The Hindu Business Line : `Vendor consolidation the norm today'

As you enter, you notice just the bare essentials: a CEO's table and chair, a sofa set for informal banter and a compact, glass-topped conference table for sober discussion.

It is much a reflection of the man: calm, measured and with no ado about anything. Mr B. Ramalinga Raju, Chairman, Satyam Computer Services, calmly dwells on the company's past and the future, even as the heat rages mercilessly outside. Excerpts from the chat with Business Line:

This is the first time the Infrastructure business has been categorised separately and figures for which were put in the public domain. Were you waiting for it to reach a critical size or is it another derisking model where you have 4-5 growth areas?

For both reasons…. That it has reached a critical mass and we also consider it to be an extremely important part of our approach to the market in the future. In the next few years, we expect Satyam to participate in large deals and compete with large global players directly and integrated services provided (is critical). Driven by the engine of consulting, integration capability is quite well in line with addressing both applications and infrastructure spaces.

What is your outlook for the enterprise solutions business? We hear that new licence purchases for products, examples such as Oracle and SAP, are coming down. Could that impact service provider prospects…? How do you see the future?

About 35 per cent of our revenues come from the enterprise solutions business. That is far higher than the second largest Indian IT company, as a percentage of its revenues. So it is true that this business is of strategic importance to us. It also gives us a lot of cross-selling (sell solutions of one type to clients who had typically bought other kinds of solutions from you) opportunities. Opportunities there are not typically limited to merely openings in that business, but goes beyond. That is the reason we have created a number of client relationships. We can better mine existing clients. That may be one of the reasons why our performance has been fairly consistent over several quarters. Having said that, (if the licence selling business is slowing down and ) whether that impacts our business.. frankly, we have not observed any correlation between the two. In fact, if there is a correlation, it may be inversely proportional.

When customers are more demanding, that they look at value for money and they look at total cost of ownership (TCO). Then it goes in the favour of companies such as Satyam that are seen to be providing high quality but at affordable prices.

There may be a greater shift taking place from global players whose services are expensive.In that sense, such market developments may not be bad news for Satyam. Though, I believe that some products are doing extremely well… SAP has performed consistently well and they are coming up with newer solutions. They are defining a new paradigm in many instances. So, companies would continue to benefit from technology innovations that are taking place all the time. I am not so sure if the ERP product players (are having trouble).

Because your revenue growth is healthy and for long your billing rates have been competitive, do you see an uptick in billing rates soon?

For this year, we have given a guidance indicating stable prices. In the medium and long term, I believe potential greatly exists if the market conditions are right. Our portfolio of services is getting enhanced and we are beginning to take wholesome responsibility with respect to services we provide (in many instances we are willing to be remunerated based on business value that we are able to show to clients). In the long term, potential exists for average prices to go up.

The gap that customers perceive in the quality of services between global system integrators (SIs) and companies like Satyam, is narrowing down, rather quickly. Customers are saying that if IBM or Accenture can do it, then Satyam can do it too. We have a full range of services we are able to offer. We are operating with a mindset that for at least one third of our service offerings, we would like to be ahead of the market.

In that background, players operating with a high cost base are at a disadvantage. Because, the customer is willing to pay similar prices to everyone and if the price differentials are in this fashion, global competitors are facing pressure to move prices downward. We are hoping if the markets are right, there could potentially be an opportunity for us to demand better prices.

Where do you meet the likes of IBM and Accenture? They claim that they rarely see Indian players in the deals that they pitch for.

That is not true. At least in 40-45 per cent of instances where we are winning deals, there is a large global SI also present. The deals we pitch for range in size from $5 m to $100 m to $200 m. We participate on our own in deals that are $100- $200 m in size. For larger deals, we have been trying to work with other established players as partners.

In Asia-Pacific, your growth has been good, even relative to other Indian players’ growth there. Any countries or industries that are showing promise for you?

In many instances we provide services in APAC for those companies that are global. You also find that use of products is higher in APAC. The relationship is not necessarily as long term as in Europe or US, with the exception of countries such as Japan. In that sense APAC has its own characteristics. We have established ourselves fairly well. In many countries, language becomes particularly important.

We are also enhancing our ability to work across cultures through specific initiatives. We have recruited a number of people at the entry level from various countries where we do business. As of now, they are in Hyderabad. Employees have come in from Norway, Switzerland, Sweden and even other Asian countries.

For example, for our operations in Budapest, locals from there come here, get trained and return. Another example is Malaysia. There are others who we recruit from there, but who spend a year or year and a half, as against being just trained here. Then we give them placement opportunities there. That overcomes issues around visa, or whatever else. More importantly, you are able to accelerate the process of the company assimilating other cultures. Secondly, it gives us better business opportunities. Soon, we will have couple of hundred people with various backgrounds working in various cities in India.

When did this start?

