Business Today | August 28, 2016

COVER STORY RailwaysYASHBANT NEGI The ideological parent of BJP, RSS is fundamentally against FDI and initially opposed it as well. The powerful Railways “The Railways does not unions too are sceptical of big corporates coming and “tak- appear to have the means ing away” their jobs. “The private investments and FDI are and the capacity to service not welcome. They will only lead to more exploitation in the the debt” name of more profits,” says Shiva Gopal Mishra, General Secretary, All India Railwaymen’s Federation. While he PAWAN KUMAR BANSAL, former Railways Minister admits that to expand the network and modernise opera- tions, Railways needs more capital, he argues this should Make it For Railways come from government coffers. Prabhu is engaging with these unions and taking them along. Meanwhile, Prime On November 9, 2015, a day after Prabhu’s party BJP faced Minister Narendra Modi convinced the top leadership of a humiliating defeat in Bihar’s state assembly elections, his RSS. RSS leaders say the leadership agreed but insisted that ministry issued a letter of awards to the US major GE and the NDA government must push for technology transfer. French firm Alstom. The agreement is to set up two separate locomotive manufacturing facilities at Marhowra and The international majors were pushing for assured Madhepura districts of the state, respectively. This was offtake. In negotiations, Prabhu made them agree to critical for Indian Railways, as the message went out that Railways’ demand of committing to maintenance, and the fate of projects would be measured on pure business making the pricing formula work. More than that, Prabhu grounds. “The file also never went to the minister. This was faced a challenge as this was the first time Railways was unthinkable just a few years ago,” says Mittal. More impor- dealing with foreign players for such a big deal, and the of- tantly, these were the biggest orders Indian Railways com- ficers were not willing to take risks. And they had their own mitted in several years. These projects will allow Railways apprehensions. For example, former chairman of Railway to upgrade several of the existing 10,773 locomotives, and Board, Arunendra Kumar, who was part of the initial delib- also allow some old and inefficient ones to retire. GE has erations on allowing FDI in locomotive manufacturing, says committed to manufacture 1,000 four-stroke diesel locomo- he had his differences on pricing in comparison to domestic tives, whereas Alstom will manufacture 800 electric loco- players. “The private entry is an experiment,” he says. motives, in 10 years from setting up of the factories. “Nobody has ever given this big an order of 10 years.” To make this happen, Prabhu opened the doors to FDI. His apprehension may not be misplaced. Each locomo- tive manufactured at Diesel Locomotive Works (DLW) Varanasi is priced at `13-18 crore. GE refused to share its price with BT. But Nalin Jain, President and CEO at South Asian chapter of GE (Rail, Mining, Defence & Aerospace), said that its locomotives will be of Evaluation grade –which is modern technology, and the prices are competitive. The market estimates are `14.7 crore a locomotive. Another point of view came from Debroy: “I would have liked a model where Railways came out with their plan to procure X number of locomotives in, say, the next 10 years rather than committing the offtake.” But for Alstom and GE, it’s a good deal. With commitment of $2.6 billion invest- ments, this is GE’S biggest bet in India, whereas, the euro 3 billion commitment is significant for Alstom, too. “The as- sured offtake gives us comfort of designing the whole pro- ject,” says Bharat Salhotra, Managing Director of Alstom Transport India. This also provides business opportunity for players like Bharat Forge, L&T, ABB, and Siemens. Efforts are on to revive projects to build coaches as well. This includes expanding the Raibareli facility’s capacity to 1,200 coaches from 400 annually. But the Railways is undecided on the Palakkad rail coach factory, which is de- layed since 2008, and was to be the first coach manufactur- ing facility with private investments. Meanwhile, Railways has decided to allow import of train sets instead of insisting on manufacturing in India. The initial requirement is of 17 train sets (316 coaches), which can run on semi-high speed, 52 BUSINESS TODAY August 28 2016

China has the largest high-speed trains network in the world THE CHINA MODELout of which five can be brought in complete knockdown condition andassembled here, and the rest is to be made in India. The five bidders who India under Railway Ministerqualified for the project are Alstom-BEML, CAF-Bombardier, Hitachi- Suresh Prabhu is not alone in re-Ansaldo, Siemens and Kawasaki-Toshiba-BHEL. In two rounds of financial forming its mammoth Railways.bids, none of the contenders put in their bets. “We asked for increasing the The sector has undergone a majororder size from 316 to 1,000 coaches to make our investments viable,” transformation in neighbouringsays the CEO of one consortium partner. But Railways disagreed. China as well. In 2013, China dis- solved its ministry of Railways. InCutting to the Core the process, it separated policy and regulation from commercial opera-By 2019, Indian Railways is expected to have debt of `2.5 lakh crore on tions. A new PSU – China Railwayits books. “Last year we spent on delegating projects, creating financial Corporation or CRC – was formed tostability, improving operational efficiency,” says a Railways official. “This run trains purely on commercialyear is for execution. We have a clear picture from where finances for the lines, whereas the transport ministryprojects will come in the next three years.” would do all the policy and planning. China is now in the league of coun- Prabhu’s baiters believe he is biting off more than he can chew. “There tries like Australia, Brazil, Canada,is a simple rule the corporate world teaches you: if you are taking financial Germany, Japan, Russia and the US,leverage, you (as an organisation) need to bring operational leverage to which have unitary transport minis-the table. This is the only way. Else a debt trap is waiting for you,” says a tries at the central level.former railway minister. Adds Bansal: “The Railways does not appear tohave the means and the capacity to service the debt. Only time will tell Can India take a leaf out ofwhether the Railways will be able to service the debt.” this? Not likely. While the railway operations of the eastern neigh- According to a senior Railway official, Prabhu’s instructions to his GMS bour are of similar scale to India’s,are clear: invest this money only where the IRR of the project is more than the issues might be identical and12-14 per cent. LIC, in another first for Railways, agreed to offer debt may require the same medicine, butthrough various instruments worth `1.5 lakh crore over the next five the problem is that India is muchyears. This forms an integral part of Prabhu’s `8.56 lakh crore capex. The slower in execution. India requiresfunds are available at a rate of 30 basis points over a 10-year benchmark major investments to uplift the ex-yield. These bonds also come with a five-year moratorium on interest and isting infrastructure. Plus, theloan repayment. “Today capital is no issue for us; we need to make our Indian Railways has traditionallyprojects bankable and make them earn good IRRS,” says Mittal. had a social obligation of providing cheap travel to the poor. That is easier said than done. Prabhu’s real test will be in the executionof his plans. And on that would ride the future of Indian Railways.~ China also doesn’t have the kind of suburban or intra-region service @anileshmahajan networks that India has. Although CRC would be compensated if re- quired to provide services that are not commercially viable, China ac- tively discourages shorter distance passenger trips. Such trips, in many countries including India, form a loss-making business. Then, unlike China, India re- quires access to technologies for modernisation and more strategic investments, such as FDI. To clear the current mess, more govern- ment patronage would be required. The Bibek Debroy Committee re- port, Rakesh Mohan’s India Transport Report, or Sam Pitroda’s report to modernise railways, among others, recommended that India run its Railways on commer- cial lines. Prabhu, too, wants to set up a holding company, on the lines of CRC and make all the railway PSUs subsidiaries. But this re- quires Prabhu’s reforms to take shape. Quickly. August 28 2016 BUSINESS TODAY 53

INTERVIEW Suresh PrabhuVIVAN MEHRA “ORGANISATIONALRESTRUCTURING WILL BETHEKEYTOTRANSFORMATION” RAILWAYS MINISTER SURESH PRABHU TALKS TO ANILESH S. MAHAJAN ON DELEGATION OF POWER AND HOW HE PLANS TO RAISE MONEY FOR AMBITIOUS CAPEX PLANS You have targeted a capital expenditure of `8.56 lakh years. That is why we came up with the plan to spend al- crore between 2015 and 2019. Of this, gross budget- most `8.56 lakh crore in five years. In the five years after ary support will be just `2.5 lakh crore. The railway that, we should spend double this amount if we want Indian ministry is creating space for private investments. It Railways to reach anywhere close to world standards. is also trying to leverage the books of railway PSUs and enter into tie-ups with state government agencies There are two aspects to this – funding and capability. and other PSUs for joint execution of projects. How do For funding, we have tapped innovative sources. We have you plan to go about it? been able to negotiate a loan of almost `1.5 lakh crore from LIC. We are also partnering with state governments Before I lay out the strategy for spending, let me put things for not only sourcing of funds but also enhancement of in perspective. The root cause of most financial woes of management bandwidth. The second element is capabil- Indian Railways is neglect of infrastructure creation for ity to execute projects. The first thing I did on joining was to delegate powers to functional levels. I also took meas- 54 BUSINESS TODAY August 28 2016

ures to ensure transparency by implementing e-contract- One game changer you are aiming for is setting up aing and e-tendering. We have started moving to EPC-type holding company for Indian Railways. You want tocontracting to ensure participation of big infrastructure leverage the books of railway PSUs to raise debt. Butplayers. Lastly, we are creating opportunities for private there is a question mark over the capability of Indianinvestment, too. Railways to execute projects. There is fear that it could land in a debt trap if these projects are executed withHow have economic headwinds hit plans to revive the the old mindset.railways? We have already seen that freight and pas-senger receipts in 2015/16 were not as per expecta- The holding company will ensure better utilisation of re-tions. How do you plan to deal with this? sources of all our PSUs. It will also help us leverage their balance sheets. On debt, I do not think there is a problem.We have taken steps to liberalise freight policies. We are Moreover, unless we build infrastructure, all future earn-looking to reduce dependence on a few commodities and ings will be at risk. Isn’t that a trap, too?expand volumes by rationalising tariffs. In the passengersegment, we have a strategy to launch distinct products Anyway, we have a rigorous process for managingfor different passenger needs. debt and improving project execution. For instance, we are looking at using drones to monitor projects. I personallyIn the Budget, you announced reforms in the Railway look at big projects like the Dedicated Freight Corridor (DFC)Board, merging of cadres and giving of more powers on a weekly basis. More delegation has reduced the timeto the board chairman. You have already delegated taken to implement projects. To quote an example, a pro-several powers to general manager-level officers. How curement tender at one of our factories, which used to takedo you see things moving from here? 500 days, was completed in 88 days recently.Organisational restructuring will be the key to transforma- When can we expect the regulator to be set up? This cantion. The overriding thought is to ensure cross-functional make investors more confident about the railways.collaboration and business-oriented mindset. A unifiedcadre will enable us to restructure the board on functional We put up a concept note on the Rail Developmentlines. The other important aspect of restructuring is about Authority (RDA) in public domain for comments. The nextprocesses, authority and accountability. One has to lead step is to prepare a draft Bill. We are deliberating onfrom the front. Hence, I was the first one to delegate pow- the feasibility of setting up the RDA through a Cabineters. I have not seen a single tender file in my tenure. Once decision.we delegate, we have to ensure that accountability is fixed.Hence, we have developed key result areas for each general The Budget announced three more DFCs. What lessonsmanager so that expectations are clear. have you learnt from delays in the first two DFCs?Indian Railways is facing competition for passenger We have managed to remove the bottlenecks. The projectand freight customers. Flights are becoming more and has gained momentum. Last year, we gave contractsmore affordable. Nitin Gadkari’s ministry wants a worth `23,000 crore, more than the total in the previouslarge chunk of freight to shift to waterways. six years. We are targeting completion of DFCs by December 2018. The key to fast execution is hard, rigor-Your assessment is right. Railways' share of freight has ous monitoring. I am calling for weekly reports. I ambeen decreasing. But in this government we don’t see talking to people executing things. Most of these projectsthings in silos. There is an integrated approach. We are will come up quickly.working with Gadkariji’s ministry to enhance connectivityof ports, waterways. Ultimately, consumers want stuff to The critics of the station redevelopment plan say themove efficiently. ‘plug and play’ model would have been better.We were told that 17 states have agreed to join hands Let the critics say whatever they want. As we are talking,with the railways for different projects. How are you the tender for the first station has been awarded. In theconvincing the states to pitch in? next few months, six-seven more will happen. We are looking at various models, not just PPP. We are revamp-The partnership is a win-win for both. What we are look- ing the entire process, including strengthening the or-ing at is managerial and project execution bandwidth ganisation for station redevelopment. ~along with partnership in cost and ownership. The statesdecide the priorities for development, including land use. @anileshmahajan August 28 2016 BUSINESS TODAY 55

