August 30, 2004 - Bangalore, India[The Hindu Business Line]
BANASHANKARI in Bangalore seems out of the way for someone not residing in Bangalore. Being used to only Infantry Road and MG Road, one of these writers hesitantly told the auto-driver to proceed to KR Road. With a turn of his head and a casual, "MindTree, hai na?" the chap changed into first gear.
For a company founded in 1999, just before the Great IT Slump that heralded the new millennium, the brand seems to have caught on. And the last year seems to have been much better than the previous two. eWorld caught up with Krishnakumar Natarajan, president and CEO, IT services, at MindTree Consulting. Excerpts from the conversation:
Now, we see better days ahead. Organically alone we can't achieve that growth. We are looking at niche segments. If it would take us 12 to 15 months to generate a particular service practice, then we'd rather look at acquiring a smaller company that has reached $4-5 million but finds it difficult to grow beyond that. In the initial stage, we would look at acquiring smaller companies.
Right now we are not focused towards the vertical domain. We are more interested in specific technology skills. Our ability to build a business based on technology skills is faster compared to using deep domain knowledge as the foundation for a business.
On the acquisition front, since integration is key, it is easier to manage integration of India-based companies. Then, you don't have barriers of geographic time and distance. Very few small companies have depth of domain expertise in India while most do have a cluster of accounts that might not be scaleable on a global model.
So stage I would be to look at horizontal skills. Next would come the verticals game when options are more likely to be overseas.
This is surprising, since most Indian companies feel that as an industry we already have or can easily acquire technology skills, but that domain expertise is what they need to acquire.
Customer facing capability is something we have had from day zero as an important element. The key elements of what would drive us to the $231-million goal is how do you ramp up business. One, of course, market momentum is there. We have also had two very large client acquisitions - one of which is GE.
So now we have to create new streams of revenue or new service offerings that would drive growth. We want to focus on technology skills. It's not difficult for us to build but to gain time-to-market, an acquisition is the way to go.
The other big change is that mid-size not a risk any more. We have survived the slump so the client is not worried about whether I will exist later.
The big challenge, though, is that client expectations don't change because we are mid-sized. We need to make the same level of investment, say, in business continuity and processes. With a big size, you can afford that. But it's a big challenge for us. For companies like ours, now is the phase to invest, since we know now that the client is amenable to looking at us. We are making phenomenal amounts of investments in these areas. With one of our prospective clients, we went through an evaluation that lasted seven months. We are now onto the next stage.
Europe seems to be picking up for most Indian companies.
If due diligence requires so much effort, then wouldn't a big order make sense? After all, no buyer would want to go through this with several small vendors.
No… Subsequent to that, the ramp-up would be fast. With all the backlash against outsourcing, most people want to maintain a low key. They don't want to talk about it. Talking about long term plans is a no-no.
In offering such solutions, we also build a framework and that makes it faster. Typically, productivity increases by two or three times.
bharatk@thehindu.co.in
It comes to mind
The good days are here again. Or are they really? The big guys are showing up impressive numbers quarter after quarter. eWorld decided to chat up smaller players.BANASHANKARI in Bangalore seems out of the way for someone not residing in Bangalore. Being used to only Infantry Road and MG Road, one of these writers hesitantly told the auto-driver to proceed to KR Road. With a turn of his head and a casual, "MindTree, hai na?" the chap changed into first gear.
For a company founded in 1999, just before the Great IT Slump that heralded the new millennium, the brand seems to have caught on. And the last year seems to have been much better than the previous two. eWorld caught up with Krishnakumar Natarajan, president and CEO, IT services, at MindTree Consulting. Excerpts from the conversation:
How do you see the year ahead?
We will continue to see last year's momentum. We are looking at 60 per cent growth this year. That would put us somewhere between $46 million and $50 million in revenues this year.Even as late as 2002, you were targeting $231 million by 2005. That was almost the peak of the slump but you had still seemed confident...
In some sense, all of us have lost about 8 quarters of growth. A period of fairly sharp growth, we came to 2002. There was this sense of optimism all around. People were saying that we were all on a U-curve and that the old growth rates would return and that you would actually see high growth just after that. Some bit of that optimism stuck with us and that made the $231 million a target.Now, we see better days ahead. Organically alone we can't achieve that growth. We are looking at niche segments. If it would take us 12 to 15 months to generate a particular service practice, then we'd rather look at acquiring a smaller company that has reached $4-5 million but finds it difficult to grow beyond that. In the initial stage, we would look at acquiring smaller companies.
