The Hindu Business Line : Eyeing the cream

ARUN Jain saved us five man-days (to put it in his industry lingo). Three of us from eWorld and two of his colleagues gathered thankfully in his room in the heart of Chennai. Thankfully. For, the original plan was to meet him in his office some 25 km from our place of work. Clearly, he seemed to have seen it all from our perspective and agreed to travel the distance. Interestingly, for Jain, CEO and MD, Polaris Software Labs, "perspective" seems to be the buzzword. The crux of the conversation was "perspective", the customer's that is. Jain says that was what directed his acquisition of Orbitech Solutions. Excerpts from a chat with eWorld:

What were the opportunities and where did they exist for Polaris through this acquisition of Orbitech? In the latest conference call, you have talked about your competitors concentrating on Tier-II and III banks of, say, $1-3 million in orders, while you will be looking at $10-15 million order size. Can you spell out your strategy?

When we picked up the entire suite of solutions, we looked at it from the customers' perspective. That is what a customer will expect from a bank. If I look at corporate banking, what I would like to have is management of my payroll, receivables, treasury function and extra cash to be managed, and foreign exchange.

Today, a CFO has to deal with five different vendors. So, we need a strong integration of systems under one umbrella. We have a stack of solutions, with a central integrator piece, which will talk to all the solutions. Using this stack, banks can move from one solution to the next over a period of five years. These solutions are all Java systems, latest technology, so their lifecycle is 15 years at least. When I say that a customer can become a $15-million customer, I am looking at Tier-I banks, instead of selling to Tier-II or III banks. This is a risky decision we took in March 2003, when the real merger happened. In 2002, the strategic option available to us was to generate cash immediately by selling our solution to a Tier-III bank. This was the dilemma at that time. We will be able to get a few quick million-dollar deals and make our profitability look better. But we moved away from this `quick attraction' mindset.

We decided to look at the top five banks in each geography, where we want to (be present), the UK, Singapore, Malaysia, Japan, Germany and West Asia.

But leave out the US for the time being. And out of the top five banks, can we sell to one bank in the next 12 months (is the question we asked ourselves)? We took this decision in June/July and went to the market in November 2003.

We are in the final stages of closing a deal in Singapore among the top four banks. Maybank is already announced.

In Shinsei Bank, some of the modules of i-flex are getting replaced already. In West Asia, one more deal in the top four banks is finalised.

In Germany, we have Deutsche Leasing (one of our oldest product customers). This is the footprint we have got. If the banks are of this size, which have a multi-million dollar budget, you can sell A module (treasury management or cash module management, for instance) in a million-dollar deal (and scale-up later).

The implicit belief in the banking sector is that Tier-I banks are still reluctant to overhaul their existing systems in the form of big bang implementation. Given your positioning and the experience of your peers such as i-flex and Temenos in the Tier-I banking space, what gives you the confidence that Polaris will be able to make this transition happen and make a difference?

I feel that the Tier-I bank business model will be very different. I think the Tier-I revenues will not come from licences, but from services. If I can charge a premium of services, I will be able to make up for the shortfall in licence fee. That is our risk mitigating strategy. If I enter into a Tier-I bank with $1 million in products, I can get $5 million in revenues. If I can take a 25 per cent premium of service revenues, say with an offshore rate of $25-30 instead of $20-22, it will make the whole model very interesting. Because even now, our revenue engine is the service engine and I do not have to shift the model.

Maybe Temenos is different, but i-flex already has the model that you are trying to replicate, maybe from a different direction? Do you think that the Tier-I banking market is ready to move from an in-house solution to a packaged solution?

We have the patience to do it and can wait for some time. We have seen that the service-oriented architecture has opened up. The Web services of Microsoft and IBM have penetrated and we are piling behind that. This architecture means that for each service, I must have a service engine and the centrepiece will be the integrator, which integrates all the other pieces. The whole value of our strategy will be realised by 2005 or 2006.

In the products business, which accounts for 14 per cent of your revenues, you are still incurring a loss? What kind of scale-up possibilities exist in the product business relative to services business?

We are not positioning the company for the next 12 months or 24 months. We are looking at a three to five-year horizon.

We feel that IP-led lock-ins are much stronger than service-led lock-ins. If we focus on Tier-I banks and have IP (intellectual property) sitting there, it is a different space altogether.

This appreciation is, as of now, not recognisable as there is a lot of noise on the general- purpose outsourcing. We are building the Hyderabad centre only for treasury, security and wealth management practices, Chennai for retail banking, corporate banking in Mumbai and investment banking in Delhi. Each centre is working on one vertical, there must be some logic to it. And the `economics of expertise' that we are talking about, puts us on a different plane altogether.

What are the lead indicators that investors need to look out for to see that you are on the right track?

I think this quarter and next quarter results will give you some indication of whether our strategy is working or not. If you are increasing the growth numbers from 5.5 per cent, investors should get greater comfort.

The operating profit margin improvement will be the second lead indicator that will be important. In the last three or four quarters, merger-related expenses have hit us. We have taken provision for bad debts in the latest quarter for IT deals that we signed up in the Orbitech merger period. When our strategy changes from Tier-III to Tier-I banks, we have to take some write-offs on those anxiety deals signed at the time of the merger.

