Getting an iron elephant to dance
Professors Tarun Khanna and Aldo Musacchio (Harvard Business School) look at the turnaround effected by Lalu Prasad Yadav and Sudhir Kumar at Indian Railways
The case (see reference below) focuses on recent developments at Indian Railways (IR), one of the largest organizations in the world. In 2008, IR had 1.4 million people on its payroll making it one of the largest employers in the world. The customer base was as gargantuan since some 5 billion passengers used the trains each year, more than four times the number served by the Chinese railway network. In the world of business, IR resembles that very Indian of animals, the elephant.
Back in 2001, Indian Railways was flirting with financial disaster. Its share of passenger traffic had fallen over the years from 75% to 18%, under the pressure of bus and airline alternatives. Freight share, under attack by the trucking industry, fell from 90% to 25%. The operating ratio (total working expenses/total earnings) stood at 98.3% making capital investment virtually impossible. In 2004, a former chief minister of the state of Bihar, Lalu Prasad Yadav, was named minister of railways with mission to turn the business around. For that he brought with him Sudhir Kumar, a civil servant who had shined as a commissioner in Bihar’s Commercial Tax Department. Working together with the eight-person executive board of directors, the team succeeded in turning around the organization, multiplying earnings by 1.7 (to $18 billion) and net revenue by 4 over their tenure.
The challenge for Prasad and Kumar was to respect all of IR’s social obligations (in particular low passenger fares) while building a commercially viable organization with a good global reputation. Their strategy focused on improved asset utilization, increasing yields per train, both in the freight and in the passenger business. However, freight deserved special attention both because receipts were twice those of the passenger side and because pricing leeway was greater.
Improving freight yields
Improved asset utilization on the freight side translated into “faster and heavier” trains. Faster trains meant reduced turnaround time. Rule changes regarding certain freight charges (demurrage and wharfage) as well as a revision to maintenance practices contributed to a reduction in turnaround time from 6.7 to 5.0 days.
Heavier trains meant that IR could transport greater loads and generate more revenue without increasing the number of freight wagons. Following a series of safety tests, IR moved away from its 20-ton axle load limit in the direction of the Chinese and American norm of 25 tons. Also, new lighter freight wagons were designed further increasing yields. Prasad formulated the freight mathematics as follows: a one ton increase in the loading capacity of a wagon leads to an annual 15 million ton increase in loading supply to customers.
Freight tariffs were rationalized and dynamic pricing was introduced. The system was made less cumbersome by reducing the number of commodities and by moving to a price based on the carrying capacity of a wagon as opposed to weight. Dynamic pricing led to the introduction of lean-period discounts, peak-period surcharges, loyalty discounts and empty-direction discounts. IR also broke away from a system of freight rates proportional to the value of the products – freight customers were now charged a rate closer to what they could bear (the case uses the example of iron ore, an export commodity that was in high demand during the team’s tenure).
These improvements led to 237 million tons of incremental loading and $4.9 billion in incremental revenue. But looking at the country comparison chart above, the Chinese example seems to indicate that IR can reasonably aim for yet greater freight volume and earnings.
Improving passenger yields
On the passenger side, the new IR team had to work around its obligations in the lower-price sector. Fare hikes in this sector were politically infeasible. So the strategy became one of increasing volumes and reducing units costs. Prasad introduced the Carib Rath (poor man’s chariot), a superfast train with enhanced seating capacity (think coach class in a jet) which resulted in a sufficiently low unit cost per coach kilometer.
Not only were there more passengers per coach but the number of coaches per train was increased. Station platforms were lengthened so that longer trains could be used. While IT traditionally featured 14 coach trains, under Prasad it resorted massively to 24 coach trains on its popular long-distance routes.
Superfast trains could legitimately demand higher fares and so IR invested in more high-speed locomotives which in turn led to increased passenger revenue. At the same time it improved its ticketing systems, enabling it to move to a dynamic pricing model much as it had done in freight. It was taking on its airline competitors by using their increased yields model.
These measures led to a 50% increase of passenger revenues (to £4.9 billion in 2008) and coach productivity that now matched Chinese levels.
Other fronts
The management team had to try to tackle two other problems: plethoric human resources and aging infrastructure. Because downsizing of the staff seemed politically infeasible, Prasad chose to focus more on employee productivity and loyalty. Productivity was built up by emphasizing speedy execution and by encouraging cross-functional work everywhere possible. Loyalty was fostered by sharing financial gains with the employees (bonuses increased from 59 days pay to 73 in 2009, a 20% increase). Managers were also rewarded with more frequent training programs - a domestic one every five years and an international one every ten years.
With regard to capital investment, the improved financial performance of IR meant improved external and internal financing. IT was able to raise $100 million in debt at a rate just 145 points over LIBOR. During the team’s tenure the cash surplus had reached $20.5 making investment through retained earnings possible once again. Finally, in non-core areas, IR was willing to enter into public-private partnerships. In particular, IR gave 15 operators licenses to run container trains, thereby making partners out of some of its road transport competitors.
The case closes on the question of Prasad and Kumar’s legacy. As a result of parliamentary elections in 2009, Prasad is being replaced by a new minister, Mumata Banerjee, who occupied the post during the less bountiful years of 2000 and 2001. Will competitive pressures from the trucking and airline industries combined with the motivation and qualification of IR's managers and engineers suffice to perpetuate IR’s success?
Reference:
Harvard 9-710-008
“Indian Railways: Building a Permanent Legacy?”
Professors Tarun Khanna and Aldo Musacchio, Rachna Tahilyani
Harvard Business School
Published April 2010