COLUMN By Lalu Prasad & Sudhir KumarRAILWAYSSLIPPINGINTOA FINANCIALMORASS ANDTERMINALDEBT TRAP AJAY THAKURIIt’s ironic that Shri Suresh Prabhu, Minister for operating cash loss (EBITDA loss in corporate parlance) in Railways, has been rated as one of the top five per- forming ministers of the Modi Cabinet by a popular TV the current financial year. channel. This at a time when the Railways is grap- pling with its worst ever existential crisis. Budget In July 2001, Dr. Rakesh Mohan Committee had pre- targets have turned out to be nothing more thanbuilding castles in the air. The entire budgetary exercise, dicted that ‘Business As Usual Low Growth’ of 23 per centwhich always enjoyed high credibility, has become a bit ofa joke. In the year 2015/16, it missed gross traffic earnings would rapidly drive Railways into a fatal bankruptcy. But(GTR) targets by a whopping `20,000 crore. In fact, GTRgrew by a mere 4 per cent as against budget estimate of 17 now even Hindu rate of growth of 23 per cent has becomeper cent, and Indian Railways barely managed to meet itsoperating expenses and make payment of leasing charges a distant dream for Railways. For the past five years, itsand dividend to the government. Provisions forDepreciation Reserve Fund (DRF) and Development Fund freight volumes are stagnating and the same at 655 BTKMshad to be reduced substantially. (billion tonne kilometres) in 2015/16 are lower than the Slippages of last year, though, will pale into insignifi-cance this year because in this years. Budget it has not only figures in 2011/12 by 2 per cent. It recorded negativeoverestimated earnings but also understated expenses.Without any increase in passenger or freight rates, it is growth of nearly 3-4 per cent in both freight and passengertargeting a growth rate of 13 per cent in GTR. In the firsttwo months of the current financial year, GTR has regis- RAILWAYS' volumes last year. Thetered a negative growth of 8.2 per cent over the corre- TOTAL DEBT trend of falling volumessponding months of 2015/16. Freight earnings, the bread continues unabated evenand butter business of Railways, have recorded a de- WOULDBE in the first two months ofgrowth of an unprecedented 13 per cent during the same the current financial year.period. Furthermore, it has grossly underprovided for DRF AROUND The end of the commoditiesand 7th Pay Commission payments including arrears. A `4 LAKH CRORE boom has resulted in a sub-provision of `3,200 crore for DRF has been made on a re- IN MARCH 2017 stantial fall in traffic vol-sidual basis, rather than on the basis of actual require- umes of heavy commodi-ments of nearly `20,000 crore. On the basis of current ties such as iron ore, man-indications, reflecting negative growth in GTR, it would be ganese ore, etc. But keysafe to project that after the implementation of 7th Pay reasons for falling volumesCommission recommendations, Railways would report are neither cyclical down- turn nor capacity con- straints, but are far more fundamental and structural in nature. The single most important reason is the deteriorating competitive strength of Railways in a fiercely competitive transportation business. Railways mindlessly increased passenger and freight rates across the board by over 65 per cent over the past five years even in segments where it is continuously losing market share. These segments are finished products like POL, ce- ment, steel, fertilizer and containers of freight business and56 BUSINESS TODAY August 28 2016

all AC classes of passenger business. The second significant reveal that Railways, like any other transporter, is nowreason for negative growth in freight volumes is the fallinglead of bulk commodities such as coal, food grains, fertilizer, operating in a competitive marketplace where it enjoys anetc. All these factors appear to be irreversible in the nearfuture. Hence, Railways has no option but to attract non- edge in some profitable segments (like heavy bulk com-bulk traffic by offering superior value, in terms of quality andprice, to the customers. modities and second class passenger business) and not in Of late, Railways has been on a borrowing spree. Its others (like finished products such as POL, cement, steel andtotal outstanding debt including Capital at Charge (whichis loan in perpetuity) would be around `4 lakh crore on all AC classes). This erosion of competitiveness is unlikelyMarch 31, 2017. The decision to further increase financialleverage by signing MOUs for borrowings of $40 billion from to be solved by regulation; instead, it requires offering ainstitutions like LIC and JICA, that too for unremunerativeand cash guzzling projects like bullet trains’ is likely to prove superior and compelling value to the customers.to be suicidal, particularly at a time when the Railways islikely to report operating cash loss in the current fiscal year. Similarly, a deep analysis of the total cost function ofNo lessons seem to have been learnt by Railways eitherfrom the Lehman crisis in the US or the current bank NPA the Railways would show that its variability is negligible incrisis triggered by excessive financial leverage. the short term. The profitability of a train is a function of Overall, all vital operating parameters of Railways areflashing red, and it is sinking deeper and deeper into a fi- several variables including price and non-price variablesnancial morass and terminal debt trap. But the Railways,particularly the Minister, is still busy managing the head- such as occupancy rates, carrying capacity, load andlines and posting selfies on Twitter. There is lack of direc-tion and focus on core operating performance. The writing length per train. Thus, the focus has to shift from pricingon the wall is clear and time is fast running out. If promptcorrective actions are not taken, the situation may spiral per passenger/tonne to maximising profits through yieldout of control after the implementation of the 7th PayCommission Report, and Railways may, for the first time, and margins per train.default in payment of dividend and debt servicing. It will bea tragedy of unimaginable proportions and a huge betrayal Like in the past, it can again come out of this crisis byof the historic mandate. The wheels of the economy willstop cranking, and millions of poor and aspiring migrant implementing numerator focused and scale-driven strat-labour will lose their only affordable means of transport ifthe lifeline of the nation is allowed to wither away like egy: ‘play on volumes, re-MTNL and Air India. NO LESSONS duce unit cost, reduce The challenge before the political leadership of the prices, gain margins andcountry today is to meet the aspirations of an energetic newIndia and, at the same time, take care of poor who are no SEEM TO HAVE market share and earnless energetic. This formidable challenge can’t be overcome billions of dollars in prof-by rolling out capex figures of `1.5 lakh crore annually norby making high sounding shallow claims about transfor- BEEN LEARNT its’. The whole supply sidemation of Railways in TV studios. For success of inclusive strategy can be encapsu-reforms, Railways, on the other hand, has to think anewand seek new pathways. Variables like the very nature of BYTHE lated in just three words,the railways business, cost structures, revenue streams, ‘faster, heavier and longercompetitive strengths, relative elasticity of price and non-price factors, their variability and sensitivity to load and RAILWAYS trains’. The whole de-length of train have to be revisited. mand-side strategy can be Such analysis would show that about 80 per cent of the FROMTHE summed up in anotherrailways’ revenue streams as well as investments are not three words: ‘dynamic,politically sensitive and can be market driven. It would also LEHMAN CRISIS differential and market- driven’. Uniform pricing across commodities, classes, seasons, routes and traffic flows has to be substituted with a differential and dynamic pricing policy. It has to be translated into action through five critical management strategies: setting stretched targets, leverag- ing resources to optimise existing assets, working through cross-functional teams, fostering alliances, adopting a de- liberative and calibrated approach and chasing projects to swift completion. Railways should utilise its scarce re- sources strategically by adopting a systems-based ap- proach, to optimise utilisation of existing assets. Innovation and asset optimisation, as opposed to asset accumulation, are central to such an investment strategy. So are ‘low cost, short gestation, rapid payback and high returns’ invest- ments. Execution Mantra is best summed up in the words of Peter Drucker: “Great people do not do great things. They identify simple and obvious things and execute them swiftly and brilliantly.” ~Lalu Prasad is former railways minister. Sudhir Kumar was OSD to Prasad during his stint in the railways ministry August 28 2016 BUSINESS TODAY 57

INTERVIEW Oil & GasWE ARE SEEINGINTEREST FROMCOMPANIESACROSS THEBOARDINMay this year, Atanu Chakraborty, who last headed the Gujarat State WE WILL ENSURE Petroleum Corporation (GSPC), was cherry-picked by Prime Minister THAT THE Narendra Modi as the new Director General of Hydrocarbons (DGH). The office of the DGH regulates the exploration of oil and gas reserves COMPANY WHICH in the country, alongside providing technical support to the Ministry of APPROACHESPetroleum and Natural Gas. In his first detailed interview after taking over, US FIRST FORChakraborty speaks to Business Today’s Anilesh S. Mahajan. Edited excerpts: EXPLORATION DOES NOTThe auction process of small oil and gas fields has just started. What are LOSE OUTyour expectations from it?It is almost five years since new acreage was offered to investors in India. Whatare currently being offered are discovered fields. So the risk in exploration isvery low. These are all small fields, both onshore and offshore. It is a nice, bal-anced bouquet of offerings. Reserves have already been discovered up to acertain level, and those with good understanding of oil and gas fields can extracteven more. Processing facilities are also there. People should come in to improvethe investment climate for larger things that will come subsequently.Global crude prices have fallen to record lows and the projection is thatthey will not climb up to $100 a barrel again for the next two years. Isthis the right environment for India to auction these blocks?Since the blocks are small, the investment required to develop them will not bevery big either. Investors will not have to spend too much on facilities for pro-cessing and related activity, as we are trying to link these fields to either ONGC’s58 BUSINESS TODAY August 28 2016

VIVAN MEHRA(Oil and Natural Gas Corporation) or OIL’s (Oil India Ltd) HELP is predicated on a Unified Licence Scheme, which allowsexisting processing facilities. We are offering almost 2,000 exploration of both conventional and non-conventional hy-sq. km. of seismic surveys and about 1,300 sq km of seis- drocarbons. We are also considering open acreage, so thatmic data for 130 wells across 67 fields in 46 contract areas. companies are not restricted by the boundaries of a contractIt is very substantial data we are providing. It makes sense area. That reduces exploration risk, and the government isto invest in these blocks. We are offering revenue sharing okay with it, either through HELP or OALP (Open Acreagecontracts. Earlier governments offered profit sharing con- Licensing Policy). Both choices exist. There is also thetracts and that was a major issue for operators. Now rev- National Data Repository (NDR), in which we have alreadyenue risk is completely out. collected substantial data relating to almost 50 per cent of the sedimentary basins in the country. There is both raw andHow much interest have investors shown? processed data, which will help anyone looking at India as an investment option in extracting oil and gas. We have alsoWe had expected small and medium companies to show worked out the outline of the revenue sharing contracts weinterest with industry professionals or capital providers like will use with HELP or OALP. We are now working out detailedPE (private equity) firms tying up with them. But now we packages. We want to start as soon as these small fields’ bid isare seeing interest from companies across the board. We over. Mixing the two is not advisable.have opened a centre in Noida which provides all the datarelating to the 46 contract areas on offer. We intend to What sort of work is still left with the NDR?open similar centres in Houston, Calgary and London.Potential investors can buy the data packages, interpret NDR is complete but in a sense it will always remain athem and then come up with bids. work in progress. You have to always keep updating data. We are now working on improving the reliability (of theAfter NELP (New Exploration and Licensing Policy) data), working on disaster recovery and testing it out, en-which existed for many years, the cabinet has now suring that access is free as far as possible.approved HELP (Hydrocarbon Exploration andLicensing Policy). What difference will this make? If a company decides on an area and wants to explore August 28 2016 BUSINESS TODAY 59

INTERVIEW Oil & Gas Full interview at businesstoday.in/Chakraborty MARKETS AND it, how will you ensure market access. The oil and gas market is no longer tightly ACCESS ARE the government gets a good controlled and fragmented. Any investor, when he looks deal? at an area of potential investment, looks at the marketBEING OPENED structure, whether market forces are being allowed free UP AND THE The company will have to go play or whether the sector is heavily regulated. Highly REGULATORY through a bidding process be- regulated markets have their negatives. The heavy regula- BURDEN IS cause this is a natural resource. tory burden, along with issues related to the environment, There will have to be bidding. made the previous regime’s policy unviable.SUBSTANTIALLY REDUCED Won’t that be unfair to the What has happened now? Markets and access are be- company which first ap- ing opened up and the regulatory burden substantially proached you if others are reduced. Companies don’t have to depend on government allowed to bid for the same committees clearing their costs. They are free to plan their area? own programmes, but must adhere to a minimum work programme. Complementing this, permissions are flowing We will ensure that the com- fast across all sectors. The regulatory risks are gone. pany which approaches us first for exploration does not lose Should the DGH be made completely autonomous like out. I’m unable to outline any some of the other regulators?structure at this stage, because we are working on the legal-ity of various options. There is the Swiss challenge structure, There can be different opinions on this. The regulator iswhich comes in many variants and is quite commonly used. important in a scenario where the market is controlled inWhen some company does the initial exploration and its monopolistic fashion. In hydrocarbons, we are now al-work is taken up and we ask for bids, we can pay the com- lowing free entry and exit. Market access is open, as ispany the cost of exploration. We don’t want the company pricing. Many of the usual functions of a regulator are notwhich came in first to be at a disadvantage, or else no one required in this sector. Here, the regulator’s job is to bringwill come at all. more data into the public domain, and possibly at some time in the future, coordinate the sharing of facilities soTill the time you finalise HELP or OALP, can we expect that companies do not have to duplicate infrastructurea NELP, Round X? and hydrocarbons can be brought into the market earlier. These are two areas which may need some amount ofNELP X was part of the PSC (profit sharing contract) series, regulation. I think the present system is working all rightwhich is now over. We have moved to revenue sharing and no overnight overhauling is required. But the termcontracts. We can have HELP 1 or OALP 1 or a combination ‘regulator’ implies a certain amount of regulatory riskof both. We can offer a data package (HELP) or ask people and we want to reduce that.to look and build their own data (OALP), or both can go onsimultaneously. We will also have to see how the market As a regulator, you report to the petroleum ministry,responds. Sometimes markets are slow. It’s a strategy that which also runs ONGC, OIL and other oil and gasneeds to be worked out. PSUs. How fair is that?How will OALP 1 and HELP 1 be different? As I said, there is free entry and free exit in the sector. In such a situation, I guess the role of government as regula-OALP will have to be an ongoing exercise because a com- tor and as owner of oil and gas companies are completelypany will come in (to explore an area) and decide and bid. separate. But perhaps we need more debate on this.It will not wait for six other companies to also show interestand bid at the same time. But if you put together a package Is the current auction, using the new formula for thewhere the area choice is not open and ask for bids… that first time, the biggest test of your career?would be HELP 1. It is a dipstick to test investor sentiment. These are smallDid Prime Minister Narendra Modi’s experience with fields. In all, we are offering around 15,000 sq. km. acrossoil and gas in Gujarat help frame the new policy? these 46 areas. Some of the single blocks under explorationHow do you analyse the scenario? are bigger than all these fields put together. The response will be crucial in determining how the policy should beThere are two or three basic things about the new policy. tweaked in future for the bigger fields. ~First, it brings market forces into play. Second, it gives @anileshmahajan60 BUSINESS TODAY August 28 2016