Why smaller?
Integration is a concern. We would rather acquire a small company, gain the experience of integration and in a year to year-and-a-half time span, we would look at (acquiring) bigger operations. By then, we too would be about $70-80 million in revenues and that would give us the size to attempt a larger acquisition. The first acquisition would have helped us live through and understand what an acquisition means. The intention would be to finally look at a larger acquisition.In the last three years, did you actually come close to an acquisition?
We have been more serious and looking at options only in the last seven-eightmonths. We have some possible options that could get fructified now.Would funds come from internal accruals?
Yes. In terms of cash and cash equivalents we are comfortable. We have been profitable for the last several quarters. On a month-on-month basis, in the last 12 months, we have been profitable. Resource is not a big issue.What kinds of companies would you look at?
In terms of verticals, healthcare is a recent interest.Right now we are not focused towards the vertical domain. We are more interested in specific technology skills. Our ability to build a business based on technology skills is faster compared to using deep domain knowledge as the foundation for a business.
On the acquisition front, since integration is key, it is easier to manage integration of India-based companies. Then, you don't have barriers of geographic time and distance. Very few small companies have depth of domain expertise in India while most do have a cluster of accounts that might not be scaleable on a global model.
So stage I would be to look at horizontal skills. Next would come the verticals game when options are more likely to be overseas.
This is surprising, since most Indian companies feel that as an industry we already have or can easily acquire technology skills, but that domain expertise is what they need to acquire.
Customer facing capability is something we have had from day zero as an important element. The key elements of what would drive us to the $231-million goal is how do you ramp up business. One, of course, market momentum is there. We have also had two very large client acquisitions - one of which is GE.
So now we have to create new streams of revenue or new service offerings that would drive growth. We want to focus on technology skills. It's not difficult for us to build but to gain time-to-market, an acquisition is the way to go.
Since you indicate your strengths onsite, in the last two-three years, have clients demanded that offshore be a h4 component? Did that result in the slump in revenues? How did you manage that?
Our mix has been increasingly towards offshore. But, overall revenue has been growing. So, the quantum of onsite revenue has not come down. Only, the proportion of offshore has been going up. If you segment your client base in terms of mature offshore users, (you would have a clutch going through) the first phase of offshoring: move applications that are not critical to their business. Then, customers want to do business critical applications but do them offshore. This means that they are unclear how to do it. Services companies need to be more consultative. At this point, (the kind of work you do) is no more customer-driven. It becomes an evolving process of how you manage these applications. Vendors have to be more customer-facing, understand local business and culture, since dependence on services vendors is increasing.The last few years have seen clients bringing down the number of vendors so as to monitor them better. Has this, coupled with the changing role of consulting vendors, affected you?
I see a big, distinct change in the approach of all big clients. During the slump that followed unrealistic growth, clients used to fear dealing with small companies. The risk is that that vendor might not exist later. So, it became a size game. "Do you have 2,000 people or do you have 3,000? Are you $100 million or $1 billion in revenues?" became critical questions. So, the real capability of Indian companies in terms of intrinsic value to deliver did not count first. Over the last three quarters, a lot of big companies, as part of their strategy, want to deal with small-sized companies. For, they don't want to be the 30th large client of a big IT vendor, primarily because clients need a more consultative approach to service. Earlier, he knew what to do so he didn't need a co-operative kind of atmosphere. Today, both client and vendor need to work together closely. So, a mid-sized company is a good alternative. We believe that is the big change in thinking which has helped us in the last six-nine months. As to our recent, large customer acquisitions, if they had started this process in 2000-2001, they wouldn't have even called us for a discussion.The other big change is that mid-size not a risk any more. We have survived the slump so the client is not worried about whether I will exist later.
The big challenge, though, is that client expectations don't change because we are mid-sized. We need to make the same level of investment, say, in business continuity and processes. With a big size, you can afford that. But it's a big challenge for us. For companies like ours, now is the phase to invest, since we know now that the client is amenable to looking at us. We are making phenomenal amounts of investments in these areas. With one of our prospective clients, we went through an evaluation that lasted seven months. We are now onto the next stage.
By investments, would you mean in infrastructure?
