Interview of Mr Puneet Kulraj with Indiainfoline.com

Indiainfoline.com, June 16, 2014, Mumbai

Vector Consulting Group (VCG) was established in 2005 with a vision to help companies achieve market share growth in their respective industries by developing unique supply chain capabilities that provide a competitive edge. VCG uses the platform of Theory of Constraints (TOC) solutions and thinking processes for developing these capabilities for its clients. VCG is an implementation-focused consulting firm that links a significant portion of its fees to the benefits derived by its clients. VCG accepts only holistic, company-wide assignments, which can deliver quantum results beyond the expectations of management. Within its eight years of existence, VCG has expanded to a size of 60 consultants and is considered as one of the fastest growing management consulting companies in India. It is now working extensively for large corporates within the Tata Group, Godrej Group, Raymond Group, Bajaj Electricals Group, Trident, Kirloskar and Cummins Group. In the space of TOC consulting, it has delivered the maximum number of success stories in the country. Moreover, VCG has pioneered implementation of TOC in India in retail, auto, fashion and engineering companies. Most of the success stories of VCG are now in public domain and are even taught as case studies in various management schools across the world.

Replying to Anil Mascarenhas of IIFL, Puneet Kulraj says, Ours is a recommendation-thin and implementation-thick engagement model both in terms of time and payouts.

Explain to us your business model. Why do you say your fee model is a hit with your clients? How does it compare vis–vis other models?

Traditionally, management consulting is focused around selling content in theform of recommendations. This approach is inherently win-lose as the risk and onus of implementation is with the client while consultants get their money for content delivery. This dysfunctional model of engagement has come in the way of expansion of the market for management consulting in India. Many times, these engagements are initiated only to get a formal outside backing for implementation of ideas of some key managers. Because of these conditions, management consulting in India is restricted to big clients who can afford the reports. 

Over the last few years, there has been increasing demand for a skin-in-the-game model of consulting with fees linked to actual results. Some established consulting companies are trying it out but the approach is still a camouflaged win-lose model where the client payshuge fees for recommendations. The consultant actually makes full-targeted margins from these efforts. If the assignment gets into an implementation mode, the focus is on program management and success related fees. However, the client ends up paying large sums as recommendation fees,the variable fees is an additional margin gain for the consultants. It is not a skin-in-the-game model.

We are trying to change that by having a model that is heavily focused on implementation. Ours is a recommendation-thin and implementation-thick engagement model both in terms of time and payouts. The assignment becomes a win-win model after 2- 3 months for both the client and us. If the results do not start accruing from the stipulated period, both stand to lose.

Which verticals do you cater to?

We focus on select industry segments- ( consumer goods, retail, auto, equipment manufacturing, engineering & construction- ) where we have high domain knowledge and experience. We have consciously decided to stay away from other sectors and geographical market. This ruthless focus has allowed us to sharpen expertise in industry domains and further reduce the time taken to deliver results. Over the last two years, we have been able to reduce by half the time taken to deliver results to our clients.

You are anIndia-focused company with experience in Indian industry. How do you help your clients benchmark with the global best?

Benchmarking and copying processes from the so-called best in the industry never works. Processes work to produce great numbers in companies only under a set of specific conditions. Trying to copy something without understanding the underlying assumptions can be damaging for organizations. I am sure many companies will have stories to tell about how a top managers visit to a different company forced them to implement a process that did more harm than good.

So, trying to learn without understanding the boundary conditions do not work. At the same time, what can work for a company is to look inside for its inherent potential and keep improving.

To give you an example, if you look at a job shop environment, the typical production lead time in many companies is at least 10 times the total value add or the touch time. There is potential to move much closer to the touch time, and this is a journey. Take a consumer goods company. The industry benchmark is about 85% fill rate, but the potential is 100% daily availability at all stocking points. It does not matter what others are doing. Taking this internal benchmarking approach, companies can actually be a benchmark for others.

One of our clients, Fleet guard Filters has inventory turns of more than 24 in its After Market (spare parts retail) distribution, the best in the spare parts industry with distributors enjoying an ROI of over 80% which is  unheard of in the entire distribution business across industries. This company never looked at their peersinventory turns or ROI because none in the industry had those kind of numbers anywhere close to their targets. They looked at their own inherent potential. They found out that distributors could actually do business with just 10 days of stocks with nearly zero stock outs, instead of 2-3months, which is the industry norm. 

