The Hindu Business Line : `We will grow by adding more and more value to our clients'

"More than topline growth, sophistication of solutions and competencies of our organisation are the way to grow." MR RAYMOND J. SPENCER, CHAIRMAN AND CEO, KANBAY INTERNATIONAL

It was only a few months ago, in July 2006, that Mr Raymond J. Spencer, Chairman and CEO, Kanbay International, was talking passionately about the smooth integration of the newly acquired Adjoined Consulting, with the company. Now, Capgemini, Europe's largest IT services and consulting company, has proposed to acquire Kanbay for $1.25 billion. Here's the text of the original interview with Mr Spencer, as we awaited updates.

How is your relationship with HSBC (its largest client) progressing? You have a $65-million contract expiring 2007, right? Do you have a structured relationship with it?

What we have with HSBC are multiple layers of relationship. There was a multi-year commitment till 2007. We gave it a better price and what it really did was to expand what was already in that umbrella.

Can you dwell on your Morgan Stanley relationship as a related party?

From an SEC accounting perspective, Morgan Stanley was a related party because of equity ownership. Now it is a third party client, and growing as HSBC does. We are the largest external vendor with Morgan Stanley.

How does Kanbay propose to grow faster, in line with the growth of the frontline Indian IT companies?

Why do I need to grow faster than 33 per cent? I am going to grow in a way that grows not just the topline but also the sophistication in solutions that we bring to clients, the competencies of our organisation, the ability to add more and more value to clients. I think balanced, comprehensive growth is more important in the long term than mere topline growth.

Indications are that you are looking at 15 per cent margins — 10 per cent on the combined entity (with Adjoined) and 14 per cent on a standalone basis. Where do you see pressures on margins and what margin is achievable over next year or two?

In a year or two, we can work back up to 20 per cent operating profit margins. The reasons we believe that is possible are, one, we will get leverage from joint relationships and, two, economies of scale and infrastructure, which is compressed right now.

Our belief also has to do with the fact that we did a lot of things within the core business, such as investments in domain expertise and learning and development. We should recover those in the next couple of quarters.

This was the quarter where we took some strategic decisions, accentuated by the Adjoined acquisition. We feel good about the progress of the integration with Adjoined. It is happening faster than we thought it would.

What are the competencies that Adjoined can bring in to the combined entity, post-integration with Kanbay?

The kind of work Adjoined is doing is something that cannot be offshored. So revenues won't decrease. Clients work with offshore organisations to do a lot of interface work such as programming. Adjoined was the onsite piece of the puzzle, bringing domain rich content to the table. With Kanbay, we could present the whole solution.

Adjoined's average onsite rates are $143 per hour. Your own overall average rates have gone up to the $80 range. Would consulting companies continue to enjoy the $125-150 range onsite rates?

If all you are providing is technology expertise, then yes, sustainability is an issue. But if what you provide is business expertise with technology, you would have opportunities for very high value offshore work. Then, the blended average rate would be high.

Before Adjoined came in, 84 per cent of the workforce was in India. Even today, ours is still higher than most Indian firms. We do much more complicated offshore development, and high value-added work in offshore locations at a high leverage of 1:4.

What are the unique skill-sets that Adjoined brings to the table?

Skills that it brings in are management consulting and SAP skills. It worked with a media and communications firm on churn mitigation strategy, which is a huge issue there. It then implemented customer management technology to support that strategy. It's not about writing a bunch of programmes, but involves presenting to clients a whole new set of solutions and then building systems to enable achieve those solutions.

Adjoined worked with a life-sciences company, which is highly regulated, and has enormous regulatory process that it has to go through. Adjoined took a very complex process and designed a focussed document-management regulatory process. You have said that you were happy with the way the integration with Adjoined is proceeding. What are you doing to ensure that?

We know for a fact that eight of ten M&As fail. So we assumed our merger was going to fail. We came up with 29 discrete points of integration on which we built detailed change management and integration plans with specific milestones. A group of people reporting to me form the post-merger integration office. They treat us as if we were clients. Attention is paid to the cultures of the two organisations and there has to be evolution on both sides.

You have moved into the consumer vertical. What is the thinking behind that move? BFSI is large and opportunities exist there.

We used to be criticised for being so focused on banking, financial services and insurance (BFSI). People saw great risk as they saw it as a single vertical. I didn't agree with that. There is no such thing as BSFI — insurance is different from capital markets which is different from banking. We could be a $1 billion company (with focus only on BFSI). I still believe that. We said that we would move into a second vertical on the same model — blend business expertise with offshore presence.

India's offshore potential

"Our view of India is the same now as from 15 years ago. It's not just a low-cost base.

What is critical is not your cost per hour, but the cost of delivering something. A customer evaluated us using function point analysis on cost per deliverable over India firms. In one case, Kanbay, with higher pricing, saw 20 per cent less cost per deliverable. This is because of product efficiency, quality processes and domain expertise. Frankly, time is a factor. People are willing to pay more to get something done quicker. What value you can bring in to make a difference to client, is key. We have got about 30 acres in Mahindra City, near Chennai. The Chennai workforce would be our biggest in three years." — Mr Raymond J. Spencer

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