VIVAN MEHRA CORPORATE McDonald's SELF GOAL The ugly spat between McDonald's and Vikram Bakshi, its estranged partner, is taking a toll on the brand's fortunes in India with competition fast catching up. BY SUMANT BANERJI It’s a balmy afternoon in Delhi and Vikram Bakshi, the 61-year-old former Managing Director of Connaught Plaza Restaurants Ltd (CPRL) — the joint venture (JV) company that manages US fast food major McDonald’s opera- tions in North and East India — is studying property sale deed documents in his corner office in New Delhi’s Jor Bagh. Bakshi, an old hand in the real es- tate business, knows this is not the best time to sell property. Yet, he has been selling a number of them, mostly in the Connaught Place area, for the past two years. He says it is okay to sacrifice a bit for a bigger goal. He is creating a war chest for the battle he has been fighting with McDonald’s since August 2013 when he was ousted as the CPRL managing director. He owns 50 per cent in the JV that dates back to 1995. The fight is a strain on Bakshi, but the real brunt has been borne by CPRL — its expansion has almost ground to a halt, financials are under strain, and it is losing market share (it is no longer the fast food industry leader; Dominos has raced far ahead while KFC is closing the gap fast). What is worse is that a settlement is unlikely. On July 21, the Delhi High Court set aside its earlier order staying the arbitration proceedings initiated by McDonald’s. Bakshi says he will challenge the ruling in the Supreme Court and insists the dispute62 BUSINESS TODAY August 28 2016

FALLING BEHINDMcDonald’s hold over the fast food segmentin India has weakened over the past fewyears, coinciding with its fight with Bakshi McDonald’s Dominos KFCREVENUES2015 2014 2013 2012 2011 2010 936.7 677.52 444.27 1,147.24 925.37 614.64 1,387.4 1,295.92 895.59 1,428.48 1,628.09 1,253.09 1,454.16 1,937.53 1,372.58 1,489.8 2,770 1,353.6 Figures in ` crore Source : Euromonitor IndiaNO. OF OUTLETS2015 2014 2013 2012 2011 2010 210 364 106 250 439 186 300 552 260 339 687 341 350 838 395 391 990 372 Source : Companies On July 21, the Delhi High Court set aside its earlier order staying the arbitration proceedings initiated by McDonald’s. Bakshi says he will chal- lenge the ruling in the Supreme Court August 28 2016 BUSINESS TODAY 63

CORPORATE McDonald's Aug 2013 Nov 2013 Nov 2014 In a contentious board meet- McDonald's terminates its Bakshi offers to sell his entire ing, Bakshi is shunted out as JV with Bakshi and moves the stake to McDonald's for London Court of International `2,500 crore. Brings it down MD of the JV. He Arbitration for settlement to `1,800 later. McDonald's drags McDonald's to the does not respond THE STORY SO FAR Company Law Board Dec 2014 Bakshi gets a stay order 2008 from the Delhi High Court McDonald's offers to buy Bakshi's on arbitration proceedings 50 per cent stake in Connaught Plaza Restaurants for $5 million.Later, raises the offer to $7 million. Bakshi refuses 1995 Jul 2016 McDonald's enters India The Delhi High Court revokes with two franchisees — the stay on arbitration. Rules inVikram Bakshi for North and East, favour of McDonald's. Dispute and Amit Jatia for West and heads to the London Court of South — with 50:50 share International Arbitrationbe settled in Indian courts. Ronald Place (Noida) outlet, our largest till December 2014. Once on best termsMcDonald, the clown that sits on the date. Everybody was happy. We were — with Bakshi being the face ofbench outside the firm’s outlets, isn't expanding and were profitable. McDonald’s in India — the gulf be-smiling any more. There was no hint of what was com- tween the two partners is wider than ing,” he says. ever. “We have lost confidence in ourDaggers Drawn former partner (for reasons set out in The situation deteriorated swiftly our legal case) and are working toThe battle lines were drawn at a after this. Stung at not being re- end the relationship according to themeeting of the CPRL board in August elected the managing director for the terms of our JV agreement,” says2013. Bakshi says he had no clue 10th time — the election took place Liam Jeory, Vice President, Corporateabout what was in the offing. The every alternate year — Bakshi Relations, McDonald’s Asia-Pacificprevious evening, he was dining dragged McDonald’s to the Company Middle East Africa. “Now that thewith Robert Larson, the relationship Law Board (CLB) seeking reinstate- Delhi High Court Division Bench haspartner for McDonald’s India, raising ment. The CLB ordered status quo on ruled in our favour and overturneda toast to CPRL’s success. The com- equity, removing any possibility of the stay, we are taking steps to con-pany had opened a record 27 outlets change in shareholding or either tinue the arbitration proceedings.the previous year and had plans to partner taking full control. While this legal action is takingopen another 35 in 2013. The only McDonald’s terminated the JV agree- place, we have no further commentsthing on their mind was expansion. ment and moved the London Court to make.”At the end of 2012, the JV agreement of International Arbitration.was amended so that the partners, The TriggersBakshi and McDonald’s, could pool A battle over valuation followed.in more equity, `6.5 crore each, and In early 2014, Bakshi offered to buy The main cause of mistrust wasraise debt for expansion. Bakshi was McDonald’s stake at a net asset value Bakshi’s real estate business.unaware that his days as managing of `150 crore. The US company made McDonald’s alleged he had leased outdirector were numbered. “It was an a `48-50 crore offer for Bakshi’s property to a rival company. He wasabsolute shocker .... hit me like a bolt stake. The latter insisted on fair mar- also accused of financial discrepan-from the blue,” he says. “Just the ket value and offered to sell initially cies/bungling in CPRL. Among theprevious night, I was at a dinner for `2,500 crore and later for `1,800 allegations the US firm levelled waswith Larson toasting our success. In crore. McDonald’s did not respond. that Bakshi had pledged 51,300 ofJune, we had opened the Great India As this went on, the Delhi High Court his CPRL shares to get a `20 crore stayed the arbitration proceedings in64 BUSINESS TODAY August 28 2016

loan for development of Savoy Outlet RACHIT GOSWAMIMall and service apartments inManesar by his company, Ascot AMIT JATIA in 2008, McDonald’s offered to buyEstate (Manesar) Pvt Ltd. Vice Chairman, Westlife Development Bakshi’s stake for $5 million andMcDonald’s said he did not take ap- later for $7 million. Bakshi wavedproval from the company before \"As a master franchisee for Mc- Grant Thornton’s report that peggedpledging the shares. It also pointed at Donald’s, we continue to grow. CPRL’s enterprise value at $331 mil-a 2007 transfer of `7 lakh from the We opened 30 restaurants last lion and demanded upwards of $100company’s account to his group year. We now have a presence million. The success of the companycompany, Vikram Bakshi and across 30 cities in our market\" between 2008 and 2012, when itCompany Pvt Ltd. It also “high- grew manifold and turned profitable,lighted glaring inadequacies with Jatia (which takes care of western was not enough to fill these cracks.respect to internal control systems”, and southern markets) was 16th.Bakshi’s focus on his other busi- They could get nothing credible The Cookie Crumblesnesses and directorship of 25 other against me and so raked up a 2007companies — it said he was not de- issue that had been resolved,” he On a hot day in June 2016, the tem-voting enough time to CPRL. says. perature touching 42 degrees in Jaipur, Chief Medical and Health “Leasing out property to a rival The first cracks in the JV had, of Officer Narottam Sharma and hismay not be a breach of contract but course, appeared much earlier when, team were on a routine inspection ofit was a definite breach of trust,” says restaurants. They were checking thea former CPRL employee, requesting quality of ice cream served in theanonymity. “Charges of financialbungling were tough to prove, and atleast in the Regal building outletcase, Bakshi did pay back the moneywith interest. But it was enough tocause discomfort in the US. Basically,they could not rely on him any-more.” The Regal building case re-lates to the `7 crore that CPRL lent toa Bakshi-owned company for a spaceit had rented in New Delhi’sConnaught Place. Bakshi refutes the allegationsand says the board, which had rep-resentatives from McDonald’s too,was aware of all the actions.“McDonald’s has used everything toproject me as the culprit. It had fullknowledge of what was happening.It makes it look as if I did somethingentirely on my own. How can I,when all the agreements are signedwith the approval of the board?” saysBakshi. “In their own brand healthevaluation, in the Asia-Pacific re-gion, McDonald’s Delhi came in thirdafter Australia and New Zealand, in2010. Their Mumbai JV with Amit

CORPORATE McDonald's900 HOW THE TWO FRANCHISEES HAVE 833 by far but the fact is that the indus- try is evolving rapidly,” says Saloni800 FARED OVER THE YEARS Nangia, President, Technopak. “There is a lot of innovation and700 681 675 fusion happening in the industry. Many new players are entering the600 market, bringing novelty. While the company is growing well in500 562 western and southern regions and innovating — the introduction of400 Connaught Plaza Restaurants McCafe is a case in point — there 299 Hardcastle Restaurants has been hardly any expansion in northern and eastern parts. This is300 dragging them down.”200 274 McDonald’s JV in West and100 South, Hardcastle Restaurants Pvt Ltd (HRPL), has had a0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16* smoother ride. Helped by the US firm selling its 50 per cent stake to part- * Estimated Figures are revenues in `crore Source: Companies ner Amit Jatia of Westlife Development Ltd in 2010, the com-various outlets. What they stumbled tor, he will not comment on the pany has been adding more outlets,upon took them by surprise. At the Jaipur incident, but agrees that qual- increasing revenues at a fast paceMcDonald’s outlet in the posh Raj ity, service and cleanliness at the and innovating. The contrast be-Mandir area, Sharma saw something outlets have worsened. tween the performance of the twounusual in the oil being used to cook ventures in the past three years isitems such as aloo tikki and french The US firm, however, says the telling. In 2012/13, the last finan-fries. “The palmolein oil had been incident was a result of misunder- cial year when Bakshi was inreused so much that it had turned standing. “Subject matter experts charge, CPRL was operating 154completely black,” he says. Visits to have met the FSSAI and demon- outlets and reported a revenue oftwo other outlets revealed this was strated how the initial misunder- `562 crore. Under Jatia, HRPL hadnot an aberration. The team de- standing of our cooking oil processes 161 outlets with revenues of `681stroyed around 120 litres oil that day led to the incorrect diagnosis and crore. The fight hit CPRL. Its outletand sent samples to the laboratory. subsequent headlines,”says Jeory. count in 2015/16 was 168 and es-“Palmolein oil is less healthy than “We are working with the authori- timated revenues were `675 crore.other edible oils. Repeated use and ties on development of consistent oil Under Jatia, HRPL had steamedheating can cause a host of health standards for the wider food indus- ahead. In 2015/16, it had 236 out-problems. From a global fast food try,” he says. The US firm says any lets with revenues of `833 crore. Inchain like McDonald’s, it was quite a doubts about the company’s regard the past three years, CPRL has addedshock,” he says. for the Indian market would be mis- just 14 outlets and `113 crore in placed. “McDonald’s is very much revenues, while HRPL has added 75 The incident shows the disarray committed to India,” says Jeory. “We outlets and `152 crore in revenues.in CPRL — expansion has stalled, are going through this difficult andquality control has gone for a toss, lengthy process because we believe “As a master franchisee forand profitability has nosedived. in its potential,” he says. McDonald’s, we continue to grow.Between 2009 and 2013, it regis- We opened 30 restaurants last year.tered a cash profit of `110 crore. In Bakshi has a different view. “Now We now have a presence across 302014/15, it had a cash loss of `41 what you see in North and East is a cities in our market,” says Jatia, Vicecrore. After opening 27 outlets in pale version of what it used to be,” he Chairman, Westlife Development Ltd.2012, it opened only 14 in 2013 as says. “This fight has turned it into aagainst the target of 35. The num- loss-making company. All I ask for is Neither Bakshi nor McDonald’sbers were nine in 2014 and three in fair value for my stake. It hurts like are in the mood to relent. The stage2015. This year, it has opened just hell. But why is it not hurting the is set for a long litigation. As Ronaldone outlet, in Ajmer, and this too was owners of the brand?” he says. McDonald would say, only the law-under construction for three years. yers and competitors are lovin’ it. ~The time taken to start an outlet has The stagnation has cost the com-gone up from four months in 2012 pany dearly. From being the market @sumantbanerjito 12 months in 2014 and 16 leader in the fast food segment tillmonths in 2015. Bakshi says since 2012, it lost the crown to Dominos inhe is no longer the managing direc- 2013, the year the spat with Bakshi began. “McDonald’s remains the market leader in the burger segment66 BUSINESS TODAY August 28 2016



CORPORATE InMobi VIVAN MEHRASTRUGGLINGUNICORN Naveen Tewari, CEO & Co-founder, InMobi

