The Hindu Business Line : Specialist skills are the key

IT was the first time we had trouble meeting N. Lakshmi Narayanan, CEO, Cognizant Technology Solutions. And no — it wasn't because he was too busy. It was merely because he was away in the US and we had to await his return. "Away" might give you an indication of a temporary visit. Not so temporary, nowadays. Since he became CEO eight months ago, Narayanan has spent only a month — and not continuously — in India. Since India's IT industry is governed by exports to the US, Narayanan's views throw that much more light on what to expect in the coming days. Interestingly, Narayanan made the point that clients valuedspecialised skills rather than the vendors, who sold everything to everybody. Excerpts from the chat he had with eWorld.

What value have the individual acquisitions you made brought to the table?

Today, end-to-end outsourcing is not fashionable and there are lesser number of such deals. As such, customers are unbundling different areas of outsourcing and giving it to specialist and niche players. The common examples cited by industry analysts are GM and JPMC. In the newer deals, customers choose a specialist in areas such as consulting, infrastructure outsourcing, application outsourcing or business process outsourcing. We are seen as a specialist in application outsourcing, spanning application development and management.

But within application outsourcing, we are widening into areas such as ERP, CRM, data warehousing and business intelligence, applications-based infrastructure services and vertical-driven BPO that synergise well with the applications we have developed and support. All our acquisitions play well into this focus — Aces (niche Siebel CRM company), Ygyan (niche SAP services company) and Infopulse (focused financial services application outsourcer in The Netherlands).

In other areas such as large and complex applications and business-technology consulting, we are building the capability by hiring key people — program managers, architects, senior technologists and consultants who can deliver large and complex projects to our customers and provide the IT road map for offshoring. We are looking at acquisition possibilities in these areas as well.

Once we have a customer, we would like to offer them a broad set of capabilities, which require technology and domain expertise. Anything that requires specialist skills, we would be there, anything that does not require specialised skills or is a commodity skill, we leave it to people who specialise in those areas. Specialist skills at the higher end mean sharper focus, better margins, and better challenges that people like.

What have you learned from your acquisitions? What are the integration challenges?

The culture, practices and values are key, and as such, they are also the key qualification criteria.

In one of our acquisitions, getting the people "to think big" was a challenge. When they got a half-a-million dollar deal they would celebrate it as a major win. But then we start off many such deals frequently. So we had to orient them to the challenges and nuances of getting a $5 million project and executing it within 3 to 6 months, which is critical.

In another acquisition, we had to orient our acquired company "to think global". This company was focused on a small geography. To get them to leverage the capabilities globally was a challenge.

As we have done only small acquisitions, the orientation and integration have been manageable and smooth. We spent time and effort and got them to think big and think global. Now that these acquisitions have been well integrated, resulting in higher value for our customers and for us, we are confident that we can look at acquisitions that are slightly larger.

Has it also been a challenge changing their mindset toward offshoring?

Yes, it has been a challenge but not a major one. Offshoring is something that all of them have not been used to doing. They know that it is successful. So instead of questioning the model itself, they are willing to learn and adopt. The mindset change starts from sending a mail and requesting global participation for a solution. As such, we have to orient them on the new way of doing things, in a new culture, and in a new organisation. We had to train by example. It was not difficult, but definitely a little time-consuming, which is fine.

With acquisitions we have seen you shed a few customers. Clients generate revenue and are valuable. Why else would you acquire a vendor?

One of the key reasons for customer churn is that some amount of work done by the acquired company does not fit into our business model. Smaller companies sometimes do resort to resourcing individuals, which is something we do not do. So at the logical end of a project, with mutual consent, we end our relationship.

In some situations, it's also automatic. We keep talking about our strategic customers and why they are strategic, what is best for these customers, and the like. Other customers also hear these announcements and they know they are non-strategic.

Those that see great value in offshoring, work hard to get into the strategic category by increasing the size of the engagement with us. But, some of them who are unwilling to commit such strategic offshoring, sometimes exit. In offshoring, unless customers are committed top-down it does not work.

It's for that reason customers, particularly in Europe, where it's consensus-based decision-making, drop off after some initial engagements. In the US, it's different as they are more open to offshoring and are not averse to doing things differently if they are convinced about the value. In countries like Germany and France, sometimes it's a large committee and even if one in the committee says "no", the decision to strategically offshore is not taken. And sometimes, it takes longer to arrive at that consensus.

On newer trends in offshoring ...

What is your take on larger deals coming to offshore players? Indian companies seem to go after low-hanging fruits in the less than $100 million deals. As the industry enters into more systems integration and infrastructure outsourcing, how do you position yourself for the $250-500 million deals?

Many of these large deals, in the over $1 billion range, are huge contracts in the government sector (including Defence and Navy contracts). In this mega billion-dollar business, there are limited players - IBM, EDS and CSC. Such large deals are always total outsourcing deals that entail taking over infrastructure and people assets. In this segment, none of the offshore players operate.

