropriate context for strategising, empowering the rank and file to respond independently to the customer's needs, and, simultaneously, knitting individual initiatives into a cohesive and coherent business strategy. It sets objectives for business units, measures their performance, and effects corrections. And it acts as the pivot around which external stakeholders--customers, shareholders, and society--and internal constituencies--the board and the employees--interact with one another. It envisions, energises, and evaluates.

The Audit

The more Bs you choose in response to these questions about your Corporate Centre, the closer you are to transiting to the New CEO Centre.

What is the pivot?
a. Assets b. Capabilities
What is the managing focus?
a. Numbers b. Value-creation
What is the configuration?
a. Hierarchy b. Network
How autonomous are the parts?
a. Independent b. Interdependent
What is the basis of action?
a. Reaction b. Anticipation
What is the managing philosophy?
a. Control b. Facilitation

Consider the 7-member Corporate Management Committee of Larsen & Toubro (L&T), which comprises, besides the CEO, one person each to supervise the 6 businesses of the company. Their writ runs only to expansion plans, major capital expenditure, approval of annual budgets, strategic planning, personnel policies, long-term goal-setting, Total Quality Management (TQM), and infotech management. Smaller corporations can follow the model too. Says Pradip Kar, Chairman, 40, Microland: "Each of our businesses has its own management team. I am only involved in the formation of the incubation cell of an idea for a new business. But the plans, the project reports, and so on are done by the external and internal people identified to best handle that idea."

Equally, the New CEO Centre is conspicuous by its withdrawal from most of the classic activities of headquarters. The functions that it once appropriated for itself, on the grounds that centralising makes them better and more economical, may remain centralised--but not within the ambit of the New CEO Centre. Instead, they are set up as separate service-centres, to be accessed by the business units as necessary--perhaps for a fee. Cast off from the New CEO Centre too are routine group-wide services that cannot add value or differentiation, and are, ideally, outsourced from external specialists. In short, the New CEO Centre adds value by performing new roles. The classic global model, of course, is the celebrated Corporate Centre of General Electric. Each of its 12 businesses is run by the respective CEOs: but company CEO Jack Welch's office only runs a school that teaches the managers how to run their businesses better. There's little choice. As Keshub Mahindra, 76, pointed out in a communication to his organisation when announcing the re-organisation of the Corporate Centre at the Mahindra Group: "Companies will have to compete fiercely for the attention of their customers. To do this, they will have to abolish bureaucracy and develop flexibility and agility in responding to the changing needs of the marketplace." Only the New CEO Centre can ensure that.

Equipped with this cluster of obligations, the New CEO Centre is patently a post-minimalist construct. The first flush of strategic decentralisation, re-inforced by the obvious need for passing on power to the peripheries of the organisation, had led to a rash abdication of all responsibilities by the CEO's Office. Functioning as holding companies, bare-bones Corporate Centres wielded financial control as their only real contribution. Restricting themselves to low-value-added management activities like legal, taxation, and image-building, these Corporate Centres created 2 kinds of problems. For one thing, they encouraged individual units to implement their own decentralised services, without exploring the scope for building economies of scale or tapping synergies. This is evident in the functioning of such loose federations as the Murugappa Group or the TVS Group, where there is no fulcrum, few shared resources, and sporadic transfer of best practices. In fact, their identity as a group only lies in the presence of holding companies and the token presence of members of the owner-family on the boards of companies that are actually under the independent managerial control of different individuals. It can be seen too in conglomerates like the Bombay Dyeing Group or the Arvind Mafatlal Group, where there is no Centre as such: the group CEOs are either personally involved in decision-making--or they leave it to the heads of the businesses.

THE WIPRO GROUP
The Change Management Centre

Azim H Premji The 5 business units may be strategically and operationally independent. But since they add up to Wipro Corporation (Wipro), Chairman Azim Premji, 53, uses his office--called the Executive Corporate Council (ECC)--to make the parts of Wipro add up to more than the whole. The ECC is involved in building culture and values for the organisation, developing an inventory of talent, and generating initiatives at a group level for the individual businesses. Building a corporate brand, for instance, is one of its most recent thrusts. So is change management.

Says Premji: "Wipro's Centre is involved in orchestrating change management across the businesses using the quality tool of Six Sigma." For example, the ECC organised the first 6-day training session for the entire top management of each business. It then identified 12 line-managers from the same, assigning to them the new role of facilitators for the Six Sigma projects across the corporation.

Wipro's Corporate Centre is also helping the businesses achieve the corporate goal of being one of India's top 5 people-oriented companies. Says Dileep Rangnekar, 47, Corporate Executive Vice-President (Human Resources), Wipro Group: "We have always taken the stand that managing people is the total responsibility of the business managers, and not the responsibility of the Head Office. Our job is just to create processes and make their implementation easy." So, the ECC is launching an assessment and development centre to judge people in terms of competencies, stability, cultural fit, and longevity. The objective: to provide the individual businesses with the information, tools, and resources they need to do their hr job better. Remove hr from that objective, and the overall raison d' etre of Wipro's Centre is clarified, too.