In the past year, while you have been reworking your strategy, has replacement of your clients been a problem such as General Re because of the slowdown and NEC where you have cut down on manpower.

There has been replacement on clients, which I cannot comment on right now. NEC (sic) is because product has not succeeded in the Japanese market as yet. They are taking a relook at the product and that is why they have slowed down right now. They will revive it next year. Japanese have their style of functioning. They go full blast, invest and then do a go-to-market check now. They have $150-200 million and they will not let the investment go waste. They will come again sometime in 2005.

Looking at customers such as UBS, AIG or ABN Amro, there appears to be a lull in the growth of business volumes, post-merger. Are you looking at a customer outside Citibank as your anchor customer?

Some of the big names have not been announced yet, at least on the products side.

When you embarked on the strategy that you talked about earlier, you already had 60 IPRs through Orbitech (called Intellect Suite now). What really led to the investments you made in the Intellect Suite over the past year? Initially, it looked like yours was a component/framework kind of a model you were integrating with services, rather than a pure play product company?

Pure product play is not a right thing to do in a large Tier - I bank. Tier I bank is different from a Tier- III bank. The way a Tier - I wants to design his interiors is his own choice. Tier - I bank is already a leader in his space, because of some innovation in his product, service or technology. So there is an inherent part of customisation in a Tier - I bank strategy. So, when he sees us as a 5000 people company, Tier - I bank says, you are doing cash management implementation for me, why can't you do treasury solution maintenance. This is the problem that Tier - II service company faced. When a strategic outsourcing deal happened, everybody went to the top-three companies. But this door has opened, whether it opens from the products side or strategic outsourcing side, it still leads to the same marketplace. So, as a $ 60 million company, you cannot bid for a $ 100 million deal. So, we are entering through this door, but occupying the same market space. That is the change we have seen. If you have read the Gartner report, it talks about three spaces called utilities space, enhancement and front tier space. Utilities space is basically, the use of Java or Cobol programmers, depending on the need. The enhancement space is where you suggest to the business that by using my solution, you will improve your business, not on cost arbitrage, but on expertise. Front tier space is where you give them the full business model say, if you do not have a wealth management system, take this model. We are now in a specialised services business and not in general services.

When you look at Tier-I banks and boundary-less banking, the kind of basic infrastructure that is required for them is different from a Tier - III implementation. The whole technology performance that is required for Tier- I is different and expectations are also different. Supporting a $ 50 million or $ 20 million kind of customer requires a different kind of engine and horse power. It is like fitting a Mercedes engine in a Maruti car. We had to make the capacity testing and improvement and hence we brought all the 60 components to the same horse power in the last two years. And this investment no other international company could have done. Today the opportunity that is available to us is phenomenal. My only challenge is how do I leverage it.

Can you elaborate on your product-led model, which has been ushered in through the Orbitech merger?

Let me take you a back a little bit. Banks were the first to automate in the '70s and '80s. For banks, unlike manufacturing, technology is a must. Since they automated on their own, everybody has grown their own systems. And the systems today are 25 year plus. In these kind of systems, the maintenance costs are very high. That is why Indian software industry is focussing on BFSI, which has the maximum spend. But these banks are like the New York subway. It was the first subway which came into the world, but it is the worst subway compared to Singapore. Since the New York subway is leaking, they are doing the plumbing to keep them in condition. In the same way, today the international banks are doing the plumbing. They buy one technology from Microsoft, IBM or something to do the plumbing. Basically, they are focussed on improving the localised efficiencies. Now, the dilemma they are facing is : Buy or build a new banking platform from scratch. 'Buy' gives you the efficiencies of faster change. 'Build' takes a longer time to do it and more risk factors are there. Both have significant risk factors. When you buy best of breed, from small companies across the world, say from ones which are focussed only on retail banking (Systemware) , credit card processing (Vision plus), Treasury solution (Trema) or Cash Management (Cash tech or Misys. But this is only one dimension.

In the last thirty years, banks themselves have gone through multiple stages. The other dimension is technology. It started with IBM, Unix, Oracle and Sybase came in later, adding platforms to banking. And this has happened between 1980 and 2004. The third dimension is that banking was local, each country had its own regulations. In the last 20 years, it has gone from local to global. In this scenario, any banking software company which came into existence, they came with each of the silos, say three dimensions of domain, technology and geography. These silos got developed in the US or Europe because the size of these product companies were 200 or 300 people. What happens is that they focussed only on a narrow band of banking capability. The advantage Polaris has is that, we built this product at the cost of Citibank. We call it Intellect, Boundaryless banking. Boundaryless banking is because we were a part of Citigroup, one of the most global banks and we picked up the equity stake (in Orbitech) in 2002 and not 1992. Globalisation has happened at the fastest pace in the last ten years. Take Spain, Elnova is a successful product there. Or Misys, which you may have heard off, has grown through acquisitions.

Picture by Bijoy Ghosh

maverick@thehindu.co.in

With inputs from Bharat Kumar and Raja Simhan T.E.

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