In the enterprise business, large opportunities tend to be in the $500 million to $1 billion, which also involves re-badging people. This would also include infrastructure outsourcing and business process outsourcing.

In the application outsourcing (space), it normally tends to be in the $250 million and below annual revenues. Some new development initiatives may be large, but nothing more than $100 million per project because that's the type of investments customers make in new projects.

Sometimes, even such deals are split among several players, each getting a share of $20-30 million. But now that's changing. Offshore companies are participating in larger deals upwards of $40-50 million, and are having relationships growing up to $100 million per year with a single customer.

Is the offshore industry ready for total IT outsourcing?

That's a difficult market. With hardware prices crashing, it's difficult for us to even conceive of amortisation and depreciation costs. To even write those types of contracts and the kind of legal mindset required for them , I don't think offshore companies are yet there. It would be interesting to note that there are many legal firms that earn a living just by writing such contracts.

But people acquisition is something that has started

Yes. We can re-badge people and have re-badged customer employees on our payrolls on many occasions, though in a limited manner.

People have been scaling up contracts and deeply mining their customers. But will 90 per cent repeat business, with accounts coming to India, make a change? That's how the industry has traditionally grown from $5 million to $20 million to $40 million and now even more.

But do you think with the likes of Accenture coming in and the range of services widening, the revenue from the top 10 or 20 customers will go up?

It's unlikely. If you look at the pattern of all companies, the top 10 or 20 customers contribute to more than a third of their revenues. Even if these companies grow to double the current size, it's unlikely that the top 10 will dilute to 1/8th or 1/10th. The proportion will continue or change only marginally. This means larger customers will contribute to a greater proportion of revenues, because the relationship with them would also keep growing.

If you get $50 million from a customer now, 2 to 3 years down, the same customer would generate $100 million. And the revenue would double and the contribution would also double. This is generally the case even for larger companies like Accenture, IBM or EDS. As they win more mega deals, the proportion of the revenue contribution will also grow.

When companies move newer forms of outsourcing like infrastructure outsourcing and BPO, is cross-selling different?

Cross selling is easy provided you sell around your core capabilities. If an IT services company goes out and sells itself as the greatest company in the call center or the horizontal BPO space, customers will not buy that as they see (the two) completely different capabilities.

But if companies go out and sell within the context of IT services, say data warehousing and business intelligence, IT consulting, ERP, CRM or application-driven infrastructure services, they will (be open). Likewise, it's not easy to sell strategic consulting, as there are no capabilities or synergies with the core-competence.

But some of your competitors claim to cross-sell all of them.

I don't think it makes sense as a value proposition. It may just be a matter of convenience. This is because the type of work is different. If one has a number of technology customers like Cisco, Nortel or Dell, running a Technology Help Desk is perhaps a possibility. In the case of enterprise customers, I don't think we could claim that we understand their business processes, to offer all forms of BPO. As such, where's the starting point and where will the twain meet?

The twain will meet at the upper end, which is the vertical BPO. Horizontal BPO, like pay roll processing or revenue accounting, are generic. If I run a Call Center or a Technology Help Desk for Dell or Microsoft, I can well use it for a credit card company, as it's completely horizontal.

But the same is not possible in the vertical BPO context where we require industry-specific vertical knowledge. That is what differentiates vertical BPO from other forms of BPO, and the efficiencies that companies bring in depend on how deep their industry knowledge is.

That's precisely what we are focusing on and would build long-term focus. But within that, if we do require a call center capability in a small way, we could look at building it inorganically. We do not see not having the vertical BPO capability as a gap in our solutions spectrum because vertical BPO doesn't exist in the offshore context yet. It's a different animal.

There are some companies that have made a business out of vertical BPO in specific industries in the US - like an ADP, First Data, or ACS. In the offshore context, much of this work is done by the captives, for example, an e-Serve might be doing for Citigroup, covering banking reconciliation and the like.

A lot of Indian captives seem to realise that even third-party kind of relationship is a better way to be in business? Is that a reason to go third-party rather than be captive?

In most cases, enterprise customers outsource to third-party players the unimportant, low-end or horizontal BPO. What requires domain and technology specialisation, they keep it captive. In other words, what is commoditised is taken to third party and what is high value-add is kept captive.

Is your position on vertical BPO a rethink?

No. We have always been focused on vertical BPO, which is at the high end, and that's one area we would continue to focus on. There has to be some specialisation for differentiation and higher value add.

On people…

On the people front, organisations in India seem to be moving towards entry-level talent with average ages moving down? Is it a strategy and is it healthy?

It's not a strategy, it's compulsion. You don't get 4-year experienced people from the industry unless you create them. So that's the investment the entire industry has to make. The challenge, however, is to retain them as we grow them.

Cognizant CEO N. Lakshmi Narayanan gives a foretaste of things to come in the country's IT exports to the US.

bharatk@thehindu.co.in

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