The Hindu Business Line : Tough to get in, reliable thereafter

THE German IT market has always been a difficult one to prise open. This is a theme that has been widely acknowledged by several Indian software companies.

But over the past three years, the Mumbai-based Hexaware Technologies has been among the few Indian software companies to patiently invest and make inroads into this market.

Hexaware is one of the top five Indian vendors in the German market. In terms of IT spending, Germany is said to be the third largest after the US and Japan.

Showcasing the strengths of Hexaware in the German market to a group of visiting journalists from India, Mr Sunil Surya, Head (Europe operations), said that each of Hexaware's three key clients - Lufthansa Systems, Deutsche Leasing AG and Citibank, Germany - renewed or expanded their relationship with the company recently. These three clients figure in list of top 10 clients of Hexaware.

He said that the buyers of IT services in the European markets are highly sophisticated and demanding; they keenly "evaluate value" and do not go merely by cost reduction in every relationship.

The sales cycle in bagging a contract is typically longer, as clients necessarily go for multiple reference checks.

But once the clients are convinced, they go in for long-term fixed-price relationships, he added.

Reinforcing this trait of German clients, Mr Kanak Choudhury, Business Development Manager of German operations, said that Hexaware entered into the Lufthansa Systems account in the year 2002 with a $2.5-million contract for Lufthansa Airlines cargo systems.

In the last six quarters, the company has deepened this into a multi-year, multi-million dollar relationship by adding CRM, testing and other passenger services under different contracts.

As recently as last week, Hexaware announced a three-year contract with Lufthansa Systems for providing mainframe-based maintenance services for its check-in, inventory and ticketing applications.

According to Mr Dirk John, Vice-President, Business Segment, Airline Services, Lufthansa Systems, partnering with Indian vendors such as Hexaware has given them typically a 25-30 per cent cost advantage over their peers.

Mr Philippe De Geyter, Member of the Board of Management, Deutsche Leasing AG, Germany, and former Citigroup veteran, echoed a similar view of the German market. Recently, Deutsche Leasing expanded its relationship with Hexaware from $25 million to $35-40 million.

In August 2002, when the existing $25 million contract was bagged by Hexaware, it was the largest awarded to any single Indian vendor.

This three-year contract is set to expire by the end of this year. The new contract from Deutsche Leasing will partly involve development of the next version of its core leasing module, while the rest will be maintenance contracts emerging from its existing relationship.

On whether Deutsche Leasing had evaluated other Indian vendors before expanding the relationship with Hexaware, Mr Geyter said, "Of course, we do this evaluation as an ongoing exercise."

He added that vendors are generally evaluated on three criteria: technology base, flexibility in application offering and cost of software delivery.

The European presence, particularly Germany, is also translating into an improvement in operating margins for Hexaware.

To a question on how these key clients have contributed to margins, Mr Rajesh Ghonasgi, CFO of Hexaware, said that margins from the European accounts are 2-3 percentage points higher than the US.

"Even though these are annuity relationships, being fixed price contracts they contribute to higher margins."

To cater to German clients, Hexaware has set up a proximity centre at Bad Homburg, on the outskirts of Frankfurt, which seats about 50-60 employees.

Of 25 per cent of the revenues from the European market in the first half of 2004, 15- 20 per cent was contributed by Germany. Hexaware has projected revenues of $114 million for financial year 2004 (January to December) and post-tax earnings of $12.5 million.