 

Name some of your large clients? How much of your revenue comes from the variable fees?

We have been/are engaged to over 50 companies in India. Amongst them are We have recently engaged with big companies like Pidilite, Tata Motors, Kirloskar Oil Engines, Bajaj Electricals, Raymond Textiles, VIP Industries, many companies in the Godrej & Boyce and Tata group, and many others. We are currently engaged with 25 odd clients. More than 40% of our total revenues come from variable fees linked to improvement in operations and to overall bottom line results.

Your model looks risky as it is dependent on the client implementing your ideas.

The biggest myth being promoted by the consulting industry is a phenomenon on the realm of human psychology called resistance to change. Many assume that people are bound to resist change, just because of the fact that it is a change. Hence without management control and use of force, an outsider cannot do much to bring about a change by implementation. Hence consulting industry perceives implementation based consulting model with success fees as risky.

The assumption that people resist change almost on an auto-psychological mode is grossly wrong. Our experience tells us that people evaluate each change based on gains and associated risks. If perceived risks are low and gains are high, they adapt to changes even when they are transformational in nature.

Many operations-related consulting assignments are focused on cost reduction. Every step to reduce cost generates a conflict. If you want to get rid of people, there will be resistance. At the same time, if you want to shift to low-cost suppliers, there will be someone in procurement worried about quality or reliability of delivery. Even long-term blue prints of strategy of getting into new products, markets and acquisitions encounter resistance as people wonder about risks and practicality of such suggestions. This resistance to change is perfectly valid and needs to be addressed not by force or other means.

We do not get into these kinds of assignments. Our primary focus is exploitation assignments how do we get more out of operational resources, how do we sell more products from the current portfolio, how do we get more out of the available infrastructure and in current market. Since our assignments do not focus on a reductionist or risky expansionist agenda, there is no threat to anyone. It creates a win-win environment. We find that because our model focuses on getting more from the same resources, the costs are also lowered as an indirect effect.

With a new government in place, how does the landscape change for the industry in general and your business in particular?

There area lot of expectations from the new government; we hope to see the turnaround in the India growth story soon. Interestingly, we have been unaffected by the recession. On the contrary, our growth has been the maximum during the recession years. We have grown by more than 35% in the last year.

There is a huge demand for our model of consulting. Word of mouth of good work generates more than adequate number of leads for us. We have taken a decision to grow our business steadily at a pace that we are comfortable with regardless of the market opportunity. This is important, as we do not want our capacity to be stretched while pursuing growth. Unlike for other businesses, for us, capacity does not get added by just recruiting resources. It takes at least two years of implementation exposure in our environment for a consultant to begin handling tasks independently even though he may have had the best of experience and qualifications before joining us. 

You are a certified Theory of Constraints (ToC) expert. What is Theory of Constraints all about?

I will try and explain the concept through an analogy. Suppose you see a crowded junction choking with vehicular traffic, one immediate idea that might come to your mind to solve the problem is to build a flyover. But building a flyover not only takes time but also worsens the current situation. This, however, is the conventional approach of removing the constraint (crowded junction). The other approach is to first find ways to eliminate all wastage of space on the road by regulating traffic, removing encroachments, repairing potholes or diverting slow vehicles to other roads. These should be the first steps towards exploiting the available constraint.At times, simple steps of exploitation of a resource can remove wastage to an extent that adding capacity may not be required. TOC takes the approach of identifying the single constraint that limits the company from making more money and then exploiting it by subordinating everything to the exploitation decisions. The constraint then shifts to some other entity for next round of exploitation actions. This becomes a process of continuous improvement.

But this approach sounds like common sense. Companies must already be doing it.

Common sense is not commonly held sense. Organizations are troubled by local optima measures. Every department tries to maximize its resources. As a result, the constraint of the organization is not exploited properly. To give you an example, in the consumer goods industry, when production wants to be efficient, itlooks at making bigger and bigger batches. Bigger batches can mean forecasting for longer periods. This results in mismatched inventory in the distribution leading to loss of sales. When a companys constraint is the number of customers willing to buy the product, the way to exploit the constraint is to avoid stockouts and always have the right product at the right place. But the long period forecast required for manufacturing prevents the constraint from being exploited fully.