Investments in terms of giving clients the confidence that you can deliver. For example, investments in disaster recovery centres (DRCs). For bigger clients, this is more important, for, they cannot afford to have a centre down for several days.Some players say that DRC is only hype, and that after making vendors invest in these centres, clients don't even refer to these centres. The point is, if vendors had used that sum - about 30 per cent of annual revenues - in operations, then they would have been better off. Would you agree?
For all our large clients, disaster recovery has been very important.Compare the Top 20 of the Nasscom list in 1998 and that in 2004. The top six have remained more or less static while the churn in the rest has been incredible. Smaller companies also grew much slower. Would you say that even though the India pie is growing, that Indian biggies have cornered much of it?
Biggies have grown better than the market. And sure, a chunk of smaller mid-sized companies have not grown or grown at rates much lower than the industry average. Some have grown faster than industry rate. So companies like ours would have gained market share from those smaller, mid-size firms that have not grown fast enough. Overall also, the pie is increasing in size. It's still an attractive market.Despite the slump, contract fees based on time taken and material used still seemed to rule the roost even though fixed price contracts made sense for clients. Now that the times are better, some companies see an increase in the contribution of T&M contracts to revenues. What do you think?
We started primarily with the fixed price business. All of our revenues came through such contracts. Since technology and customer requirements change, it is not the most optimum sort of model. There is also an element of risk. It is not as if a project ends and the next starts the next day. We have been working on how to get a certain percentage of annuity business. It's a result of large applications we build and which the client later asks us to maintain. Then about 10 per cent of our people work on this maintenance project that goes on for two-three years. We moved from being largely dependent on fixed price contracts (85 per cent) to 60-65 per cent.We would ideally like that to be 55 per cent.Is innovation difficult in T&M?
In T&M, there is no pressure for you to see how you can be faster or cheaper. There is no drive to increase productivity. If there's some real problem, then the client would question you. But if there is a 5 per cent slump in productivity, then he won't bother. The pressure to be most productive would not be there in T&M. But getting into T&M contracts helps us balance our portfolio.What does that mean to you?
That means more ownership of projects… trying to maintain, sustain and enhance a system. Also, it helps create more downstream opportunities.Europe seems to be picking up for most Indian companies.
Europe has been a h4 growth market for us. We are only 19 months old in Europe. Still, it gave us 16 per cent of our revenues last year. This year we see that going up to 18 per cent. Our dependence on US is down now to 65 per cent. Would mid-sized buyers automatically target mid-sized vendors?
No. They typically look at sources such as the Nasscom Web site or get a reference from other CIOs. Reference is a big thing there. Now, there are so-called experts in Offshoring who are emerging. They advise clients on whom to go with and even help them build a strategy and help choose an offshore partner. That's interesting.Are the days of big deals over?
Looks like it. No one knows if the big deals promised one or two years ago have actually grown. Today, people want to get it right. They don't want to experiment. So the process of evaluation is much longer - typically seven-eight months, six pilot projects. We even had to go through some 10 success criteria in each of the six pilot projects and could not afford to miss on any of the 10. That's a fundamental change from just experimenting. Today, it's consciously planned and every element of detail is scrutinised.If due diligence requires so much effort, then wouldn't a big order make sense? After all, no buyer would want to go through this with several small vendors.
No… Subsequent to that, the ramp-up would be fast. With all the backlash against outsourcing, most people want to maintain a low key. They don't want to talk about it. Talking about long term plans is a no-no.
Where do you think operating margins would stabilise?
Fundamentally, the dollar has always appreciated. So we used to have a built-in rise of 3-4 per cent in margins. Even with manpower costs, if operation efficiencies are controlled then it comes into margins. If wage increases continue to be what they are even now, (14 per cent for the industry), that's a big challenge as is the dollar-rupee movement. Margins would stabilise between 16-18 per cent.Now because of increased competition, differentiating yourself is a necessity.How do you do it?
Today, vendors cannot offer everything to everybody (at the first selling opportunity). That is possible for large players with expertise and credibility in each such segment. For acquiring good, lasting customers, you have to focus on areas where you can add value. We say we are in manufacturing. Within automotives, we specialise in after-market applications, that is, either spare parts management or dealer management where we can consult for the client. For instance, we tell clients why dealer management is important, whether he should integrate workshop management, how he could bring in warranty claims and the like. That's the entry strategy. But once you enter and build credibility, then you can sell your other lines of expertise.In offering such solutions, we also build a framework and that makes it faster. Typically, productivity increases by two or three times.
bharatk@thehindu.co.in
