The Hindu Business Line : `Not easy for global majors to ramp up centres here'

WHEN we walked into CFO Mohandas Pai's office at the Infosys Technologies campus in Bangalore last week, he turned to us and said, "Yes, tell me what you want."

Surprised at the conversation beginning without a preamble, we explained that it was a good time to see him, since the industry's fortunes seem to be changing a bit.

Then, recognition flashed in his face and he said, "Sorry, I didn't recognise you. I thought you were part of the Infosys team working with Verizon."

And sure enough, there was a `Welcome' sign for visitors from Verizon at Infosys' reception lobby - two sure evidences that customer visits are increasing and there's more business to be had. It surely was time to get the dope from industry captains. Excerpts from the chat:

When the slump happened, clients insisted on renegotiation of prices downward. Now that things are better, will prices go up, for existing clients?

No. Prices have become stable. That's the good news. Even when renegotiation happened during the slowdown, it was not a trend but occurred only with very few clients. New clients are coming at average rates. Vendors are not competing on prices. Our margins are decent.

Due you see nuisance value in small vendors undercutting to get a contract?

We do see that happening, but they don't have the scale to match the bigger companies. It is unlikely that clients would go to them only on the basis of price.

IBM and Cisco are examples of companies that upped guidance recently, citing an increase in corporate spending in the US. Do you feel that pulse yet?

Companies are more open to spending. Investments in hardware too seem set to increase. For, replacement of hardware equipment has been delayed for some time. The more they do that from now, the more the maintenance costs. So that is coming true.

Would you follow the EDS model of acquiring your clients' assets for large contracts?

Capital is not our strength. But we are interested in services such as remote infrastructure management. Also, the propensity for large multi-year contracts is declining. There is great risk for the buyer. He is tied into the vendor for all those yearsIn a 10-year contract, if the client's revenues slip in the fifth year, he cannot reduce costs with the vendor.

Given recent reports in the media on your manpower problems, has there been a crisis of sorts, something that you are concerned about?

My personal feeling is, yes. We came out of two to two-and-a-half years of low growth. We kept all our people together. We had to make some tough decisions. The situation is now better.

In the last one year, we have given people significant promotions and salary hikes. There has been some degree of unhappiness. We are learning to manage that by communicating better and by getting people to participate more in decision-making.

Our strategy to make units responsible for a vertical helps in this and in communicating better with our employees.

Recently, your Chairman indicated that the Indian market was the one to focus on, given its large potential. Interestingly, your India revenues as a percentage of the whole has actually halved in the last quarter compared to the same period in the previous year. Is there a dichotomy?

We are focused on the banking sector in the domestic market, where we have a 60 per cent market share.

We work with very large public sector banks for their software needs. Many of them are also going in for core banking. But even when you sign a deal, it may take some time to get going because of issues such as network readiness, hardware installation and the like.Last quarter's revenues are a result of what happened a year before and not a function of today's happenings.

Today, there is an upturn in IT spending in banks here.

We have some very good deals being signed. We are also investing in our banking products to take it to the developed markets.

For the last few quarters, the portion of your revenues from fixed price contracts has remained stable, quite opposite to predictions that clients would prefer such contracts given the need to cut costs.

In fixed price contracts, there is risk for both parties. The vendor has to manage change and become highly efficient and the client has little flexibility over time.

What is your manpower attrition rate?

About 10 per cent, significantly less than other players who are citing 15-18 per cent. And, the absolute number of people who left us in the December quarter is less than that in the previous quarter.

How are your plans for China going?

We have set up a subsidiary there. We have taken space and will recruit shortly. We are on target. In Mauritius, we have a capacity of 500, for both the development and the disaster recovery centres. Mauritius has skills in both English and in French, which is good for tackling Europe.

Are clients with presence across the world insisting on a central pricing deal?

That has always been the case. But we also settle for regional differences in pricing. For instance, a contract for a company's branch in Germany would mean higher prices than for its office somewhere in Asia.

How about pricing based on domain expertise or specific skills?

That too is common. Clearly, prices for consulting skills are higher than those for enterprise solutions, which in turn is higher than those for applications development. It all depends on the percentage mix. About 35 per cent or so of business gets a higher price point than other components of the business.

You have about Rs 2,500 crore in cash and equivalents. In context is your most recent acquisition that cost you only $30 million. On one side is the necessity of being highly liquid and on the other is the corporate sin of sitting on too much cash.

Look at technology companies in the US. Be it Microsoft or IBM, they all carry large cash balances. They try to reduce business risk by reducing financial risk.

Back in India, we are not used to seeing companies with low debt and high cash balances. So people are asking questions. The key point is, are we earning a rate of return on capital employed and total capital in the business which is higher than cost of capital, and can you sustain it?

If the answer to this is, 'yes', then it is for the management to decide how much cash to have. We have set benchmarks - twice the cost of capital on capital employed and thrice the cost of capital on invested capital. On this count, we are comfortable.

Does that mean you are doubly cautious on the acquisition front?

No. We evaluated 125-130 companies and came close to making an acquisition in 2-3 cases, those did not work out in the last minute. We saw a good fit in the Australian acquisition we have made.

People tell us that our risk-taking ability is low. That is not true. The management's job is to maximise revenue and minimise risk. Three years ago, we quoted for a large, 10,000-person contract. We were in the final list. We continue to quote for large contracts.

For acquisitions, are you interested in a particular domain or geography?

We had to fill a gap in Asia Pacific, so the Expert acquisition in Australia was timely. We have been looking at consulting companies since they have relationships that would help us grow to the next stage of evolution.

We have looked at technology companies to see if those technologies could help us. We did make investments in tech companies in the past, some of these haven't worked out.

We hear that global majors who want to quickly ramp up in India are urging their mid-management employees of Indian origin to relocate to India. Given that each of them manages about 30-40 persons, if a good chunk of them relocates, then a 1,000-person centre can be built up quickly. Does that bother you?

It's not as easy as getting a bunch of guys in a room and starting work. We have put in effort, time, money and energy into building the offshore expertise for some time now. Also, the top management is here in India. So the model has to be turned on its head. For those majors, the focus of the delivery team has to shift from the US to India.

How do you manage the backlash on offshoring jobs from the US? Also, at one point, when manufacturing jobs were offshored, the services sector took over in the US. Now, there is nothing to from services. That's causing problems.

There are some pain points. But as economies improve as a result of offshoring, things will become better. As to services, there are several kinds of services jobs. Of the 138 million jobs in the US, only 400,000 have been offshored so far.

Doomsayers in 2001 predicted that we would never go back to the good old days before the Internet bubble burst. Now, even as things are said to be improving, across the software industry, measures such as operating profit per employee and revenue per client are slumping significantly.

In those days, you had volume growth as well as price growth. Now, prices are, at best, stable. Only volume growth is there. Industry is larger, there is no great scarcity of resources and there are no new trends in technology for huge tech spending. So, the good old days may not come back. Stability itself is a great achievement.