InMobi, India’s first billion-dollar-valuation 10 REASONS whystart-up, is finding it difficult to raise funds InMobi is strugglingand survive independently. BY VENKATESHA BABU INTENSE COMPETITION: While theOn September 15, 2011, when Japanese firm SoftBank Group global ad-tech market is very announced a $200-million investment in InMobi, celebra- large, it is highly fragmented be- tions broke out in the company’s then main headquarters yond Facebook and Google, which at Embassy Golf Links, a technology park in Bengaluru. own 40 per cent of the market There was a palpable sense of excitement among InMobi's rank and file. An Indian company was taking on PLATFORM OWNERSHIP: Unlike Face- the might of the likes of Google and Facebook in the digital book, Google, or Twitter, InMobi advertising technology space (ad tech) – a David taking on doesn’t own platforms and thus the Goliaths. The investment was a milestone. Softbank will always be at a handicap when had come into the company, valuing it at a little over a bil- competing for ad inventorylion dollars, officially making it India’s first Unicorn. A Unicorn is any privatecompany, which has a valuation of more than a billion dollars. FAILURE OF MIIP: InMobi launched its discovery commerce platform Cut to June 22, 2016. The US Federal Trade Commission said in a statement that MiiP with considerable fanfareInMobi had “deceptively tracked the locations of hundreds of millions of consumers and investment last year. That– including children – without their knowledge or consent to serve them geo-targeted optimism is yet to pay off in termsadvertising.” Under the terms of settlement, FTC slapped a $4-million civil penalty on of revenuesInMobi, who admitted that it had made an inadvertent and unintentional error.Significantly, the FTC statement further said that the $4-million penalty was slashed TALENT FLIGHT: A series of depar-to less than a fourth to $950,000 based on the “company’s financial condition”. tures of senior leaders — from CFO to chief revenue officer to head Why did India’s first ever Unicorn company, which had raised a cumulative of M&A — seems to have affectedsum of $220.5 million apart from a $100 million in venture debt, have to plead executionto have its penalty reduced? Rumours have been swirling for months that thecompany, which says it is the world’s largest independent third-party ad-tech FUNDING PAIN: InMobi has beenplayer, was up for sale; that it was unable to raise further funding; that it was struggling to raise funds, evenburning through cash; that it had laid off nearly a fifth of its employees; and that though the company claims it isit was staring at an uncertain future. not looking for the same Business Today spoke to the company as well as former and current employ- LACK OF PROCESSES: To retainees, analysts and industry experts to get a sense of why India’s first Unicorn may talent, InMobi did away with annualend up as a Unicorpse (a former Unicorn, now valued at less than $1 billion). ratings, travel budgets and decid-But before we get there, it is important to understand the digital ad-tech space ed to give bonuses to everybody.and why InMobi has had a dizzy roller-coaster ride. This worked when it was small, but was a recipe for chaos and lack ofGenesis and the opportunity ownership when it grewThe story of InMobi’s birth is by now well known. How Naveen Tewari, a whiz- POSITIONING DILEMMA: Most play-kid who studied at IIT Kanpur and Harvard with work stint at McKinsey, even- ers have decided to focus on one area of expertise — locational or video-based ad tech. InMobi wants to be a horizontal play, a much harder thing to pull-off DEBT: The company recently raised $100 million in venture debt. Unlike equity, debt for a loss-making com- pany is an expensive proposition STAFF MORALE: Recent layoffs in the company of 10-20 per cent of the workforce have hit staff morale STRATEGY STRUGGLES: With its larg- est investor Softbank itself facing leadership turbulence, InMobi has struggled to get its strategy right August 28 2016 BUSINESS TODAY 69

CORPORATE InMobitually started a company with three friends in 2006. The millions of people in Asia – particularly China and India –company was initially called mKhoj (short for mobile khoj as well as other emerging markets, their first online experi-or mobile search) and two of the co-founders were his ence was through a mobile phone. If InMobi could act asfriends at IIT Kanpur – Abhay Singhal and Amit Gupta. the middleman by matching companies (advertisers)The three along with Mohit Saxena started mKhoj in a seeking to reach these billions and those who owned con-Mumbai flat. It offered SMS-based search services. tent or platforms, it could make a tidy sum in the bargain. It could insert banners, pop-up ads, search, display, video, The company even raised half a million dollars from location and geo-specific advertisements to match theMumbai Angels in 2007. However, failing to find traction content/publishing property and the advertisers.in providing SMS-based search services, and in keepingwith the old VC thesis of investments being about people This, of course, would happen seamlessly with the helpand not the idea, mKhoj pivoted. Then a concatenation of of technology. InMobi would just take a small sliver of per-foresight and circumstances helped mKhoj hit the big time centage for the services rendered. However by scaling, that is serving billions of ad impressions, it could make a substan-FADING COLOUR OF MONEY tial sum. Think of say one paisa per ad, inserted. While that may not sound much, if you multiply it with a few billionInMobi’s last tranche of funding was $5 million in 2014… impressions, the numbers start getting impressive.FROM WHEN AMOUNT ROUND InMobi was not alone in recognising this potential. Apart from the major players like Google, Facebook,Mumbai Angels Aug 2006 $0.5 Million Angel Yahoo, AOL, Microsoft and conventional ad agencies, Series A several digital ad-tech players sprung up.Kleiner Perkins & Sherpalo May 2007 $7.1 Million Series B Series C What did help InMobi was its initial focus on marketsKleiner Perkins & Sherpalo Jul 2010 $8 Million --------- like China and India, which were mobile first. While esti- mates vary depending on who is collating and interpretingSoftbank Sep 2011 $200 Million data, the mobile ad-tech market is a $30-50 billion oppor- tunity. Even if a player corners single-digit market shares,Softbank Aug 2014 $5 Million that is very big revenue. The company, which serves up the ads, charges its customers in many different ways. Cost per# In addition InMobi has raised a net venture debt of $100 million click, cost per view, cost per action, cost per install, cost perSource: Company announcements impression and many other ways. It passes on bulk of this revenue earned to the platform owner or content owner…And the losses, too, have refused to go away, though revenues are healthy and keeps 30-40 per cent to itself.300 Revenues Losses 0 InMobi says it is the largest ‘independent’ ad-tech net-250 -10 work in the world. That is the largest player who does not200 -20 own a platform to serve those ads like a Google or a150 -30 Facebook does. -40100 -50 Investment and Inflection -6050 -70 Even before the Softbank investment, InMobi had raised -80 money from blue-chip VC firms such as Kleiner Perkins0 -90 Caufield Byers (KPCB) and Sherpalo Ventures of Ram 2009/10 Shriram, an early investor in Google. When the Softbank 2010/11 2011/12 2012/13 2013/14 2014/15 investment came, ad-tech was the hottest sector to invest in.Figures in $ million Accumulated losses till 31 March 2015 is ~ $223 million While the market was fragmented, InMobi rode theSource: Company filings with ACRA Singapore & other regulatory authorities wave and doubled its revenue each year. It counts the likes of Uber, P&G, Airbnb, Adidas, Yamha and several othersunder a new moniker. It rebranded itself as InMobi. amongst its customers. It also acquired small niche firms The advertising business has been around forever. to plug gaps in its offerings. “We positioned InMobi as a true technology company and thought leader in the mobileEven by the time InMobi took birth, the online advertising ad-tech space, acquired a large base of customers, grewspace backed by technology was not just growing but a revenues like crazy and helped integrate acquisitions,” saysclearly identified opportunity for at least a decade. Google, Shrikant Latkar, a former San Francisco-based chief mar-even in 2008, was a multibillion-dollar corporation, which keting officer of InMobi.earned revenue mostly by serving ads to visitors of itsubiquitous search engine apart from other properties. So However, platform owners like Google, Facebook anddid Yahoo and a then rising star called Facebook. Yahoo had one advantage over middlemen like InMobi. They own the inventory. Other middlemen have to either aggregate InMobi quickly realised that unlike the western mar-kets where desktops and laptops were the mainstay, for70 BUSINESS TODAY August 28 2016

inventory or match make the same. So, ability to manage NILOTPAL BARUAHmargins and inventory was higher with the platform owners. INTERVIEW: ABHAY SINGHAL In order to not get steamrolled by Facebook and Google,which had locked up nearly 40 per cent of the market, most Co-founder & Chief Revenue Officer, InMobiothers decided to focus on vertical strengths. InMobi madea contrarian bet and decided that it would continue to be a “We will be profitable in the next three months”horizontal play. Meanwhile, newer players like Verizon,which has acquired AOL and Yahoo recently, apart from InMobi Co-founder Abhay Singhal has the unenviablethe likes of Snapchat, Twitter and Pininterest have emerged task of being the company’s chief revenue officer at aas other major players. InMobi, though, insists it reaches time when it is struggling to cut losses and raise money.1.6 billion unique mobile users a month and decided to Singhal spoke with Venkatesha Babu. Edited excerpts:continue headbutting against the biggies across offerings. On cutting losses and becoming profitable: This was the inflection point. We will be profitable in the next three months. Profitability is no more a concern as it was, say, six to eight months back.MiiP and Markets We will become profitable without pulling down the GMV (gross merchandise value). Unfortunately we are beingTo further strengthen its offerings, in August 2015, InMobi bracketed with e-commerce companies. We are unit eco-launched MiiP (pronounced meep) – its branded offering for nomics profitable. We have margins of 40 per cent.mobile commerce discovery – with much fanfare and moreimportantly substantial investment. A select bunch of Indian On layoffs & moonshoots:journalists were flown to the launch in the US. Naveen We have had an annualised attrition rate of only aroundTewari proclaimed that mobile advertising was broken be- 20 per cent. We have a stable workforce of around 975.cause it didn’t include the user effectively. With a monkey as We continue to hire. Yes, we might have pulled backa mascot, MIIP was supposed to change that forever. on a few moonshot projects. We shut down four products and put them on 6-12 months hold. For instance, if you were searching on mobile for aflight ticket to Goa, MIIP would also serve up hotel room On survival as an independent ad-tech network:bookings, taxi services for your pickup and drop to airport In third-party, independent ad tech networks, there areas well as sell beachwear to relax in, once you reach the pressures from advertisers as well as content platforms.destination or that was the idea. It was all about contextual InMobi’s unique proposition is its strength in the East ininformation and MIIP was touted as the next big thing. markets like China (and India). Days of being everyone to everybody are over. Everybody is looking to carve A year later, Abhay Singhal, the Chief Revenue Officer out a niche.and Co-founder of InMobi admits that MIIP could have donebetter. Faisal Kawoosa, Telecom Analyst at CMR Research On raising more money:says that “MIIP has not been able to add value”, which is By the end of this quarter, I don’t see us dipping intowhy it has not taken off in the manner anticipated. reserves to run the company for working capital. We will be able to do it on our profits. We are not looking to raise More than the failure of one single product, the biggest capital. However, we are in on-and-off conversations withchange is that markets and investors have turned sour on a few strategic partners (investors) to provide for whateverad-tech companies. There is a good reason for that. Most is required for our long-term growth. I don't think theof the ad tech companies that listed are quoting at a frac- company needs cash for sustenance or survival.tion of their IPO price. For instance, Tremor Video issuedshares at $10 but is now trading at $1.91. Similarly,Millenial Media was valued at more than $2 billion onlisting in 2012 – it was sold in September 2015 for a mere$238 million or a tenth of its peak value. Ad-tech players are falling out of favour because plat-forms like Google and Facebook are purchasing their ownads, cutting out the middleman. Since they have scale theycan afford to do so. This hurts non-platform players likeInMobi. With high fragmentation, platform players are run-ning away with the most profitable chunks of the industry. There are some other concerns, too, such as advertisersbeing concerned about ad fraud (charging for inflated view-ers), lack of transparency and accountability as well as in-creasing use of ad blockers even on mobile. To be sure, theseare industry-wide issues but platforms are more effective incountering them than independent ad tech companies. August 28 2016 BUSINESS TODAY 71

CORPORATE InMobi “There are only three models. One is to be a large plat- VP of Marketing, however says the company still has 975 form of owned inventory, like what Google, Facebook or to employees and “we continue to hire”. A series of senior lead- some extent even Twitter is. The second model is to be a ers has left the company in the recent past. Manish Dugar, tech provider to mega digital publishers. The third model, CFO; Samuel John, Director of Operations; Atul Satija, Chief which is difficult to execute, is to become a very large ag- Revenue Officer; and Nimish Joshi, Head of M&A, Investor gregator and thus get pricing power. InMobi can pursue the Relations, among others. Counters Singhal. “Most of them latter two options – they have to decide what makes sense with the exception of Manish (Dugar) were not that key. All for them,’’ says Sharad Sharma, a former Yahoo India R&D start-ups face some attrition. People who had left us in the head who now is both an active investor and leads the past have returned recently.” Indian software product industry lobby group iSpirt. To ensure that it becomes profitable in a tough climate, Layoffs, funding and profitability: InMobi also has cut back on funding for so-called moonshot projects (long-term projects with low probability of success). While InMobi raised a cumulative $220.5 million and has Singhal, however, says that they continue to invest in de- been witnessing topline growth, it has struggled to make veloping products required to help InMobi’s customers. Softbank, the main investor in ARUN PATTABHIRAMAN/ VP & Global Head, Marketing, InMobi InMobi, is itself facing turbulence after its COO Nikesh Arora recently left the “The potential for mobile advertising to grow even organisation. Another analyst who further is very huge and we (InMobi) have been making did not want to be identified, says the right moves in the marketplace” “Nikesh came from Google and under- stood the ad-tech business very well. The fact that even when he was at Softbank and when InMobi was des- perately looking for additional funds, he chose not to invest, must say some- thing. InMobi is clearly at crossroads.” Singhal asserts that InMobi will be profitable in a quarter and does not require additional funding for survival. His claims are however being taken “with a bucket of salt” says the analyst quoted above. “Since 2011, they have been publicly saying they are a quarterNILOTPAL BARUAH away from profitability. Unless they raise equity or debt, they are a good acquisition candidate who will be likely sold for pennies on the dollar.” Softbank, which is a major stake- holder in the company, might not also allow InMobi to raise funds in a down round making them a money. While Singhal protests that the business enjoys Unicorpse. ‘That is for the board to de- 30-40 per cent margins and is “unit economics profitable”, cide and I cannot comment on it,’ says Singhal. the company is clearly making losses. It has accumulated Naveen Tewari in the past had declared that InMobi losses of $224 million. On top of it, the company raised would reach a billion dollars in revenue by 2016. It looks $100 million in venture debt from Tennanebaum Capital like this year they may end up closer to $300 million. The Partners, of which $40 million was used to repay an ear- US IPO that Tewari has spoken in the past is unlikely to hap- lier loan raised from Hercules Technology Growth Capital. pen, too. China’s Youzu Interactive is often mentioned as a Filings of the company indicate that at the beginning potential investor/acquirer of InMobi. However, with ac- of the financial year it had a mere $30 million in the bank. cumulated losses and debt equal to revenues, it is unlikely Just for perspective, InMobi had losses of $40.91 million to pay the kind of price that existing investors may want. in 2015/16 and that of $45.5 million in 2014/15. So this For InMobi, the next couple of quarters might decide has to be a do or die year. its future.~ To turn profitable, the company has laid off approxi- mately 15-20 per cent of its workforce. Arun Pattabhiraman, @venkateshababu 72 BUSINESS TODAY August 28 2016