How does it help clients staying the course with respect to their core business? To what extent do the complexities of change hamper the process?

TOC implementations focus on exploiting current assets of operations and market the idea is to get more from the same resources and market segment by increasing market share by building a competitive advantage.

Despite the best of theories and strategies, a lot would still depend on how the client implements and manages the situation. To what extent or till what stage are you involved with the client?

Our implementation method focuses on buy-in and close hand holding till results are delivered. Once results are significant, people adapt to new paradigm. Our assignments start go for couple of years to set the processes as the DNA of the company. Most engagements are extended beyond two years, as companies want to expand to other market segments or want to extract more from existing investments.

How has the Indian management consulting industry evolved over the years?

The management consulting industry has come a long way. We had one-man consultancies in the pre-liberalization era. Today, there are multi-national consulting firms. However, the market is small and limited to a few large companies. Most are unable to afford the fixed fees of these established firms or are wary of the risk of engaging consultants for recommendations, which they may not be able to implement fully. The current model of these firms of making full margins by selling content in the form of recommendations is coming in the way of expansion of the market. One needs real skin-in-the-game model of consulting to expand the market.

Our model helps in expanding the market size; this is evident in the fact that many companies engaging us were consultant- averse.

How stiff is competition from large established consulting firms?

There is one big advantage that large MNC consulting firms enjoy a big advantage many companies engage them just to get a stamp of approval for the ideas already developed in the minds of their managers. We are not vying for these assignments.

Our engagements are based on our assessment of what is required for an organization and also through word of mouth from work done in other companies within a group.

What we bring to the table is an ability to deliver quantum results without adding resources or taking undue risks with blue ocean strategies. Clients who have engaged with us are getting spoilt with this approach. They will prefer to stay away from consulting work that talks about huge payments for many months of study and report writing efforts. 

You recently won an award in the supply chain category. Tell us more about it.

Association of Management Consulting Firms (AMCF), New York, recognised our project with Godrej Securities Solutions Div, (part of Godrej & Boyce) as the best supply chain project across many nominations globally. Our assignment was to triple profits in three years. The company quadrupled it in three years. With minor additional investments, the level of inventory has come down by more than half. Subsequently, the return on capital employed for the business has gone up by three times. These numbers and the implementation methodology were recognized as the global best.

Why do you say that Theory of Constraints (TOC) implementation is better than other methodologies like Six Sigma, which is popular in India, too?

TOC is gaining an exponential jump in popularity and adoption. The big names in the Indian corporate world now acknowledge and swear by this methodology. In an organization, almost everything can be improved upon. It is important to identify what should be done and what should not be done because at the end of the day the management bandwidth is limited. The TOC approach helps in identifying the leverage point which everyone in the organization needs to focus on.

Brief us about your financials. What is your outlook for the coming year? What is the ownership pattern?

We are growing at a pace of 30% year on year.Over last 6 years we have grown up to a team size of 60 consultants. We should reach Rs100cr by 2016. If you look at revenues from management consulting, there are few companies with a size of about 100Cr. The company started off with 3 founding partners and now expanded to 5 partners.

Any expansion plans?

The need for expansion comes when the current market is inadequate for risk-free growth. We feel that the Indian market, with our model and offering, ishuge, and can serve our growth rate for quite a few years to come. We have not touched even 50 companies, while there are over 500 who will be interested in our model. It is a conscious call to stay focused in India, exploit the market potential before we look at other geographical markets.

Any plans to sell stake or get listed?

No we do not have plans to sell stake or even get listed. There have been few aggressive bids for acquisition by large MNC consulting firms but we have decided to continue the journey on our own. This is primarily to maintain the unique culture of our organization, which is crucial for our implementation-based model.

With a strong relative ranking system-based appraisals, most management-consulting organizations are highly competitive environment with strong competition between consultants. This is not good for our environment where teamwork is very important to deliver in implementation. We focus on team goals for the organization as whole. We do not even have project specific bonus. We focus on monthly individual grooming sessions for every consultant to help to keep improving. As a policy we strongly believe in a non-blame work culture and always focus on identifying systemic issues for dealing with organizational problems.

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