Homi Khusrokhan has spent more than 40 years in the corporate sectorwith companies like Tata Tea, Tata Chemicals and the Glaxo group in India. Last year, he was appointed special advisor to the board of Satyam. In an interview with India Knowledge@Wharton during the 2010 Wharton India Economic Forum, Khusrokhan discusses the aftermath of the Satyam scandal, the secret to making corporate acquisitions successful and some leadership challenges he has faced during his career. India Knowledge@Wharton: In 2009, you were appointed as special advisor to the board of Satyam soon after a major scandal broke over there. I am sure that our audience all over the world will be very curious about your impression of what really went wrong and what you, in your role, were able to understand about how India can avoid such situations again.
Khusrokhan: Well, when I took the assignment everyone said I must be crazy to take on something like that. But I found within a few days that it was a very fine company. It was just the actions of the promoters which brought it to its sorry state. But there were 40,000 people who worked very sincerely for this company, did a phenomenal amount of good. I really felt glad a few days later because I found there is so much you can do in a positive way for revival of this company. It's just very unfortunate that a promoter could do something like what [B. Ramalinga] Raju did.
How do you prevent such things in the future? Very difficult. I think you can always legislate. You can always sort of try and put tighter rules into the system. But eventually it comes down to the philosophy of the promoter. This was a blatant fraud and it was clear there was an intent to deceive and it was done over eight years very systematically, very methodically. So I don't think there can be ultimate safeguards against this sort of thing happening again. But I suppose there will be tighter regulations in the future and certainly people will have to be a lot more vigilant about these sorts of things happening.
India Knowledge@Wharton: Considering the fact that you have seen governance in a lot of different companies, were you surprised that the fraud went undetected for so long? And could there have been any red flags that people could have paid attention to in order to bring this to light sooner?
Khusrokhan: Yes. Seen in retrospect it is always easy to say, "Look, surely someone should have noticed this." But it was a very, very well thought out, meticulously planned, fraud. Most of the documents put before auditors were forgeries. One could say, "Look, the auditors are responsible for really checking on things and, therefore, one of the key areas of blame lies there." But then again, you don't know exactly how they were lured into this feeling that everything was hunky-dory. It was a very difficult situation.
India Knowledge@Wharton: The Indian government and the people on the board have received tremendous compliments for the way in which the whole Satyam situation was handled and the way in which jobs were not lost, clients were not driven away, and a new buyer was found. What sort of lessons do you think can be learned from that experience?
Khusrokhan: Well, we structured our entire exercise into three buckets. One was the customer, which is very important because we had to make sure customers didn't walk away. We had to look at the people, because a lot of people were very anxious, very uncertain about their future and, of course, the cash. It was a very, very illiquid company in a pretty dire situation. I think when we went in, I wouldn't be surprised if they had just about two weeks of cash left in the organization, so getting some cash inflows into the company – emergency loans – was extremely important.
One of the things which we realized fairly early on was that we needed to work very fast. If this were allowed to fester and drag on for a longer period of time, it could have been disastrous. So it was a tough choice. Some people said, "Look, are you guys going to do a fire sale?" We said, "No. We are going to make sure we get the best price for this company." But we had to move very, very rapidly.
India Knowledge@Wharton: I'm sure there must have been a fair amount of demoralization among employees as well as a high degree of skepticism among customers. How did you address those issues?
Khusrokhan: Well, the people felt very let down. A lot of them were completely shell shocked. They didn't know how this sort of thing could have happened. I mean, people who were not any where near the top of the organization were completely dismayed, demoralized. They thought they had built a great company and they suddenly found everything vanishing in front of their eyes.
As [far as] customers were concerned, we had two types of customers. The guys who said, "Look, we will not deal with a company which has indulged in something like this." And they walked away within the first week. That was a knee-jerk reaction and we just couldn't do anything about those. But those who hesitated a little, those were the guys we started working on and saying, "Look, this is not all bad. It is a great company. They have done a phenomenal amount of work – good work on the software side. If you stick with them, just weather this little period, everything will be good again." A lot of them fortunately stayed back.
