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Krishnan Thiagarajan

`In the last six months, the large deals have gone to the mid-cap companies'

Spearheaded by the CEO, Mr Rusi Brij, Hexaware Technologies, has scaled new heights in financial performance in the past couple of quarters. As a medium sized company, the company is committed to a niche expertise model which focusses on select verticals (airlines and banking), PeopleSoft practice and concentration on the German geography. In a telephonic conversation from the US, Mr Rusi Brij spoke to Business Line on the trends in the industry and Hexaware's positioning in the mid-cap software space.

Excerpts from the interview:

What do you think are the sustainable operating margins for the frontline companies and what impact will it have on the margins of medium sized companies, going forward?

Most CIO's now feel that next year, the IT budgets will start rising again. That may ease some pressure on further erosion in billing rates and thereby on margins. I am not expecting any significant fall or major impact on margins next year. Most Indian companies have started cutting costs in a significant manner in all heads from salaries to allowances to sales and marketing expenses to other fixed costs. So they are becoming leaner organizations to protect margins. I think they should be able to buffet the future costs. But for Hexaware, we are in the process of improving margins as we are coming from a very low base.

Given the widening gulf between frontline and medium sized companies, do you think that medium sized companies have a prudent value proposition for the future?

Yes and No. I think medium sized companies will survive. Our recipe is that every medium sized company must have some differentiation and focus. The companies which have a differentiated offering, in the sense that they are the best in class in two or three focus areas, they will get their share of the business. If you a me-too of a larger company, your offerings will be less competitive.

I also feel that companies which invest in sales and marketing will be able to sustain any downturn better than companies which have lived largely from various partnerships or systems integrators such as EDS,IBM or Capita.

The pressures on billing rates have not shown up in the case of Hexaware and other medium sized software companies. Do you think that billing rate pressures will show up and cost arbitrage advantage may get whittled away in the near future?

That is the beauty of the niche expertise model. You look at our focus areas and how we are able to maintain our billing rates. The PeopleSoft practice is about 30 per cent of our revenues and will remain about one-third of our revenues next year. It commands good rates because we are the market leaders. If the client recognises that we are the best in class, we get the top billing rates. So, our competitiveness is secure as long as I remain the market leader.

Or take German geography where we are the top three or four vendors in terms of size. We have also been able to get good rates. Compared to an average of $22, we are able to get rates in the region of $25 in this geography. We are not going for large bids as most of them are in the $18-19 band.

Don't you think your market size also shrinks when you get very selective in client acquisition?

I agree with you that the issue is scalability for medium-sized companies. PeopleSoft is doing about $20 million of business with us exclusively. The total revenues of PeopleSoft is about $2 billion. Can we take $20 million of revenues to $40 million and to $100 million over three years time? It is possible. Therefore, clearly demand is available; whether we can win the demand is another story. I am limited only by my ability to service clients and not by the overall demand. Secondly, Germany is probably the most scaleable market available in the world today. They have just started looking offshore. Language is an issue but the possibility of high scalability is there. Look at airlines alone in this geography. They have IT budgets of about $ 400 million. Which essentially means we have a five-year window of growth.

Do you think that failure to participate in large RFPs (requests for proposal) will be a constraint to growth for medium sized companies?

In the last six months, the largest deals have gone to the mid-cap companies. Take Lucent's telecom deal bagged by Hughes Software. This deal went to Hughes because of its competence in that vertical. The largest order in Germany, Deutsche Leasing, was bagged by Hexaware. Similarly in airlines or Peoplesoft practice, we have bagged some big deals. We have not lost any order because of our size.

What kind of a derisking model do you have in place in the individual niches that you operate in, especially in the light of the Oracle-PeopleSoft bid?

The Oracle bid for PeopleSoft shows that we need to de-risk each of our niches. What we are doing is that by the end of the year, we are adding one more enterprise package as our new line of activity.

If anything to our core activity, we will have this to fall back on.

Two, even if the deal goes through (which appears uncertain at the moment), our internal estimates show that it will still give us a window of one-and-half to two years.

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