Some time ago. We have about 200 such employees at the moment.

The industry wide perspective is that clients are moving towards multi vendor sourcing.

Our observation is that clients are reducing the number of vendors they interact with. This distribution follows a bell curve. Large Fortune 500 companies are as unlikely to have one single vendor as they are unlikely to have a given number of vendors. In that sense, the trend towards reducing dependence on multiple vendors that crosses a critical size. It is likely that if a company was working with 10 vendors, it now wants to work with 5 or even 3 vendors. Then company working with only one vendor, wanting to work with 3 vendors. The latter cases are very few. The number of clients wanting to reduce from working with too many vendors is much higher today. So vendor consolidation is the norm. And there certainly are clients who have been working with only one or two vendors. If clients are already working with 4 vendors, then they certainly wouldn’t want to increase it to 10.

Even there, volume discounts could put pressure on pricing….

As size increases, the expectation of customer would be higher is a given whether it is price or whatever else. Even in those deals, the margins may in fact be higher than lower thanks to economies of scale and other benefits you derive out of working with them.

What is your outlook for Nipuna, your BPO arm? Your COO recently quit… Are you happy with the business there?

One Mr Sandeep Madan designated as COO has left the company. We have been very fortunate that attrition at the leadership levels has been very low. For our higher performers, that is the top among say five levels, the attrition is one per cent. At the second level, with both together, it is one third of general attrition.

But are you happy with Nipuna’s performance?

Let me put it this way. Nipuna by any standard has done quite well as far as revenues are concerned (370 per cent growth). We are fairly happy with that. We were not too happy with that the bottom line has not behaved the way we would have liked it to. But that is understandable since we had very ambitious growth plans and you tend to build a fair level of additional expense to do what you do. Otherwise, we are on the right path. We work for more than 20 large companies and we are doing very interesting work as well.

What is your outlook for GE as the top client in the future? Your dependence has come down to below 10 per cent for the first time compared to an earlier 20 per cent of revenues.

I prefer not to talk about specific customers. We should not single out a company. GE continues to grow for us. In that sense, it continues to be an extremely important part of the select number of our highly valued relationships. We have learnt a great deal in working with GE and continue to do so. We have a long-term relationship and intend to keep it that way. That the organisation has grown in no way diminishes the importance of the relationship we have with GE.

The number two client has also slowed down substantially in terms of growth figures this year. Is there a particularly reason?

No. There is no specific reason that we can attribute… among top clients, we have been able to retain them and continue to grow business with most large clients. Sometimes, few clients may grow faster than others – (there is) no specific reason.

Your top 10 clients have grown better than top 5. Meaning, client numbers between 6 and 10 have grown very well for you. Is any particular industry inhibiting growth, such as the automobile industry?

It goes without saying that some sectors at times may grow faster than others. I am not able to comment at that level of detail as to why clients six through ten may have grown faster on what may have contributed to that event. I do not have the specific details. But… we have grown the number of one million, five million and 10 million dollar clients quite significantly.

How has your China centre progressed?

We were an early entrant. We have about 170 people or so there, most being local recruits. We have aggressive plans for growing numbers there. It is of strategic importance. It serves as near shore centre for other countries. It services Thailand and Japan.

What is your view on soon becoming a billion dollar company?

Size is important. We are participating in larger deals globally. Another factor to be noted is that we have crossed the 20,000-people mark. We are one of the first to have reached this mark in the fastest time globally. That is gratifying.

It fits in well with the kind of choices that customers want to make. Unless they see a critical mass, unless the vendor is of a certain size, the decision to outsource may not be easy. For, they are not accessing A or B competency alone. Most often they would like to first establish a relationship and have the opportunity to access a full range of services. They are investing more and more in relationships and partnerships. So, they are reducing the number of vendors they work with and would like to have a vendor who understands them well and therefore that approach of the customer fits in with the fact that we have attained a certain size. That enhances opportunities for us to access new business or grow existing business.

Recently, Mr Rajat Gupta, former chief of McKinsey, recently said in a speech that in his 30 years at McKinsey, the company’s annual growth ranged betwee 7 per cent and 15 per cent. He feels that unless a company can integrate cultures, monitor quality and retain original values, growing at 30 or 40 per cent and from 25000 employees to 50,000 employees could mean doom for the company. Where do you think innovations must appear to ensure stability?

My impression about the next 15 years compared to the last 15, is that change will be lot more rapid. Why is that? What happened in the past is that equivalent of disruptive way of providing services has been established and it was more in the testing and validation phase. We have overcome that. Distances being eliminated is no more a concept but an established reality. In my opinion, the players that would move on to this platform and change the rules of the game would be much larger in numbers and also the extent to which they want to use this platform, which is a powerful one.

That would pave the way for innovative and agile companies to do well.

In that sense, it is not an end of an opportunity but a beginning.