AUTOMOBILES Utility Vehicles RACING AHEADUVs are fast becoming the most popular category in passenger cars. What attracts customers to them? By CHANCHAL PAL CHAUHANt is a dramatic change in the price con- around two-third of the passenger vehicle market, UVs –scious Indian auto market where small despite their higher cost and lower mileage – rose to 25.54cars have traditionally cornered the bulk of per cent in the first quarter of 2016/17, a significant rise inconsumer demand. In 2015/16, the rate market share from 21 per cent in 2015/16. Five of the topof growth of utility vehicles (UV) – includ- 10 bestselling passenger car models of 2016/17 are UVs –ing sports utility vehicle (SUV) and multi- Hyundai Creta, Toyota Innova Crysta and Maruti Vitarapurpose vehicle (MPV) segments – has Brezza. The achievement is all the more impressive sincestarted to gain, well above that of hatch- auto sales have been tepid for a number of years.backs. Though hatchbacks still comprise UVs are distinguished by their larger size, higher74 BUSINESS TODAY August 28 2016

VIVAN MEHRA38 % The pace of growth of utility vehicle sales so far this fiscalground clearance and four-wheel drive, as compared to waiting period. It has surpassed our expectations and couldhatchbacks. For years in India, they struggled to make an become our fastest growing model ever.”impact, with the Gypsy, for instance – the first ever SUV inthe country, launched three decades ago by Maruti Suzuki A number of Maruti Suzuki’s rivals have also recently– lagging well behind the company’s more popular models launched new SUV models – Hyundai has Creta, Mahindralike the 800 or the Omni. The contrast with the reception has TUV300 and KUV100, Honda its BR-V, Toyota, a newto its new SUV, the Vitara Brezza launched in January this version of its Innova as Crysta – all of which have beenyear, is striking. “The Brezza is quite a craze,” says R.C. enthusiastically welcomed. Honda’s BR-V has notched upBhargava, Maruti Suzuki’s Chairman. “It has a six-month 10,000 bookings since its launch in May this year. Many more are expected this year: Tata Motors’ Nexon, Maruti August 28 2016 BUSINESS TODAY 75

AUTOMOBILES Utility VehiclesRACING AHEAD Suzuki’s Ignis, Mahindra’s Ssangyong Tivoli, Datsun’s GO-Cross and perhaps, Ford’s Kuga. Hyundai’s new TucsonUtility vehicles outgrow other segments – Europe’s third-highest selling SUV after Nissan’s Qashqaiin April-June 2016 and Renault Kadjar – Chrysler’s Jeep Wrangler and Jeep Cherokee are expected to follow. But success is not limited LITY VEHICLES to new models – the likes of Mahindra’s Scorpio and Tata Motors’ Safari continue to have ardent customers. 38.04% 1,76,788 UTI Competition among the numerous brands is fierce. In 4,82,614 March this year, Maruti’s Brezza was the top-selling SUV 1,28,073 with 7,193 units sold, but in April it had slipped to third place. In May, it was back at No 2, with Innova as the -1.41% CARS bestselling UV brand, selling 7,259 units, followed by Creta and Mahindra’s two models. All of them are stepping up VANS 4,75,799 production, with Maruti increasing Brezza’s rollout from 6,500 to 10,000 units a month to reduce the waiting pe- 3.87% riod. “We’re noticing unprecedented sales of our SUVs in 42,906 44,567 Delhi, Mumbai and other major metros,” says P.N. Shah, Mahindra CEO – Automative Sector. Rakesh Srivastava, April-June 2015 April-June 2016 % Change Senior Vice President, Sales and Marketing, Hyundai, is just as enthusiastic about the Creta. “Despite increasing Source: Society of Indian Automobile Manufacturers (SIAM) production, the demand exceeds supply,” he says.Utility vehicles now comprise a quarter UVs can also be divided into segments – compact, mid-of passenger vehicle sales size, luxury – and it is no surprise that it is the compact variety that appeals most to the value conscious Indian 78.67 77.59 consumer. A number of the recent SUV launches have 70.56 71.37 72.12 72.61 68.23 been in the compact category. Renault already had a winner SUV in its Duster, but with its sales lately sagging,12.86 20.61 it also brought in its SUV-styled Kwid in September last 13.89 25.54 year. While the Duster costs between costs between `8.462010/11 lakh and `13.56 lakh, the Kwid’s starting price, at `2.62 21 21.29 21.03 lakh, matches that of any hatchback. “Duster helped us establish the Renault brand in India, so we thought we 2016/17* would use the same concept in the mini segment too,” says Sumit Sawhney, Renault India Managing Director. Cars UVs “Kwid borrows the styling philosophy of Duster, such as wheels at the outer edges of the body, high ground clear- UVs include SUVs and MUVs; Figures (in %) indicate share in total ance, wing extenders and versatility in use.” It is also passenger vehicle market; *April to June 2016; Source: SIAM working towards introducing its global favourite among compact SUVs, the Kadjar, in India. Some industry experts believe the SUVS could well overtake the hatchback in coming years. “There has been a sustainable shift towards new-age vehicles, and SUVs, which provide both functionality and comfort, have gained the most,” says Amit Kaushik, Country Manager of auto- motive business intelligence provider, JATO Dynamics India. “One can blame bad roads for their rise, or point to the enhanced status they confer on their owners as com- pared to hatchbacks. As Indians get richer, we expect this segment to keep growing.” While young people in general have been attracted to SUVs, a curious feature is their growing attraction for women drivers. In 2015/16, around 6 to 8 per cent of SUV buyers were women. This may appear small, but in the overall passenger car market, woman buyers comprise half this figure. In the luxury SUV bracket, women buyers are76 BUSINESS TODAY August 28 2016

COST NO BARLuxury SUVs, too, are making a mark Its rival Volkswagen’s luxury brand Satya Bagla, its exclusive importer. “We in India. Leading luxury carmaker Audi initially thrived in India on its A4 and are booking only for 2017.” Mercedes-Benz’s initial lot of GLC A6 sedans, but lately its Q range of SUVs models were fully booked even — Q3, Q5 and Q7 — have overtaken all Lamborghini is set to bring its Urus before they hit the market in June this year. other models. “Our SUV portfolio contrib- Concept to India, while Maserati is plan- Since the GLC engine is above 2,000 cc, the utes about 45 per cent to our total sales ning to introduce its Levante SUV. Aston Supreme Court’s order put paid to its diesel and, going by the trend, it could emerge Martin intends to launch its DBX in India varient in the Delhi-NCR region, but the as our single biggest category,” says Joe in 2019, earmarking an investment of $315 petrol variant is selling very well indeed. “We King, Head, Audi India. “We assemble million for this country. Rolls-Royce has are tempted to expand well beyond the six- these models in India.” Bentley has even almost finalised the Indian entry of its model portfolio we had planned, given the brought its most expensive and fastest Cullinan. Tata owned Jaguar Land Rover pace at which the demand for SUVs is grow- model, Bentayga to India, selling at an is bringing its F-PACE model in the home ing,” says Roland Folger, CEO and Managing astronomical `3.85 crore per unit. “We market, while Mercedes-Benz may induct Director, Mercedes-Benz India. “India is the were allocated a certain number of its new Maybach SUV to rival Bentley’s fastest growing market across Mercedes Bentaygas for India in 2016 by Bentley and Bentayga. India may still have some way Benz’s portfolio.” we have exhausted that figure,” says to go to rival China in luxury SUVs, but it has made a beginning.around 12 per cent against a negligible number barely four ditional segments,” says Kaushik of Jato Dynamics. “It isto five years ago. The introduction of an automatic trans- the same in India with a clear trend of consumers movingmission variant in most SUVs – which dispenses with the from compact cars and sedans to small SUVs.”need to operate a gear shaft – has been a further draw forthem. “Automatic transmission brings in many women Safer Optionscustomers,” says Srivastava of Hyundai. Creta, which al-ways had an automatic transmission variant with its diesel A big advantage of SUVs is that they are much safer, in theengine, recently added one for its petrol model as well. event of an accident, than hatchbacks or even sedans. Safety standards have risen over the years and all vehicles Some of the new SUVs like Vitara Brezza come only have excellent crash test ratings, but SUVs are severalwith diesel engines. Even among those with petrol and notches safer. Tests by agencies such as the New Cardiesel variants, it is the latter that has proved more popular Assessment Programme (NCAP) have shown that in the– 84 per cent of SUVs sold in the first three months of case of a side-on or head-on collision, SUV occupants are2016/17, for instance, were diesel powered. “Around 80 less likely to be injured than those in smaller vehicles. Oneper cent of Creta’s demand is in diesel,” says Srivastava of particular study by the University at Buffalo showed theHyundai. Diesel SUVs are preferred despite diesel’s polluting possibility of casualties occurring – following a crash – ispotential and the curbs imposed on such vehicles by the 7.6 times lower for an SUV passenger than for those inSupreme Court. Last December, the court banned registra- other types of vehicles. “The SUV is bigger and heavier withtion of new diesel vehicles of more than 2,000 cc in the a higher stance, which allows superior construction,” saysNational Capital Region – which included popular models Srivastava. “It enables carmakers to accommodate safetysuch as Innova and Mercedes-Benz GLA. features like crumble zones, which also appeal to the safety- conscious younger generation.” In opting increasingly for SUVs, Indians are only follow-ing the global pattern. The SUV segment was the biggest There are no mandatory safety ratings for vehicles ingrowth driver in Europe in the January-March quarter of India yet, though they are likely to be enforced by next2016, gaining 25 per cent over the same quarter in 2015, year. Mahindra XUV500, for instance, got a high safetywith Hyundai’s Tucson and Renault’s Kadjar leading the rating from NCAP-Australia, but it did not have to satisfyway. Other models, too, are selling handsomely – Toyota’s any such standard in India. In this case, then, carmakersRAV4, for instance, gained 13 per cent globally and Honda’s seem to be ahead of the regulators in the country. ~CR-V 7 per cent in 2016 (until June). “Across the world,SUVs continue to post strong growth at the expense of tra- @sablaik August 28 2016 BUSINESS TODAY 77

SPATELECOM DNCRegistry SMS Text: Turkish Full Body Massage With 2 beautiful Girls @1499, Single body MSSG @999/- Venaz Thai Spa Jacuzzi Rooms, Noida Sec- 18, Call: +919811643471, 919811643481 T he SMS above is a sample of the tens of promo- tional calls and messages that most of us get on any given day. But there has been a change of late. The numbers have seen a sudden spurt, after a relatively quiet phase following crackdown by the Telecom Regulatory Authority of India, or TRAI, starting with the Do Not Call, or DNC, guidelines in 2007. These

AMMED!PTRHTOEHMETOHTMRIEOINVNAIANCLGESBIMSUBSYSUMeIANsNNULEAKAIUSNKSHSEDIK LOMYFATSIOLESNVADMNIENIASGNHSwere followed by more detailed gest, however, is affordability. After getting the licences, telemar-norms in 2010. TRAI has changed Telemarketers have to pay just 8 keters tie up with telecom compa-the regulations 17 times. To little paisa to telcos (the selling price is nies, which assign them dedicatedeffect. Even the DNC registry — a 9-11 paisa), whereas bulk emails SMPP pipes for sending SMSes. SMPPsystem under which one can regis- require buying of server space in is a protocol that allows non-mobileter one’s number for prohibiting data centres that costs between players to use services of telecomany telemarketer from calling or `20,000 and `40,000 per server companies for sending and receiv-sending promotional messages — is per year. The cost of an email is one ing SMSes.of little help as telemarketers have paisa. It is sold for 2-4 paisa.devised ways to skirt the rules. The Most registered telemarketersnumber of complaints against spam Though there is no official esti- abide by the rules. The problem iscalls and messages grew from mate, experts say telemarketing is non-registered telemarketers who39,636 in quarter ended December around a `1,500-crore industry. buy bulk SIM cards off the shelf and2015 to 51,540 in quarter ended TRAI says India has 10,888 regis- bombard users with spam SMSes.June 2016. The phone numbers tered telemarketers. The unregis- However, the rules, as they are,disconnected rose from 23,540 to tered space is even bigger. In the handicap the licensed player, who34,412 during the period. past two years, TRAI has blacklisted can contact only those who are not about 317,000 unregistered tele- on the DNC registry as in case of a The reasons for the spurt in marketers. violation the penalty can be as highunwanted calls/SMEes and emails as `2.5 lakh. At last count, 234.3include loopholes in rules, lack of Advantage Spammers million subscribers had registeredawareness, rising mobile penetra- their numbers in the Nationaltion, backing from some telecom The system to monitor commercial Customer Preference Register out ofoperators, and rise of e-commerce calls and messages is not water- the total mobile subscriber base ofand services companies. The big- tight. TRAI issues licences to tele- 1,034 million. In contrast, non- marketing companies for five years. August 28 2016 BUSINESS TODAY 79

