The Hindu Business Line : ‘Towards shared services’

“My model is to come up with an intersection of technology, process and people, a solution where I use the same technology, processes and people to offer a set of services to multiple customers.”

Phaneesh Murthy

iGATE Global Solutions has just come from a mixed quarter. The gross profit margins (profit with respect to pure operations, unclouded by the impact of depreciation, interest or tax) have met the goal that its CEO, Phaneesh Murthy, set for the company two years ago. However, the mortgage industry in the US, in which iGATE saw good potential, has seen a slump from which it is to yet recover.

Murthy feels the industry needs to innovate to delink increasing revenues from rising employee strength. Murthy addressed Business Line staff in our office in late July, on these and other issues.

How is the next wave of innovation going to happen?

The offshore discontinuity was the last discontinuity that happened, which was the operating model discontinuity — same thing faster, cheaper, better. Before that there was a technology discontinuity, with the newer players coming in and saying ‘we will do client-server work’ against the mainframe work done previously. And before that the business model discontinuity, where accounting firms asked SAP to stop doing their own implementations.

Now it’s time for the next level of discontinuity. My hypothesis is that the next solution will be shared services. My model is to come up with an intersection of technology, process and people, a solution where I use the same technology, processes and people to offer a set of services to multiple customers. This is an extension of the iTOPS (integrated technology and operations) model. If you change the architecture of the solution, you can deliver a much lower cost.

For example, when I am originating a mortgage for five-six customers, I am not doing it on the traditional people model but I am charging the customer on the mortgage originated. That’s the benefit to him. I am able to do it because I have a technology platform that encapsulates the customers’ business tools into a technology solution through a six-sigma leaned out process. And I use the same people. This is similar to the ADP’s payroll processing model.

Are you moving towards output-based pricing?

The IT industry will move towards that. Ten years ago, Fortune 1000 companies thought there were only 10-year contracts in the IT industry. With the Indian companies and offshoring coming in, we now have one-, three- and five-year contracts. This is a valid proof point that the Indian IT industry changed the contracting method for these companies.

Is the mortgage industry particularly open to shared services?

It is amenable to this model because, in this industry, interest rates have always been changing. For every quarter per cent change in interest rates, about 50,000 people either walk into a home or walk out, in the US, depending on whether interest rates are up or down. For a bank, this change in volume is quite difficult to manage. From that perspective, if someone else takes care of technology and operations, they are quite happy to pay a variable cost for it. At iGATE, we started by building out a platform for the mortgage industry.

Is there a recovery in sight for the US Mortgage industry?

It’s not there yet, but I think it will come back. When it does, companies there will not be in a hurry to hire people again. In 2000, the US market hit a brick wall. When the markets started picking up, the Indian industry gained. I expect this to happen this time too.

Learnings from the recent slump?

The mortgage fallout taught us two lessons. One is to expand our presence across geographies for the same vertical (mortgage) and not just focus on one market — the US. So we are looking at Canada, Europe and Australia. And two, to expand our iTOPS shared service offerings to other verticals and not rely on just one vertical. We are now looking at Insurance and Capital Market verticals.

Has your currency hedging policy changed?

We hedge 100 per cent of our net cash inflows. We are looking at one-to-three year hedging strategy at Rs 41.6/41.7 to the US dollar.

Higher Year-on-Year growth despite lower expenses

The higher year-on-year growth is because of higher billing rate. Average billing rate has gone up with our bringing on newer clients (added in the last two years) for whom we are providing a different value proposition. The new clients constitute about 39 per cent of iGATE’s overall clients. For the first time, we entered $20+ bill rate this quarter. We expect this trend to continue this year.

We see you have met your margins targets set two years ago…

When I took over at iGATE three-four years ago, margins were at – 3 per cent EBIDTA. I am happy at where we are today. Two years ago, I had said that we want to be at 15 per cent EBIDTA by March 2007. And we achieved that, though no one gave us a chance. Now, I want to be at 20 per cent EBIDTA for the quarter ended March ’09.

eworld@thehindu.co.in