How do you see Satyam changing? You had even said that you wouldn’t be surprised if you touch 50,000 employee strength soon. Any management change expected in the next 4-5 years?

Being in a fast growing industry and in the company of fairly sizeable and established organizations as competitors, one cannot afford to be complacent. One must reinvent oneself all the time and think of newer and better ways of doing things. Therefore, this is nothing new for Satyam nor has it been to most other successful companies, particularly other IT companies. We have done a number of things in the last 15 years or so… In a way we have reinvented ourselves five times. Orbit 5 means onsite consulting, offshore, established quality standards of international repute, offsite centres, reaching out, domain competence being the driver, etc.

We believe that Satyam provides, relative to most other companies, much greater opportunities for leaders to grow. If someone asks us what business we are in, our immediate reaction is that we are in the business of grooming leaders. We believe that all else is incidental. We believe in distributed leadership and empowering people. We have created a model within the organisation which encourages people to be entrepreneurial. We have always given that high importance towards being customer-focused. To that effect, we have internal business models that we believe are unique and among other things, these are significant differentiators.

You seemed bullish about the near future compared to your competitors. Any signs you see that give you such optimism?

I read it differently. All the large companies appeared confident about the medium term and long term. It is not correct to conclude that larger players were pessimistic. They were not. I thought they were as bullish as we were. In one or two instances, the quarter was not as good as they would have liked it to be…Their comments were restricted to, in my understanding, to the current quarter.

I think the industry is therefore generally optimistic. As far as we are concerned, one thing you would have noticed …last year was that we had fairly consistent performance… most of the year it was high. In one or two quarters, we may have appeared to have been not as high as others. Use of the word ‘consistent’ is appropriate for us. Whenever we have enhanced our guidance, we have met it. Last year too was the same.

In the last four or five years, a lot of changes have taken place, in my opinion, for the better. We have derisked our business better than other companies. In the ‘90s, we were known to be aggressive and to focus a great deal on growth. In the last few years, we have brought a lot of balance to the growth. The access we have to the quality of customer for our size is amongst the highest. We have relationships with 144 global and US Fortune 500 companies. In that sense we have an excellent spread among high quality large clients internationally. We have reduced our dependence on top 10 clients, from its highest revenue contribution of 54 per cent to 42 per cent now. Dependence on the largest client has also come down significantly to single digits from a one-time figure of 20 per cent.

Revenues accrue to us from not just 4-5 verticals but from 10 verticals. Newer verticals that we have started on not only have a built up base of their own but have become a fairly significant proportion of our overall revenue.

Geographically we have done extremely well. We had single digit business arising out of Asia Pacific (APAC) and Europe a few years ago. Today Europe contributes 18 per cent and 15 per cent comes from APAC. In the latter, in many markets, we have established leadership position… in others we have respectable position.

We emerged as leaders in enterprise business space including consulting. We made early investments in the ‘90s. That is paying rich dividends now. We are the second largest extended engineering services provider in the country. That is quite a good position to be in. We find the infrastructure business growing. We consider that a strategic part of our overall portfolio that we provide.

How much did competitive pressure play a role in the importance that you have given infrastructure management? Wipro is a significant player and has for long been visible. Did that influence the way you ramped up on this?

In my opinion, it is the opportunity that is compelling companies to take things forward. At this time in India, I don’t think any company is able to claim a leadership position…

Some of your clients might show more promise of giving you greater business in future. How do you nurture them?

We have been doing that for a very long time. Every client is very important for us. Though, there are some special relationships depending on the nature of engagement and size of operations, among several other things. We prefer not to go into details there because we feel that it may not be very healthy to discuss in the open. If I say that one amongst three is of strategic importance, the other two might wonder if they are part of the special list. I don’t want to get into such a situation.

Post-acquisition of Citisoft, you have given revenue guidance of 26-28 per cent growth. Industry watchers feel that this is conservative and believe that the acquisition could actually help you grow better than the rate you have mentioned.

The guidance we have given is realistic. But much depends on how markets behave. I do not want to peep into the future for it would interfere with our guidance. A number of factors have been considered. At the beginning of last year, the guidance we gave was between 15-18 per cent. But things worked out well. So…we have started now with a fairly optimistic note. So, the guidance this time has been higher.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
SunGuard to ramp up Pune operations

Punitive liabilities for data theft, loss — BPOs faced with higher insurance premiums

Bengal sees scope in knowledge process outsourcing

Nokia launches Concept Store in Delhi

Anil Ambani assumes charge at Infocomm, reconstitutes board

Tata Tele lines up customised tools

$12-b chip unit coming up in AP

Emerson Network seeks to tap potential in `B', `C' cities

`Vendor consolidation the norm today'

More security breaches in US, says Forrester

Infinity fires Bahree

Indian consortium develops data security system

AP broadband project order for Aksh Optifibre

ITES exports surge 41 pc: ESC