Reliance Capital, one of India’s leading Non Banking Financial Companies, is in news for chalking out a profitable growth path and de-leveraging its balance sheet. Reliance Capital is a portfolio company with different lines of businesses such as asset management, life insurance, general insurance, broking and commercial finance. All these lines of businesses are individually headed by their respective CEOs, who in turn report to the Corporate CEO.
In a recent news statement in the Business Standard, Sam Ghosh, CEO – Reliance Capital has said that his objective is to make each line of business profitable by using different strategies for different business. This statement leads to a very basic question. If each of the individual LOB is to become a profitable entity, what then would be the requirement for having a corporate portfolio company over these LOBs? Initially the corporate office served the purpose of capital infusion to the individual LOBs. However when these LOBs become profitable and self sustainable, capital infusion from corporate office may no longer be needed. One could wonder what purpose the corporate office will then serve. Will the corporate office simply be an overhead, with no revenues, removed from the individual businesses? Is this corporate structure created only to play the role of a ‘Big Brother’ for imposing corporate reporting restrictions and/ or bringing about cost savings by the way of shared services? Or does it add some value to the LOBs other than compliance and the shared services?
The answer lies in the notion of corporate parenting. Among the different types of corporate parenting activities, some are geared towards core compliance purposes while some activities are classified as shared services – i.e. providing services to multiple units in order to gain savings by obviating the need to replicate the service within each unit. Other activities fall under purview of ‘Value Added Parenting’.
Corporate advantage is created if the combined portfolio structure results in improvements in profits greater than the sum of the profits of the businesses operating individually. This draws on the idea of “synergies” that is closely linked to the idea of related diversification. In diversified business, corporate advantage is created if synergies can ensue by applying resources or combining capabilities across businesses to either reduce costs or enhance revenues.
As in the case of Reliance Capital, we see that beyond compliance and the shared services, synergies within an organization may be derived by applying common management capabilities at the corporate level to different businesses units, thus helping the businesses to pick on appropriate strategies, unlock value and promote self-sustainable and profitable growth.