More damaging was the fact that the minimalist Corporate Centre meant abjuring the possibility of adding value through strategic synergies and the transfer of resources that can enable different units of the multi-business conglomerate to draw on one another's strengths. While their small dimensions, resultant low cost, and minimum interference in the functioning of business units are precisely the kind of benefits that the New CEO Centre must aspire to, the shortcomings of the minimalist Corporate Centre prevent them from delivering results. There can be a thing as too little involvement from the Corporate Centre: the Tata Group is learning as much today, having paid for founder J.R.D. Tata's determined policy of encouraging freewheeling entrepreneurship by having a collection of 91 companies, often duplicating products and services, in disparate businesses that defy management focus and core competencies. The danger here is that the disillusioned CEO may then decide to revert to the full-function Corporate Centre. That is why it is essential to adopt the New CEO Centre quickly if the minimalist version has been implemented. And conglomerates that are still managed by the old Corporate Centre will be best served by leapfrogging this stage.

Some measured introspection will tell the CEO clearly whether his Corporate Centre, in its present form, is adding value to the group's activities or not. Says Ralph Heuwing, 33, Manager, Boston Consulting Group: "Corporate Centres are being asked to justify the cost of their existence. Can they really add value, sitting on top of those divisional managers who run the business anyway?" The metric is simple enough: if the value placed on the group--by the market, for instance--is greater than the sum of the values of each business, the Corporate Centre is obviously doing useful work. But such an exercise is difficult, if not impossible, to conduct in simulated terms. Moreover, measuring the intrinsic worth of its activities is difficult: after all, it is neither a profit-centre, nor can it generate wealth through customers. Agrees Rana Sarkar, 29, Consultant, Roland Berger & Partners: "Measuring value-addition from the Corporate Centre is a nebulous business." To outweigh its costs, therefore, the Corporate Centre must provide some service to the companies in the corporation that the latter need, and could not have achieved at lower cost on their own.

In theory, this is just what the task of providing centralised services, such as purchasing, finance, or human resource management, is supposed to achieve. In practice, however, too many Corporate Centres simply become a drag on the businesses they purport to manage in the process of offering these services. Typically, there are 3 questions that CEOs must ask about the functioning of their Corporate Centres to find out whether they are adding value or not. First, is the Corporate Centre dominated by the knowledge and strategies gained from, and employed in, 1 or 2 businesses only--which it is trying to transfer to others in a one-way process? Second, in its attempts to generate group strategies, is the Corporate Centre facing resistance and complaints of intervention from the managers of the different businesses, leading to delay, negotiations, and break-downs? Third, are the functional managers in the Corporate Centre and their counterparts in the individual businesses repeatedly experiencing conflicts, with the result that the tasks they are involved in are not being managed well? Affirmative answers to any, or all, of these normally indicate that the Corporate Centre is not adding value. Analyses K. Ramachandra, 42, Professor (Strategy & Entrepreneurship), Indian Institute of Management, Ahmedabad: "When environmental turbulence runs high, the Corporate Centre tends to interfere to ensure that things are under control in the units." But, in the process, it often ends up destroying value.

The problem is exacerbated when the Corporate Centre measures the value it generates using the same parameters that it used to set its objectives in the first place. Thus, a Corporate Centre that considers financial control its prime target considers its job done when the units show better financial results. While in the short run one may see the targeted improvement in bottomline terms, it erodes the long-term capacities of the organisation, particularly in creating and maintaining thriving cultures and top talent. The new metrics, in other words, must flow from the new functional responsibilities.

Using this measuring stick, the case--if there were one--for keeping the Corporate Centre unchanged holds no water. Invented in the first industrial organisations--notably, the woollen mills and iron foundries of the UK--and refined by mammoths of mass production like General Motors, the command-and-control-oriented Corporate Centre thrived because it was the ideal mechanism to manage a string of repetitive activities that were bereft of flexibility and unpredictability. The model was relevant for the times because business was devoid of complexity, in terms of products and market structures.

HINDUSTAN LEVER
The Resource Management Centre

Keki B Dadiseth The sheer scale of each of its 8 business divisions--soaps and detergents, beverages, personal products, oils and dairy products, animal feed, culinary products, chemicals, and frozen foods--forces Hindustan Lever Ltd (HLL) to treat them like separate companies. Summarises M.S. Banga, 43, Director (Soaps & Detergents), HLL: "Each business is almost a mini company, drawing upon the centre for cash and people." So, its Corporate Centre does not get directly involved in their businesses. Instead it exercises its influence through 2 distinct mechanisms. First, it strategises for all the businesses at the macro-level, and provides critical resources like finance, managers, and technology to them--taking upon itself the task of grooming these resources. It also offers centralised distribution, sourcing, and production services, which helps because so many of its businesses work with similar supply-chains and channels for the relevant businesses.