India Knowledge@Wharton: Great. Well, let's take a step backwards in your career when you were at the head of two major companies in the Tata Group. In 2001, you took over at Tata Tea and, of course, the Tetley acquisition is very well known. Could you help us understand a little bit of the strategic thinking that went into your growth plans for Tata Tea and how you went about planning that growth?
Khusrokhan: Yes. Actually the acquisition decision had been made before I joined Tata Tea. One of my first tasks when I went in was to try to integrate the two companies. But the thinking was very clear and very sound. Tata Tea was an old world plantation company. Of course it had powerful brands in the Indian environment, but it was not known outside the shores of India. The only way to really grow the business geographically across the world was to acquire a major tea company and a major tea brand. It really changed the type of company Tata Tea was.
India Knowledge@Wharton: In what way?
Khusrokhan: Teas can be sourced from wherever you want. There is no sense force-feeding your own teas into brands. You want to buy the best teas available at the best prices. The temptation is when you have your own production of tea. You tend to use that in preference to the best teas available for the blends you need. So one of the tasks I had to do was difficult, to get people to focus on the value of [the] teas they were producing and not just the quantity and yields of teas. The temptation of a plantation is to say, "Look, I've produced X% more than last year." But if the quality isn't what they should have produced, it is really worthless tea. So I had to introduce a system of internal transfer pricing and every batch of tea produced was actually valued at the price it could get in an auction.So that's how we sort of changed the value concept of plantations. And then people began to realize that it wasn't just a question of the quantity produced but the quality produced.
India Knowledge@Wharton: You very modestly said that the decision of the acquisition was made earlier and yours was the task of the integration. Very often that is the toughest part after an acquisition. How did you go about doing it and what were some of the lessons learned?
Khusrokhan: I have done about three or four [integrations] before that. And I had to do two more, so I have done about six or seven now. I knew the basic model but while there are certain commonalities in all integrations there will always be some new thoughts which come out of an integration. But the process is pretty well trodden.
India Knowledge@Wharton: Could you walk us through some of the basic models? And what was unique in the tea situation?
Khusrokhan: Well, in most integration models, two or three things which I insist on [are] -- first of all, what is your integration philosophy? What are you going to do? Are you going to just put two companies together? Or are you going to try and build a new company? Are you going to try and chose the best of both when you make your choices between people and processes and systems? So we decided, and I'm comfortable with this philosophy, that we use [the] best of both. We said we will choose the best of the lot and put together a new company. I think that worked very well.
We also found that although people talk a lot about cultural problems, it is not such a huge issue. I think the mistake people try to make is to change cultures. You've got to understand cultures and respect them. You don't necessarily have to change them. You need to understand how things are done in a particular culture and adjust your way to handling that cultural difference. I think that is a far better approach than trying to say, "Hey, these guys are now ours, we bought them. They have got to do what we do."
At the end of the day I think most integrations fail because people don't manage the uncertainty which goes with an integration. You've got to really think about the people – the uncertainty they are going through. Allay their fears. If you put a little bit of caring and employee-involvement into integrations, they work much better. So that's just a couple of things.
India Knowledge@Wharton: That's very sound advice. You went through, as you said, a similar exercise (acquisitions) when you were at Tata Chemicals in the soda ash industry. Could you tell us about some of the unique challenges those posed for you?
Khusrokhan: The first was a British company, [chemicals manufacturer] Brunner Mond, which was very similar to the Tata culture. We had a 100-day period for doing all the administrative stuff. We also drew up a new strategic plan for the group going forward. This was a company which was owned earlier by private equity [investors]. So the moment they felt they were back in the fold of a chemical company they felt so much better. A chemical parent was what they were looking for and I think that we gave them that. Plus, they had been strapped for cash. We had things like R&D. We were doing work in innovation, new technologies, nano chemistry – the sort of stuff fascinated the people who were working in Brunner Mond and they really enjoyed coming into the fold of a large chemical company. So that integration worked really well.