THE JOURNEY OFA SPAM MESSAGE1.A real estate developer plans 2.He goes to a telemarketer, who sells him 3.Developer logs in to to run an SMS promotional 1,00,000 SMSes for Rs 10,000. Gives the website. Types incampaign to sell his unsold flats him a login/password to access the web panel the SMSregistered telemarketers can spam in case of a violation. the system will always find a way,”whoever they want to. This means Another reason for the prolif- says Rajan Mathews, Director-their reach is wider. Two, if an un- General of the Cellular Operators’licensed telemarketer is caught, eration of unlicensed telemarketers Association of India, the GSM indus-there are no penalties. TRAI can is lack of strict rules for getting a try body.only disable the SIM card used for phone connection. As per the rules,sending the messages. “They buy an individual can buy up to 10 SIM The process of filing complaintSIM cards in bulk, send SMSes, and cards. But a few telemarketers BT through SMS is also tedious. Usersthen dispose of these cards. When spoke with said there are ways by have to send SMS “the unsolicitedwe receive complaints, we discon- which people can buy hundreds of commercial communication,nect the numbers. We cannot do SIM cards in their names. If one SIM XXXXXXXXXX, dd/mm/yy, Timemore,” says Sudhir Gupta, card is deactivated, more can be hh:mm” to 1909, whereSecretary, TRAI. Registered telemar- issued in their names or in names XXXXXXXXXX is the phone numberketers have to deposit `50,000 as of employees and relatives. or the message header of the unso-security with the telecom operator licited call or message. A uniquefor deducting the penalty amount “There are some fly-by-night complaint number is generated. operators who are creating prob- Users are informed about the action lems. The guy who wants to scam taken within seven days.HOW TO STOP UNSOLITICED “On paper, telecom companiesCALLS AND SMSes may have the identity of each SIM owner, but when it comes to viola-USING DND SERVICES APP: The app is currently available tion it’s difficult for TRAI or telecomon Android. An iOS version will be launched shortly. In this app, there companies to track SIM factories,”are four options: reporting of unsolicited SMS, reporting of unsolicited says Kalpit Jain, CEO of netCORE, acalls, complaint status, and option to check registration status. The first Mumbai-based mobile marketingtwo options show call records and SMSes and can be manually ticked if company. Unlicensed telemarketersthe user receives unsolicited calls or SMSes. are called SIM factories in industry parlance.THROUGH SMS: Strangely, users are given two options: fullyblocked category, which can be activated by sending ‘START 0’ SMS TRAI, however, says that theto 1909; and partially blocked category, which can be activated by spike in spam SMSes/calls andsending ‘START’ SMS with one or multiple options to the same number. emails has got to do a lot with theThe users can choose to get spam SMSes related to banking, insur- rise in the number of users. “It’s notance, financial products, credit cards, real estate, education, health, that the framework we have put isconsumer goods, automobiles, entertainment and tourism. To register not working. It is just that morea complaint, they have to send SMS \"the unsolicited commercial com- people are using SMSes for promo-munication, XXXXXXXXXX, dd/mm/yy\" to 1909 where XXXXXXXXXX is the tion,” says Gupta.number from which message has come. TRAI says it has asked telecomUSING PHONE CALL: DNC service can be activated by dialling companies to block SMSes from un-1909 and selecting the options from pre-recorded voice menu of all telcos. licensed operators (unregistered telemarketers use regular 10-digit80 BUSINESS TODAY August 28 2016

4.Developer loads contact 5.The message goes through the 6.Message reaches the AJAY THAKURI numbers of potential telemarketer system. DND inbox of non-registeredcustomers to the web panel, scrubber weeds out numbers regis- subscribers showing alpha-and clicks send tered under Do Not Call registry numeric number on topmobile numbers whereas licensed much as their monthly pay checks. BUGGING AWAYones use alpha-numerics). “Telecom That’s not all. The business is growingcompanies are not allowed to read at 30-40 per cent a year. Both take NUMBER OF TELEMARKETERSSMSes. However, we have asked them home `1.5 lakh each per month. “The REGISTERED (IN JULY 2016):to find identical SMSes that number business is thriving thanks to demandbeyond a limit and block them on their from real estate, e-commerce, banking 10,888own,” says Gupta. This means every and services companies. We processtelecom player keeps a directory of key close to one crore messages every NUMBER OF SUBSCRIBERSpromotional words and blocks bulk month,” says Kailash. They have REGISTERED IN NATIONAL CUS-SMSes that have these words. But served over 1,000 clients across the TOMER PREFERENCE REGISTERsome unregulated telemarketers have country, including Andhra Bank, (IN JULY 2016):found a way out of this too. For in- Honda Motorcycle And Scooter India,stance, they replace “LOAN” with IFFCO and Union Bank of India. 234.3 MILLION“L0AN” (with 0 digit). Baghel’s business card reads Sales TOTAL COMPLAINTS RECEIVED TRAI had imposed a limit of 200 Manager. He says this helps them get BY SERVICE PROVIDERSSMSes per day per SIM card in 2011. payment upfront. “If we tell new cli- (BETWEEN SEPTEMBER 2011 ANDThis reduced spamming to an extent. ents that we are the owners, they may JULY 2016):In 2012, the Delhi High Court re- ask us for trial. In this business, clientmoved the cap. Later, it increased the satisfaction can never be guaranteed. 1.3 MILLIONcost of sending more than 100 mes- Sometimes when a client doesn’t getsages to 50 paisa per message, higher good ROI (return on investment), it NUMBER OF TELEPHONE DISCON-than the average of 10 paisa. But this holds back payments,” he says. NECTIONS OF UNREGISTEREDhas not helped much either. TELEMARKETERS (BETWEEN SEP- Hind Adsoft is a small player in a TEMBER 2011 AND JULY 2016):Flying High market dominated by netCORE, ValueFirst Digital Media, SMSCountry 0.78 MILLIONThere are many reasons for the prolif- and mGage. netCORE was started byeration of telemarketers. First, the cost Rajesh Jain, who managed Prime NUMBER OF TELEMARKETERSof setting up operations is minimal. Minister Narendra Modi’s social media BLACKLISTED (AS ON JULY 2016):Ram Kailash, 26, worked for about 18 campaign in the 2014 general elec-months with a digital marketing com- tions. It processes close to 1.8 billion 12pany before starting a telemarketing SMSes per month and also offers a hostfirm, Hind Adsoft Pvt Ltd, in 2013. of other services such as IVR (interactive NUMBER OF UNREGISTEREDKailash and his partner, Sanjay voice response), outbound dialling, TELEMARKETERS BLACKLISTEDBaghel, operate out of a small first- missed call and bulk emails. So, when IN TWO YEARS (TILL JULY 2017):floor office in New Delhi’s Laxmi the prime minister calls you up and asksNagar and employ 12 people. Baghel you to give up LPG subsidy, the call has 317,000and Kailash used `4 lakh savings to most likely originated from netCORE’sstart the business. Kailash says within outbound dialling facility. The company TELEMARKETERS AREthree months they were earning as claims to be a market leader in spam ASSIGNED A DISTINCT SERIES BEGINNING WITH 140 Source: TRAI August 28 2016 BUSINESS TODAY 81

TELECOM DNC Registry \"IN CASE OF A \"THE GUYVIOLATION, IT’S WHO WANTS DIFFICULT FOR TO SCAM THETRAI OR TELCOS SYSTEM WILL ALWAYS FIND TO TRACK SIM A WAY\" FACTORIES\" RAJAN S. MATHEWS KALPIT JAIN DIRECTOR-GENERAL, COAI CEO, NETCOREemails. It sends four-five billion emails framed their DNC regulations much ers, is becoming smarter. The cli-from its 400 servers in a month. before the federal government ents are demanding higher ROIs, drafted national guidelines. Some that is, higher conversion rates – However, remember that not all states such as California operate the number of people who enquireSMSes are spams — they can be clas- their own DNC registries. Australian about or buy the product or servicesified into promotional and transac- regulator ACMA joined hands with as a proportion of those spammed.tional. Online transactions, one-time regulators from 11 countries to There are no industry standards butpasswords and reminders are trans- form the International Do Not Call 1 per cent ROI is considered good.actional messages, a fast-growing Network in 2012.category in the spam economy. As stricter DNC guidelines have Thriving Biz hit ROI, telemarketers are offering “We connect with seven billion clients smart solutions. For in-customers in a month, which The spam economy is thriving. stance, email is cost-effective, butmakes us the largest player in this Billions of messages and call min- not many people read all theirbusiness,” says Jain. Telemarketers utes generate decent revenues. emails. So, the marketers are usingsuch as netCORE are now entering Though the margins are thin, good systems that track how many peo-push notifications, short messages volumes ensure steady income. ple clicked on an email (or the we-sent by e-commerce apps to pro- blink in the SMS) and how manymote special offers. COAI’s Mathews says telecom made the purchase. companies by and large obey DNC What is driving the business is rules. “For most large operators, it “Spamming software are be-affordability, in spite of strict DNC contributes less than 1 per cent to coming intelligent and doing be-rules increasing costs. In 2013, revenues. Smaller operators with haviour-based marketing,” saysTRAI introduced a termination excess capacity may feel compelled netCORE’s Jain. For instance, therecharge of 5 paisa on each transac- to grow this side of the business,” he are software that look at the behav-tional SMS and 2 paisa on each says, adding that “some telcos with iour of the user and then decidenormal SMS on operators from around 60 per cent utilisation may what message to send next. So, ifwhose network the message origi- be using their capacity for such the user buys a mobile phone fromnates. Earlier, the total cost was services.” Flipkart, he is likely to receive SMSes1.5-2 paisa. “Still, in comparison to for mobile accessories over the nextother channels such as TV and TRAI’s June report shows that few days.hoardings, SMS is an affordable VLR (visitor location register) of fourmedium. It’s effective as well. telecom companies – MTS, With constant spamming, tele-People usually read each SMS. They Videocon, MTNL and Quadrant – marketers are invading privacy.may not watch all TV commercials. was around 60 per cent. VLR is the The serious business models beingAlso, SMSes reach the target audi- number of active subscribers com- built around this make it even moreence,” says a telemarketer. pared to the subscriber base. A low difficult for the regulator to come number suggests telecom compa- down heavily on them. For con- Several countries, including nies have high unutilised capacity. sumers, it seems there is no sign ofAustralia, US, Japan, New Zealand the end to suffering.~and Canada, have strict rules on Intelligent Spammingunsolicited calls and messages. In @manukaushikthe US, for instance, many states The spamming industry, like oth-82 BUSINESS TODAY August 28 2016



START-UPsHome(Not So)AloneTrue to its name,Health Care at Homebrings hospital care,ranging from injectionto chemotherapy, toyour doorstep.By SONAL KHETARPALIt was 11 PM when a Noida- May 2015; she has continued using crowded and expensive private based IT consultant was the service since then. hospitals – as per World Health bringing her father home Statistics, India has only 0.9 beds from the hospital – he was Vivek Srivastava, CEO of Health per 1,000 people, far below the being discharged after two Care at Home (HCAH), admits that it global average of 2.9 – are paving months. “We needed a full- was an anomaly and that it usually the way for more such services. time assistant and an air takes 24 hours of fulfilment time as Moreover, a PwC report states that bed urgently,” she recalls. commercial vehicles – required to India needs an investment of aroundDoctors prescribe air beds for bed- carry items such as beds – are al- $245 billion to address this problemridden patients to prevent bed sores. lowed to ply only in the early hours. of limited resources; only then can itShe contacted Health Care at Home, cater to the need for 3.5 million beds,a patient care service provider, and Patient services at home are be- three million doctors and six millionin an hour a team was setting up ing increasingly availed by families, nurses over a period of 20 years.the bed at her place. This was in especially for those with long-term chronic illness. The weak public In 2012, Srivastava, who used hospital infrastructure, and over-84 BUSINESS TODAY August 28 2016

VIVAN MEHRA Co-founder Vivek COMPANY: Srivastava Health Care at Home FOUNDED IN: September 2012 FOUNDERS: Vivek Srivastava, Charles Walsh, Gareth Jones, Anand Burman, Gaurav Burman BASED IN: Delhi-NCR BUSINESS: Provides healthcare services at home FUNDING COMMITTED: `200 crore REVENUES: `13.77 crore (FY 14/15) MARKET SIZE: `13,200 croreto manage private investments for In the beginning, HCAH tied up complex treatments such as homethe promoters of Dabur, met Charles with hospitals to provide post-oper- ventilation and chemotherapy.Walsh and Dr. Gareth Jones, co- ative treatments such as injections, Srivastava claims that HCAH canfounders of Health Care at Home in dressings and physiotherapy ses- provide 70 per cent of the servicesthe UK. The duo had exited the sions at patients’ homes. Delhi- provided in hospitals at the comfort`13,000-crore company – built over based Fortis Healthcare was its first of a patient’s home. Surgeries, radi-18 years – and was scouting for a partner. When the company real- ation-related medical tests such aspartner in India for a similar ven- ised there was a huge demand for MRI and ultrasound, which requireture. The Dabur scions, Anand post-surgery and palliative care for a licence, are outside its purview.Burman and Gaurav Burman, also patients 24x7, it launched the ICUgot interested and co-founded the at Home service, which now gener- In 2014, the company startedventure. The partners plan to invest ates the maximum revenue, partnering with pharmaceutical`200 crore in the entity over the Srivastava informs. Over the years, companies to offer value-addednext five years. it expanded its services to provide services such as counselling for specific illnesses and reminders for August 28 2016 BUSINESS TODAY 85