Second, the Corporate Centre enriches the businesses by finding ways for them to transfer their learning among one another. For that, it tracks the achievements and activities of different businesses, constantly looking for best practices which can be profitably emulated in other parts of the company. Thus, if the personal products division, for instance, has had a successful brand-promotion exercise, the Corporate Centre ensures that the learning is shared. It arranges sessions where the concerned managers make presentations to other managers, explaining the strategy as well as the tactics. And because managing knowledge is, first and foremost, a case of managing people, HLL's Corporate Centre performs that role itself, too.

As a corollary, people initiatives at HLL also originate with its Centre. For instance, concerned by the possibility of the corporation's becoming slow and stodgy because of its size, the personnel department conducted a company-wide workshop to identify 3 characteristics to instil in its managers: teamwork, restless creativity, and customer intimacy. Says Gurdeep Singh, 54, Director (Personnel), HLL: "It will call for a complete organisational overhaul. Now, our training will be targeted to develop these traits." By performing such tasks to improve the quality of the resources used by the businesses, HLL's CEO Centre keeps adding value to them.

It self-inflated quickly into the Imperialist Corporate Centre, characterised by huge staff-strength--with 500 or more people--and significant double-checking to reduce business risks by line-managers. This Corporate Centre believed that it substituted for deficiencies in business units--that nobody else had the grandeur of vision and the sweep of ambition that could provide the strategies for growth. However, none of these conditions holds good today. S.D. Kulkarni, 64, CEO, L&T, articulates the logic: "If the profit-making responsibility lies with the business units, then the responsibility of the decisions should also lie with them." Thus, the Corporate Centre that retains all decision-making powers necessarily becomes obstructionist.

It is characteristic of the New CEO Centre to customise its decision of how much and what kind of power to wield. As strategy guru C.K. Prahalad, 57, puts it famously: "It depends." The decision must be based, importantly, on the identity of the value-drivers in a group. When the value is sourced from innovation, creativity, and knowledge--all of which can be traced back to human resources--the New CEO Centre must build the resource, but get out of the way of operations and control. On the other hand, when value is derived from the optimum use of conventional resources, a stronger monitoring role is warranted. Asserts K.R.S. Murthy, 60, former director, Indian Institute of Management, Bangalore: "There are no set rules. As an organisation strives to find the best mechanisms, it develops its own unique Corporate Centre and culture for adding value." Thus, the Corporate Centre of the RPG Group, which is managed directly by the brother-owners Harsh and Sanjeev Goenka, uses just 2 levers to manage the entire group: finance and human resources. This enables the Centre to interface with the individual businesses continuously, without, however, being directly involved in their operations. Adds N. Kumar, 48, Vice-Chairman, Sanmar Group: "We have 42 divisions. While operations are completely decentralised, one area that the Centre keeps tight control on is financial management."

In fact, the very forces and compulsions that have led to the development of the New CEO Centre have also created the mandate for it:

STRATEGY-EVOLUTION. The New CEO Centre's role begins with the creation of the appropriate context for business-unit strategising. Without interfering in the actual process of strategy-creation for each unit, the CEO must involve his office in setting the stage for the units to strategise. The are 2 levers here: first, the communication of the group's imperatives--captured in the vision, mission, and the values which the New CEO Centre must be the custodian of--to the business units. And second, energising people at every level to translate their understanding of the customer and the marketplace into a concrete action-plan for the business units to meet their goals. In addition, the New CEO Centre must operate on a longer temporal scale than each unit, creating long-term objectives and milestones--and leaving it to the individual businesses to draw up their roadmaps. Explains Ajay Piramal, 43, CEO, Piramal Group, who uses his 18-member Group Management Council to play just this role for his 6 business units: "The purpose is to ensure consonance between current operations and long-term strategy."

To the CEO's Office too will go the task of validation of business-unit strategy--acting as consultants, as it were--conducting reviews and suggesting mid-course corrections. Finally, as the agglomeration of these activities, the New CEO Centre will create and implement group-level strategy, planning, initiating, and managing processes like portfolio restructuring, diversification, integration, and M&A, and triggering off change initiatives like TQM or Business Process Reengineering. Adds Udayan Bose, 48, Chairman, Lazard India: "Alliance-management has taken an important place. Keeping in mind its sensitivity, the Corporate Centre is critical for this." The Aditya Birla Group, for instance, has constituted its Corporate Centre, titled the Birla Management Centre, primarily to devise group-level strategy and to examine how well the strategies of individual companies mesh with it. It validates all strategic proposals, no matter which part of the group they emanate from, to ensure that the results will be aligned, both qualitatively and quantitatively, with the corporate mission of the conglomerate. Ratan Tata, the CEO of the Tata Group, is adopting the same objectives as he builds his New CEO Centre by hiring top-notch managers like, for instance, R. Gopalakrishnan from Hindustan Lever Ltd (HLL) and Kishore Chaukar from I-Sec.