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Krishnan Thiagarajan
Raja Simhan T.E.

Spearheaded by its CEO and Managing Director, Mr Phaneesh Murthy, iGate Global Solutions is close to completing the internal restructuring exercise it embarked upon in July 2003. Mr Murthy has overshot the initial transition period set for restructuring involving client rationalisation, acquisition and integration of companies from within/outside the group and shifting all non-customer facing operations from overseas locations to India. But in his view, this restructuring has helped create a differentiated business model for iGate, which has begun pitching for integrated "IT services and BPO" kind of deals. The ultimate test of success for this model will, obviously, be in the marketplace. In a candid assessment of iGate's future, Mr Murthy says that if they cannot win three-four deals from Fortune 1,000 companies based on this model by September 2005, he will start questioning the validity or the timing of the model. Mr Murthy detailed to Business Line the restructuring operation.

Excerpts from the interview:

How many quarters have you given yourself for turning around and say, posting consistent gross margins of 35-40 per cent and operating margins of 15-20 per cent and what steps have you taken to attain this?

In services business, which has a large base, it is always slow evolution. There are customers you do not want to give up whose contracted gross margins may be lower; they may account for a large portion of your revenues. I can increase my gross margins today by cutting down on half my customers. So the model is that each incremental customer has to come in at much higher margins and if these customers contribute higher percentage revenues over two-to-three years, that is how gross margins in the company will start going up.

From a clean-up perspective and giving up of customers, I would say one more quarter till end December. 2005-06, will be a watershed year for us. If we cannot win three-four integrated technology and operations (tech and ops) deal by June-September quarter, I will start questioning the validity of the model or its timing. Our benchmark has to be three-four integrated tech and ops deals by September 2005.

You are entering the best year of technology. The confidence in industry is high. Is there dramatic visibility for companies to add people in big numbers?

On the IT services side, my reading is that budgets are going up 1-2 per cent for the first time in three years. Whenever budgets are up, your mindset changes quite dramatically. It means more new projects are getting funded. You are able to use more offshoring. There is likely to be less pressure on pricing and hence one can absorb a lot more new people without giving up gross margins. For companies that have got their model in place, it is good.

Is iGate's key strength its business model or in the sales organisation?

I think today it is more in the business model, and, not yet in the sales organisation. That can evolve over time. The deals we are winning today is of a relationship kind.

Where a customer is looking for a partner and there is no particular project in mind, what happens is that we are evaluated on whether our vision and our partnering capability is what they are looking for.

There our integrated tech and ops model particularly in the financial services space is coming out strong. It gives them the confidence that we are headed in the same direction that they are.

On the other hand, if they are looking at purely IT services, brands such as Infosys (or Wipro) were built because of the fact that they did not want people to be able to compete. And they have a strong execution engine. So we cannot go in and say that we can do better than Infosys, even if we think we can do as well, because the credibility value of that (proposition) is lower.

Will the BPO-backlash impact the integrated tech and ops model?

I do not see it as a major risk. I am more concerned about debugging the business model and making it acceptable to customers.

That is a bigger risk. What is to be integrated and what is not. If I am offering accounts payable services, nobody is going to give me SAP accounts payable to take care of, when the rest of the financials is taken care of by somebody else.

If I am doing accounts payable on a transaction pricing model, it is going to be a difficult model. So I have to increase my scope of services to those where there is a logical module from a tech side also. These are the kind of things we have already worked out over the last 12 months. Most companies will go through this struggle over time.

What is your key selling pitch?

In keeping with my broader theory that we must pick areas that are evolving, and where there are no entrenched players and position the integrated tech and ops model there. Today, a lot of people have invested in ERP.

That is what I call a basic transaction infrastructure which means you know how to enter your transaction, how to pull out your balance sheet, P&L, stock register, etc. A lot of companies have also made a complete mess of ERP transaction environment- five different versions of SAP or 10 different ERPs. The business value for this comes from business intelligence and analytics.

I had an interesting discussion with the CIO of one of the largest pharma company in the world and he told me that there were 23 pages of listing for one product when there should have been single line, which should have said `quantity available' because the product was coded differently.

So clearly, our story is that we know how to get value from the transaction environment; we have expertise in business intelligence and analytics strengths.

So that is where the business value comes from. So once I present the model, no CIO will ask me what is different between you and other companies. It is a language that nobody else is speaking.

We are saying your data is in a mess, your transaction infrastructure may be in place, but it is not a clean structure, you need to generate business value to your clients and we are the ones that will help them in that direction.

So from an entry point of view, we have a clear differentiator and on every thing else, I believe all of us are on an even keel.

Are you using differentiation as a platform to enter into a client relationship and then scale up from there?

If you have sound principles of account management, customer relationship management and a good execution engine, then you are there. And we have all come from such background and we have built all of that in iGATE. We think it is more the entry, not at the tactical level, but at the strategic level, and we are addressing a specific CIO level problem.

Many a time you come across customers who are keen to do something but don't know how to do it. They want to do outsourcing but don't know how to do it.

Our model, which we call Ph Matrix, takes a good close hard look at your processes, tells you which processes are better than industry average, which processes are worst in class, tells you what other companies in the same space are doing with their processes and basically puts together a model of what you should do. That is another clear differentiator for iGATE.

Several customers have described us as a mid-sized company with Tier 1 management. If you look at the mid-sized players, there is no doubt that unless we do something different, it is difficult to compete with other players.

And that is the reason for us to go down the so-called IP (Intellectual Property) kind of route. Any IP route is always fraught with risks. You have to make certain investments upfront, and, then hope that over the next one-to-two years, markets rewards those risks.

Each of the mid-sized companies is looking at a differentiated or niche positioning and away from a me-too strategy. What is the next stage in your lever for differentiation if your integrated tech and ops differentiator does not work?

The integrated tech and ops model is the broad theme of our company. We are investing in significant amount of domain expertise, process consulting, significant product kind of technology.

It is more a product kind of mind set. It is a ` This is what I want to offer rather than tell me what you want to do and I will do everything for you' kind of a mind set.

If this doesn't work, we will be a me-too company and have to go back to the drawing board. When you are betting on a discontinuity, if it doesn't happen, you are back to square one.

Can top-tier companies play catch up with you faster on this integrated tech and ops model?

The problem is not in the IP. It is more in the cultural differentiation that is there. Culturally, it is more difficult for these companies to go to a transaction price model and absorb the fluctuations as they pride themselves on earnings management.

For a big, tier-one company, the entire premium is based on predictability of its earnings. There is no variability in the pricing.

Business models of big IT companies are also undergoing a change and they are also looking at ones that can help them acquire customers faster.

The two benchmarks for evaluation at these companies are rates and utilization. The mindset is a lot more difficult to adapt within a company that is already ticking along on a rate-cum-utilisation model.

Your vision for iGate is to be one of the top 10 IT players left competing in the long term. The top two-three IT companies are adding two-three mid-size companies every quarter. From where you are today, what strategy will take you to that level?

If the integrated tech and ops models works, we will be there. As we are on a transaction-based model, our scalability is high because we use common infrastructure, processes, platforms and people. There is a risk of someone replicating it, but money is not the only criteria. Intellectual horsepower is important, changing mindset is also important.

You cannot change mindset with money. One of the advantages we have is that we are channeling all our investments in only two-three areas. We are more focussed.

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