And a few years later, well, 18 months later, we bought General Chemicals, which was a really big American company. And this again turned out to be a very simple integration. When I said to them, "Look, we will do a typical 100-day process," [they said] "Why 100 days? Let's do it in 50." That sort of thing. All gung ho and ready to go ... and much more open to change than the British culture was. They expected jobs to be lost. They expected people to be changed around. They expected changes in hierarchies and responsibilities. [They were] much more ready to accept that. So [we gained] some valuable learnings in those two as well.
India Knowledge@Wharton: Academic research shows that a large number of mergers actually end up destroying shareholder value rather than building it. What did you learn through your experience about how to prevent that happening?
Khusrokhan: You have got to draw up an action plan for how you are going to build value. At the end of the day the meat of the matter is in the value you create out of integration. Unless you have a plan going forward -- what you are going to do, and how you are going to build that value -- it just doesn't make sense. A lot of integrations tend to focus their attention on cutting costs and thinking that just by synergizing and reducing numbers we can produce results. But at the end of the day it is the revenue synergies and the expansions, the growths, the new product opportunities, which come out of integrations, which are far more important. So I'd sort of focus on the value-creation rather than just cutting costs.
India Knowledge@Wharton: Right. If I could take you still one step further back in your career to the almost three decades that you spent in the pharmaceutical business in India with Glaxo and Burroughs Wellcome. What were some of the challenges you faced as a multinational trying to operate in India's pharmaceutical industry especially at the time when regulation was pretty tough?
Khusrokhan: Glaxo was a very unique multinational. I used to always say when we were running that company that it was the multinational of the brown face because we really thought as Indians. We were manned by Indians. Our MD (managing director) was an Indian from, I think, 1975 or 1976; we didn't have an expat. Glaxo had some very strong beliefs and hats off to the chairman at the time, Sir Paul Girolami, who was a far-sighted, legendary strategist. Sir Paul said, "Look, for a country like India"-- and he said this sometime in the 1980s -- "I don't expect a bottom line out of this country for the next 25 years." You won't find many chairmen saying something like that. But he said, "As long as you do well in your environment and you are a respected company in the environment in which you operate I am happy." That philosophy continued for many years thereafter. We did, of course, have a lot more profit pressures as the years passed, but that [was the] basic sort of approach -- that India is going to take time, there is no great urgency.
India Knowledge@Wharton: Over the course of your career you have faced lots of different challenges. Which would you regard as your single greatest leadership challenge? How did you overcome it? And what did you learn from it?
Khusrokhan: It is difficult to say which was the greatest challenge? But I think there was a period of time when I had to learn to manage people. I was a functional guy. I was a finance guy. And I was suddenly put in charge of marketing and had a team of 1,400 reps to look after. These guys were getting unionized and I think my biggest challenge was to encourage them to move away from external unions and bring them back into the internal fold. I still look on that as one of my greatest learning experiences.
India Knowledge@Wharton: How did you go about doing it?
Khusrokhan: I intuitively didn't attack the level of the [representative]. I attacked the level of the manager they reported to and I said if I make changes there, then I think I'll succeed. If I had gone straight to the rep level I would have probably failed. But I got a lot of champions on my side by going to the level of middle management, convincing them that they had to treat their reps differently, and then worked on their bosses to make sure they were treated differently. And then everything fell into place. But it took about two-and-a-half years of hard work.
India Knowledge@Wharton: One final question. How do you define success?
Khusrokhan: Something that makes you happy. It has to be something that you feel within you. I don't think [of it as] a pat on the back. Of course it helps, but you know it has got to be something you feel deep inside -- that "yes, I have succeeded."
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