START-UPs Health Care at Home medicine delivery. HCAH has tied up monitoring, random physical checks it acquired Mumbai-based Health with 40 pharma companies; the contracts can cost `50,000 to `20 are carried out every month and calls Impetus for an undisclosed amount lakh per month, depending on the scale of services required. Today, 60 to the patient’s family are made once to offer disease management services. per cent of its revenue comes from this segment. The rest comes from in two to three days. It has also partnered with Japan’s hospitals and individual patients. The two users this writer spoke $10-billion healthcare media com- The cost of a wound dressing or injection could be `500, whereas to affirmed HCAH’S emphasis on pany M3 to launch an internet-based setting up an ICU at home could cost strong customer service. A Delhi- healthcare service in India. between `6,000 and `20,000 per day, which, Srivastava says, is 30- based female entrepreneur said, “I According to PwC, globally, the 50 per cent lower than what a hospital charges, on average. have screamed at them and vented home healthcare market is estimated HCAH provides mandatory six- my frustration, but the good thing to be worth $210 billion, of which week in-house training to its person- nel, followed by regular refresher about them is that they listen, apolo- India has 1 per cent share – about courses and an examination. There is heavy reliance on technology to en- `13,200 crore. sure processes are streamlined and quality is assured. Its in-house tech Estimates indicate platform generates care plans auto- matically, as per the disease, and that close to 90 per measures the patient’s condition on 300 parameters. The software is cent of the home loaded onto the tablets that the healthcare providers carry. This al- healthcare market is lows HCAH to monitor services pro- vided in real time. Apart from remote unorganised, serviced by local players. Several other compa- nies such as Bangalore-based Portea Medical and Nightingales Home Health Services, and Chennai-based India Home Health Care have woken up to this huge opportunity.SHEKHAR GHOSH Start-ups such as Care24 in Mumbai and Pramati A patient being Healthcare in Delhi, treated at home too, have entered the fray recently. From 3,000+ monthly vis- its in October 2015, gise and try to rectify the situation.” two-year-old Pramati claims to be The IT consultant quoted in the handling 6,000+ monthly visits. beginning, who does not wish to be Founded in December 2014, Care24 named, said, “They would call me serves around 500 patients per day three times a week to check if the and claims to be growing at about service provided was fine. When they 30-40 per cent month on month. got to know that I have a travelling HCAH claims to have grown by a job and my mother is alone at home, hundred times since its inception and they started calling her every alter- has serviced 300,000 patients. This nate day, without us asking.” growth has helped the company be- However, she would prefer that phys- come gross-margin positive, says ical checks be done more often, espe- Srivastava. “We are yet to recover the cially for critical patients. investments for fixed costs, which we HCAH is exploring partnerships hope to do by 2018.” As per MoC, in with insurance companies for pre- FY 2014/15, the company’s revenue policy check-ups, post-operative care was `13.77 crore, a healthy growth and ICU at Home services for people from the `1.87 crore in 2013/14. ~ covered under an insurance plan to bring down the claim cost. Recently, @sonalkhetarpal7 86 BUSINESS TODAY August 28 2016







ILLUSTRATION BY: RAJ VERMA

Detecting marketplace “fault lines” is the keyto building the case for pre-emptive change.By MARK BERTOLINI, DAVID DUNCAN, and ANDREW WALDECK

HBR ExclusiveNo business survives over the long term with- medical policyholders, making it the third-largest player in out reinventing itself. the highly conservative health insurance business. The But knowing when to undertake deliberate stra- Fortune 100 company appeared to be in a strong position: tegic transformation – when to change a com- It had grown even during the 2008-2009 recession, when pany’s core products or business model – may be millions of people lost their jobs and their employer-pro-the hardest decision a leader faces. This kind of change re- vided health insurance, and it was prospering in the wakequires overcoming big obstacles: Employees feel threatened, of the 2010 US Affordable Care Act, which imposed signifi-customers can become confused, investors don’t like un- cant industry reforms. By the end of Bertolini’s first year atproven strategies. And the risk of failure is high – research the helm, Aetna had achieved a 38 per cent surge in year-conducted by two of us suggests that although more than on-year net income; it seemed impervious to disruption.80 per cent of executives at large enterprises recognise the Yet during a pivotal series of board meetings early inneed for transformation, only about a third are confident his term, Bertolini began making a case for transformingthat they can get the job done in five to 10 years. The deci- the company into something beyond a traditional healthsion to reinvent is even more difficult when company per- insurer. He was driven in part by personal experiences –formance is strong and Wall Street is happy; it’s tempting he had suffered a near-fatal ski accident, and his son hadto take a wait-and-see approach unless evidence clearly been diagnosed with a rare form of cancer – that left himshows that industry disruption is imminent. But by then it deeply critical of the existing health care system. But hemay be too late, as demonstrated all too well by cautionary backed up his intuition by telling the board of certain faultcases from Borders and Blockbuster to Compaq and Kodak. lines that indicated a changing future: Despite its profit-So how can a leader know that it’s time to transform a ability, the business of health insurance in its currentcompany? We have identified five interrelated “fault lines” form would soon disappear, to be replaced by a wholethat suggest the ground beneath a company is more un- new way of making money that focused on servicingstable than it may appear. Executives who can detect these health care’s consumers and providers. If Aetna pursuedfault lines have early warning of industry only small changes, Bertolini argued, itupheaval and can prepare and adapt. Just When an risked either slow decline or disruptionas important, our fault line framework can industry from new entrants – but if it transformedhelp executives build a case for change and reaches an to take advantage of new opportunities, itgarner stakeholders’ support. Finally, by inflection could double its revenue by 2020.identifying gaps between an organisation’s point, oldcurrent state and where it needs to be to ways of As of this writing the transformationthrive in the future, the framework can measuring programme at Aetna is far from complete,inform the vision of how the company must and – like that of any ambitious initiativetransform, which can be refined once the – its success is not guaranteed. Our inten-change is under way. tion in what follows is not to discuss the specifics of Aetna’s programme but to ex- Given the magnitude of disruption re- plore each fault line in turn and to explainquired to compel a company to reinvent it-self, our fault lines focus on fundamentals: success how the fault line framework helpedwhether a business is serving the right set of can lead to Bertolini and the Aetna board make thecustomers and using the right performancemetrics, whether it is positioned properly in a sharp existential choice to reinvent the companyits ecosystem and is deploying the right busi- decline — just when its profits were soaring.ness model, and whether its employees and or failure 1Customer needs. For most of itspartners have the necessary capabilities. 160-year history, Aetna’s customers were mainly large organisations – corpo-To illustrate how to detect the fault lines, rations, governments, universities, andwe rely principally on our experience at the health care other employers. Typically one person or a small depart-company Aetna, where one of us (Mark Bertolini) is the CEO ment in each chose the health plan or plans for the entireand the others have worked as strategic consultants. We organisation. Thus, one of Aetna’s core competencies wasalso draw on cases from Nestlé, Netflix, Xerox, and Adobe, selling plans to those intermediaries, rather than to theall of which undertook strategic transformations in the past ultimate consumers.15 years. Accompanying the discussion of each fault line is This turned out to be a major fault line. Benefits manag-a set of diagnostic questions designed to help leaders recog- ers and policy brokers look for ways to demonstrate valuenise impending upheaval while there’s still time to respond. to their organisations – which had come to mean offeringDetecting the Fault Lines at Aetna employees something “new”. The process inevitably gave rise to policy features that few members used in a givenIn 2010, when Bertolini became CEO, Aetna had 22 million year but that generated higher and higher premiums. It92 BUSINESS TODAY August 28 2016

FINDING STABLE GROUND When leaders spot fault lines early, they can preempt disruption. Here’s how five companies adapted to impending upheavalFAULT LINE Customer Needs Performance Metrics Industry Position Business Model Talent and CapabilitiesCOMPANY Nestlé Adobe Xerox Netflix AetnaCONTEXT In 1997 Nestlé was the In 2008 Adobe In 2001 the office In the late 2000s In 2010 Aetna identified world’s largest food measured success by equipment industry was streaming content talent as its biggest company. But consum- how many software under siege from Asian threatened to risk — not just finding ers wanted more- packages it licensed, competitors and make Netflix’s people with the right healthful options but its customers cared intermediary group- mail-order DVD rental skills but also cultivating more about web traffic purchasing service obsolete employees with the and revenue organisations courage to step into something newSTRATEGIC Nestlé transformed Adobe switched Xerox lessened Netflix changed and uncertain SHIFT itself into an R&D- its primary metric its dependence emphasis, and by and marketing-driven of success to on office hardware and 2013 it became the Aetna launched an nutrition, health, and subscriptions began offering business world’s leading internal start-up in wellness company and renewals for process outsourcing streaming-content Denver and Silicon its new cloud-based services company Valley — places where services it could find employees with the skills and attitude to disrupt its traditional businessalso resulted in one-size-fits-all plans, with individuals un- health and their health plans. Because of its narrow focusable to choose the coverage that was best for them. on its traditional customers, Aetna had become discon- nected from the most urgent needs of its true customers – Bertolini recognised that the needs of his primary cus- such as the ability of individuals to buy the right healthtomers – benefits managers – were not as urgent as the plans for their situations and the ability of hospitals, clinics,needs of the insured. Indeed, catering to those middlemen and other providers to offer higher-quality, lower-cost care.was backfiring. Employers and consumers alike were start-ing to actively shop for health care services, and they were Aetna is not the only company to recognise a fault linegrowing increasingly sensitive to price. The Affordable between the needs of today’s customers and those of to-Care Act had drawn public attention to the enormous cost morrow’s. A similar awareness drove Nestlé’s decision toof health care in the United States and its impact on the change direction in the early 2000s. In 1997, theglobal competitiveness of US firms. Employers had begun Switzerland-based multinational was the world’s largestto shift health care costs to their employees, offering plans food company, with 70 per cent of its revenue coming fromwith high deductibles and out-of-pocket expenses at the its core segments of beverages, milk products, and choco-point of care. And just as they were beginning to shoulder late and confections. Yet CEO Peter Brabeck-Letmathe wasthose expenses, consumers were becoming empowered by concerned about the sustainability of the company’s coreaccess to medical information through technologies such strategy at a time when consumer behaviours were rapidlyas Google and WebMD. It all added up to an awakening in changing. As people embraced more-healthful food andwhich consumers sought more control over the design and lifestyle choices, he and his team came to believe thatcost of their health plans. Nestlé was in danger of underserving future customers. As he described it to shareholders, partners, employees, and To remain a major player, Bertolini realised, Aetna other stakeholders, the company “made the strategic deci-would have to develop products and services that directly sion to transform itself from a successful food and bever-targeted the affordability needs of end consumers. This was ages company into an R&D- and marketing-driven nutri-the heart of the powerful case for transformation. It re- tion, health, and wellness group”. That meant identifyingquired a strategic shift over time from being strictly a B2B specific health and wellness needs and developing productscompany to becoming a B2C company as well – one that and brands to meet them. Fifteen years later Nestlé’s tradi-could help consumers make informed decisions about their August 28 2016 BUSINESS TODAY 93

HBR Exclusivetional core segments account for just 47 per cent of reve- Bertolini’s personal experience navigating health carenue, while the powerful new focus on the future consumer confirmed his suspicion that Aetna’s primary performancehas allowed the company to continue growing. indicators were not adequately connected to the needs of end users. Although the system offered lots of choice, it wasDiagnostic impersonal, convoluted, and costly. No one coordinated individual patient care to monitor quality and eliminateTo discover if you have a customer fault line, talk to 10 unnecessary tests and visits.customers in each of three categories: your most profitablecustomers, your least profitable ones, and those you don’t As costs kept rising and premium hikes kept gettingcurrently serve. Don’t ask for feedback about your com- passed on to employees, Aetna realised that the industrypany; instead, try to discover the functional, social, and needed to start measuring value as a function of threeemotional needs each group seeks to have fulfilled, along factors, adopting what one nonprofit advocacy groupwith the frustrations they feel when doing so. The follow- termed “the triple aim”: improving the experience of care,ing questions can help guide you: improving the health of populations, and reducing costs.• What are the top unmet needs of each group of custom- That was the definition of value that would matter mosters? Do they vary across different types of customers (in to future customers.Aetna’s case, benefits managers, hospitals, and individ-ual consumers)? The shift towards delivering on the triple aim required• Do customers we don’t currently serve have emerging new ways of measuring the business. For decades Aetnaunmet needs? If so, does that signal an opportunity that a had focused on acquiring new members to build its cus-new competitor could seize? tomer base and lower its risk exposure, but in the new• Are our customers loyal to our product, or are they world of health care, retaining customers would be morecaptive for lack of other options? Would they defect if important. With more consistency in the customers theythey could? served, providers could better prevent illness through ho-• If we are a B2B company, do the needs of our business cus- listic programmes and better manage care by coordinatingtomers conflict with those of end consumers? Could emer- services over time and across various clinical settings.ging technology simplify how end users’ needs are met? Metrics such as customer acquisition targets needed to be superseded by customer retention targets to give invest-2Performance metrics. When an industry ments in prevention and wellness time to pay off for both reaches an inflection point, old metrics can prove de- employers and providers.ceptive – and are sometimes dangerous. Once-reliable ways To confirm that the triple aim should be its new Northof measuring success can lead to a sharp decline or even Star, Bertolini turned Aetna into a laboratory. He made a variety of wellness programmes available in-house tofailure, although your short-term results may be healthy. Aetna’s 50,000 employees, including fitness centres, healthful meals, and alternative healing methods such asAetna’s main performance metric had long been the yoga, meditation, mindfulness training, and massage therapy. He believed that this would reduce the compa-degree of choice in policies ny’s overall health care costs and lead to a happier, healthier workforce. Subsequent surveys revealed a 28offered to employers and insti- Just per cent decrease in employees’ stress levels, a 20 per centtutions. Benefits managers because improvement in sleep quality, and a 19 per cent reduc-sought the largest physician tion in pain. Health care costs dropped and productivityand hospital networks possi- your increased. These types of metrics were one way Aetnable within a given cost range, current would start to measure success with its B2B customers –so as to minimise complaints business and they would increasingly form the primary basis offrom employees that the doc- competition in the industry.tors and facilities they wanted model is Other companies have similarly recognised that tradi-weren’t covered. In this con- widely tional metrics were leading them astray. By 2008, thetext, “innovation” meant giv- Silicon Valley software giant Adobe – the creator ofing consumers a wider range used and Photoshop and Illustrator – had become the world’s second-of providers and giving com- profitable largest desktop-applications company, after Microsoft. Butpanies broader options for following a series of blue-sky strategy sessions, CEOstructuring benefits. doesn’t Shantanu Narayen and his senior team concluded that the company needed to move beyond desktop software and When Aetna recognised mean even beyond its core mission of serving creative profession-that its most important cus- it will als developing content.tomer might soon be chang- serve youing, it naturally saw that its well in the During its first 25 years Adobe measured success byway of measuring the value of futureits products and serviceswould also need to change.94 BUSINESS TODAY August 28 2016

how many copies of software packages it licensed. But its would be displayed.customers wanted results such as increased web traffic and Benefits consultanciesrevenue, not just beautiful documents. Recognising such as Towers Watsonthe disconnect, Narayen decided to divide the com- and Aon Hewitt had be-pany’s products into two sets of cloud services. come multibillion-dollar busi-Adobe’s core group, digital media, offered 19 pro- nesses by helping employers and em-grammes in a set called Creative Cloud, available ployees navigate health care’s complexi-for $50 a month with a one-year contract. A ties. Now they were building simple ex-new group, digital marketing, offered eight cat- changes for consumers that directly pitted oneegories of programmes and apps packaged together as health insurer against another. Having once been advisersa subscription service called Marketing Cloud. to Aetna’s customers, they suddenly became direct com- petitors to Aetna. After making the change, Adobe needed a way to tell Second, starting in about 2013 Aetna faced disruptionwhether it was working. The key metric became monthly from hospital groups and other providers that began takingand annual subscriptions – sign-ups and renewals – rather on one of its historical responsibilities: assuming the finan-than package sales, and it showed that both business units cial risk of caring for defined populations of patients. Thatwere delivering the desired results. The company had suc- increased the danger that Aetna and other insurers wouldcessfully shifted from focusing on products to building be disintermediated and that their raison d’être – matchinglong-term relationships – a change inspired by identifying demand for health care services with supply – would disap-a fault line. pear over time. In a similar way, Xerox found its role in its industry’sDiagnostic ecosystem under siege. By the late 1990s, Asian competi- tors, including Canon and Ricoh, had drastically commod-To ensure that you are using the correct performance itised the market for copiers and printers. At the same time,measurements, hold a cross-functional internal working big corporate customers had begun to outsource the pur-session in which you examine whether your metrics are chasing and servicing of the machines to small third-partyconsistent with the things your customers value most. contractors who were focused on saving them money – andDon’t be afraid to challenge the logic underlying each that meant attacking Xerox’s margins. In 2001, the newmetric. Use these questions to guide your analysis: CEO, Anne Mulcahy, and her leadership team decided to• Do we understand what our customers really value? How launch a transformation effort to lessen the company’swell does the performance of our product or service match dependence on manufacturing and concentrate instead onthe customer’s definition of value? offering business process outsourcing services. Xerox would• Will the customers of tomorrow define quality differently not only manage machines but take over entire corporatefrom the way today’s customers do? functions, ranging from technical support to corporate• How closely do our customer satisfaction and financial accounting to customer-relationship management. Bymetrics correlate? Are our customer satisfaction scores as assuming a new place in the corporate services ecosystem,strong as our financial indicators? it found a new way to grow. Within 15 years the compa-• Are we measuring units and volumes, or outcomes? If ny’s core business had declined, while Xerox Businessoutcomes, are we measuring ones that matter to our cus- Services accounted for nearly 60 per cent of revenue.tomers, or ones that matter to us?• Do our products or services have more features or com- Diagnosticplexity than most of our customers value?• Is there a new metric that aligns with the needs of future To determine whether your position in your industry’scustomers? ecosystem is risky, scan the periphery – analysing start- ups, adjacent competitors, and historical partners and3Industry position. Companies that start out suppliers that have the potential to fill existing and emerg- serving niches often expand to encompass more and ing customer needs. To make the exercise more tangible,more tasks. If others are moving into your space at lower draw up a list of 10 companies that are viable competitors.cost, it could signal the third fault line. In other words, Consider the following questions:watch out for players that are beginning to do what you do. • Are regulatory, technological, or other external develop- ments lowering barriers to entry to our industry or chang- Aetna faced disruption in its core business on two ing how our current customers consume our products?fronts. The first was from public and private health ex- • Are external forces diminishing the value of our role inchanges, which were central to the Affordable Care Act. the industry?These digital marketplaces allowed benefits consultants • Is a disruptive technology emerging that could signifi-and other third parties to redefine how employers and cantly change the cost-value equation in a major partemployees shopped for health insurance – including whatproducts would be listed on websites and how information August 28 2016 BUSINESS TODAY 95



HBR Exclusiveof our industry? Denver and Silicon Valley. Its mission was to help providers• Are our customers starting to bring our services in-house manage costs and risks while improving the overall healthor to outsource them to someone else? of large populations. Bertolini saw the initiative as a way• Is our industry expanding to include new kinds of com- to become the big data engine – the “Intel Inside” – of thepetitors? Is there consolidation among major players – sig- new provider networks.nalling that it’s becoming harder to make money in thetraditional way? In seeking new business-model initiatives, Aetna was hardly alone. Netflix provides a classic example of how a4Business model. Successful companies are often corporation must assess whether it needs to move beyond lulled into complacency by how well their business its core business model – and how tricky the timing can be.models have been – and indeed still are – working. But just In 1997, when Reed Hastings started the company, he designed the business model to leapfrog physical storesbecause your current model is widely used and profitable such as Blockbuster by providing DVDs through a mail- order subscription service. Despite overwhelming earlydoesn’t mean it will serve you well in the future. success, he understood that another upheaval was on the horizon – the shift to streaming content.For Aetna, strong financial performance at a time when The streaming business initially looked unattractivehealth care costs were escalating meant that its business because of constraints in bandwidth, consumer resistance, and Hollywood’s recalcitrance about signing new kinds ofmodel was serving the company but no longer working deals. But Hastings chose to embrace the transformation. As he himself acknowledged, at first it seemed that he hadwell for employers or end consumers. The model involved moved too quickly. In 2011, when Netflix announced that it was spinning off its mail-order DVD business to focussetting policy rates to ex- Making a on streaming, hundreds of thousands of customers can-ceed the cost of claims. case for celled. Hastings acknowledged the disaster and reversedThis practice – keeping a course, retaining the DVD service and treating the twotight lid on claims while pre-emptive businesses as equals.premiums skyrocketed – Yet Hastings’s speed soon appeared prescient: Aswas at the heart of the change Netflix accelerated its transformation to a streaming com-frustration directed at is always pany and a purveyor of original content, revenue grew,health insurers in 2010. challenging, doubling in just three years. Detecting and acting on the fault line too early had almost surely been better than wait- Recognition of the first but it’s ing for the business case to become entirely clear.three fault lines led Aetna even moreto seek new ways to gener- Diagnosticate profits. The company To see if you’re sitting on a business-model fault line, mapidentified two major busi- difficult your current business model and assess how well it isness-model initiatives. when the primed to compete against emerging rivals and to deliverFirst, it launched a con- against new performance metrics. (For a discussion of map-sumer unit at its Hartford, journey ping, see “Reinventing Your Business Model,” by Mark W.Connecticut, headquarters will be Johnson, Clayton M. Christensen, and Henningto start shifting its core long term Kagermann, HBR, December 2008.) Ask yourself:business from a B2B to a • Is at least one emerging competitor in our industry follow- ing a different business model – even if at the moment thatB2C model. This meant model looks financially unattractive? • Is the way we make money aligned with how value iscreating direct-to-con- created for customers? Are customers balking at price in- creases or added fees?sumer advertising along with digital distribution systems • How durable are the key components of our existing busi- ness model – things like the customer value proposition,for new consumer-centric products to be piloted in 2016. resources and processes, and the profit formula? Are any at risk of being undercut by external forces or new com-Because of out-of-pocket expenses and premium sharing, petitors? • Will the strategic assumptions that underlie our existingconsumers were already footing the bill for 40 per cent of model – assumptions about risk, differentiation, and growth – hold true as our industry changes?their health care costs, with employers covering the rest.Anticipating that consumers would soon pay for morethan 50 per cent, Aetna decided to create a private-ex-change marketplace –something that would provide anexperience analogous to shopping on Amazon.The second initiative was directed at providers.Correctly predicting that hospitals and clinics would be-come increasingly interested in taking on the financial riskof managing the health of groups of patients, Aetna de-cided that it needed to offer new technology along withtraditional actuarial and other risk-management servicesto health care providers. This led to the formation of a newbusiness unit, Healthagen, based not in Hartford but in August 28 2016 BUSINESS TODAY 97

HBR Exclusive5Talent and capabilities. It is a best practice savvy talent? for executives to continuously assess what skills, • Do the leaders of our business view talent as their respon-competencies, and organisational structures will be re- sibility, or is it relegated to HR?quired to succeed in the future. When that future is markedby fault lines, the chance of misalignment is high. We find Synthesising the Shifts into athat the fifth fault line is often different from the others in New Strategythat it may become apparent only after you have detectedthe first four. And yet the sense that your human resources The fault line framework augured major disruption forare not well configured for the future can be the decisive Aetna. But it also suggested how the company might suc-indication that your organisation is off track. ceed in the future. And because it provided early warning, Bertolini was in a strong position to innovate. Aetna had After pondering Aetna’s future and identifying mul- more than enough capital to invest in the future. Moretiple fault lines, Bertolini came to believe that the com- important, in 2010 it and other insurance companies werepany’s single biggest risk lay in talent – not just in finding the only industry players with both the actuarial expertisenew people with the right skills but also in cultivating and the data needed to make money by keepi ng entireemployees with the courage to step into something new populations healthier at lower cost, which was the key toand uncertain. That’s why Aetna located its technology- abandoning the increasingly unpopular health care modelfocused Healthagen venture in Denver and Silicon Valley that focused on reimbursing often expensive treatmentsrather than in Hartford. In those places it could more for the unwell. This opened up opportunities to occupy neweasily staff the initiative with employees who were experts places in the industry over time.not at creating insurance policies but at developing soft-ware to manage, deliver, and track patient health. Making a case for pre-emptive change is challengingVoicing his belief that Healthagen would be key to under any circumstances, but it’s even more difficult whenAetna’s transformation, Bertolini said publicly that the the journey will be long term. Reed Hastings may haveinitiative “will de- stumbled when first communicating his vision of transfor-stroy the insurance mation at Netflix. But, like the leaders of Nestlé, Adobe, andindustry as we Xerox, he learned that it takes years to fully communicateknow it”. such a vision. Their campaigns are still going on today. Nestlé, Adobe, For Aetna, assessing the fault lines and synthesisingand Xerox went through a similar them into a single worldview yielded the clear outlines ofprocess, recognising that they wouldneed new talent to overcome the forces a new strategy. Yet only recently has the bulk of theabout to shake their industries. At Nestlé, the focus on health care sector caught on. In mid-2015,consumer nutrition and wellness required capabilities Aetna announced that it would acquirein areas as diverse as consumer ethnography, micro- rival health insurer Humana in abiome research, and health economics. So the company $37 billion deal that would keepboosted R&D spending, opened the Nestlé Nutrition it among the big three playersInstitute, and began working with a wide network of uni- in its sector. The acquisi-versities and hiring hundreds of postdoc scientists. Adobe tion would extendneeded to beef up capabilities in the new field of digital Aetna’s traditional foot-marketing in order to deliver on the promise of its print. But it was also “aMarketing Cloud. And Xerox had to hire thousands of way to accelerate our transfor-specialists across more than a dozen industries for itsbusiness-services venture. In each case the need for new mation to a consumer-centric health care company,”talent and organisational structures was so great that the Bertolini told investors.company decided to make strategic acquisitions a majorpart of the transformation plan. Although the process of transformation may be long, the fault line framework can give organisations the clarityDiagnostic to overcome the inevitable speed bumps and roadblocks along the way. It can help leaders frame the challenge,The following questions can help uncover a fault line in build confidence among senior leaders, and align stake-your current capabilities and organisational structure: holders with the case for change – and do so years before• Will we be fulfilling customer needs that require new skills the situation becomes so dire that there’s not enough timeto be brought on board? or capital to execute a new plan. ~• Do we have enough emerging leaders who are excited bythe prospect of transformation? Mark Bertolini is the CEO of Aetna. David Duncan• Have our company and industry struggled to attract tech- and Andrew Waldeck are senior partners at Innosight, a growth-strategy consulting firm. This article was published in HBR, December 2015. Copyright©2015 Harvard Business School Publishing Corporation. All rights reserved.98 BUSINESS TODAY August 28 2016



RAJ VERMA PERSONAL TECH TRACK ‘EM DOWN A RANGE OF BLUETOOTH TAGS AND GPS-ENABLED DEVICES IS MAKING IT IMPOSSIBLE TO LOSE THINGS SUCH AS WALLETS, KEYS AND LUGGAGE. READ ON TO KNOW HOW TO USE THEM. By NIDHI SINGAL 100 BUSINESS TODAY August 28 2016