The Hindu Business Line : Post the tech bubble, the small were getting smaller even faster

During the slowdown, there was no scope for developing new applications; the focus was on just maintaining the applications. Customers did not increase fees, but workload went up. KALPATHI S. SURESH, CHAIRMAN AND CEO, SSI

Rarely do you get entrepreneurs to speak about their past, especially if you want them to dwell on why they came away from something that was close to their hearts and on events that led to their change of track. SSI was an aggressive player in the IT training and software development business. It went through a merger process with Albion Orion in the US and had robust growth aspirations, before macroeconomic events — bursting of the tech bubble in 2000 and September 11, 2001 — completely altered their future. Over the next year or two, SSI's education arm was merged with Aptech and its software services with Scandent Solutions (now Cambridge Solutions). SSI, in its present avatar, is focused on the entertainment and hospitality sectors. Mr Kalpathi S. Suresh, Chairman and Managing Director, SSI shared his thought process during this difficult phase. Here goes:

What was the thought process behind the sale of the software services business?

Given the size and nature of the company (in the software services business) and as a vehicle by itself, will it provide desirable returns for the company and its shareholders. It also drew the question whether the technology business will give the desired returns on investment (ROI). The big companies were getting bigger and the small, smaller. But more importantly, after the turn of two major events, the big were getting bigger faster and the small were getting smaller even faster.

During the slowdown that happened after the bubble, equity markets went bust and then September 11 happened (in 2001) which resulted in major cost cutting. There was no scope for developing new applications; the focus was on just maintaining the applications. Customers did not increase fees, but workload went up. The rate per hour came down. Every vendor wanted us to put up a disaster recovery centre for city and country, which would not have been productive for us, at that time. The only way it would have been viable was to increase volumes and then achieve economies of scale. But there was no increase in work from the customer front.

Customer's appetite to manage several vendors went down. The number of vendors every client had slumped. One company even shot down the vendor list from about100 to single digits. The environment was not encouraging for small and mid-size vendors to take the next step. While big getting bigger and small getting smaller is a fact of every industry, these factors accelerated that in this industry. Dramatic consolidation took place in the industry.

When we completed the Albion Orion acquisition, we were targeting $100 million in 2001— that was considered a good size then in the marketplace. Size was critical to be part of being shortlisted and for survival. Our view was that the size was $100 million. Albion (revenues) was $27 million then, they were targeting $40 million. We were around $40 million. We thought we could do $45 million in that year. With 9/11, organic growth suffered and inorganic acquisition suffered too. We were struggling to keep Albion at $27 million.

While all this was happening, because of vendor consolidation, the volume of business shrunk. On the other side, the top three domestic software vendors grew bigger and faster in size, because of this dramatic consolidation. The $100 million bar set by us to achieve `critical size for an IT company' suddenly shot up to $250 million. In the list of things customers look for in their choice of customers, size was a predominant factor and suddenly $250 million became a bar. When we were not even sure of doing $100 million, to do $250 million was out of question. That's when we realised that we were running a race we would never win.

The more we were in this business at that current size, the more we would logically have to downsize. Taking a three-to-six month perspective, business was going away, which would have meant we would have had to cut staff and that would have meant cutting our size further. And then with our size getting even smaller, we would not even have been in the reckoning. That's when we decided that the company should be merged with one that would take it to another level.

Did you explore the possibility of merger with an equal sized company or a niche business at that time?

We only looked at size. It's a strange cycle this industry goes through. Our entire platform for our services business was based on niche offerings in the financial services space. If you did everything, we would have become commoditised and it would have been tough to sell.

Our focus was to understand the customer's business even more than the customer himself, so we could understand their problem, add value and provide appropriate solutions. We had started recruiting brokers, research analysts, investment bankers, portfolio managers and domain experts. We won several businesses because of this. It was at a time when the market was growing and companies wanted to develop new applications and were looking at cutting edge technologies. At that time, niche made sense.

When things slowed down, all these innovative drives were the first that customers cut. Maintenance applications were all that happened. In such a situation, niche does not sell because customers do not want a vendor who understands his business but someone who can just maintain applications. At that time, equity guys were non-existent. It was all fixed income. So niche focus was not on the cards when we looked at a merger, we were looking only at size.

Since the Albion Orion acquisition, we have not seen similar acquisitions in the IT space made with the intent of exploiting potential in the US' mid-west.

People actually still remember that acquisition. Given the context today, big dollar acquisitions can be really challenging. There are cultural issues to be tackled — majority of workers were non - Indian. And these, can, sometimes, literally break the company.

If you were still in the software services business, what kind of acquisitions will you do today?

Assuming we had continued with our niche focus and had the wherewithal to sustain the burn rate, and if we had the business, there are two types of acquisitions I would look at now. The market is good. Today it is a beautiful place to be a niche player.

You acquire to win a big customer. This can be good because you acquire a customer and because ROI on the acquisition will be there, thanks to a predictable business. This I call `pinpointed' acquisition to get customer relationships, put people behind and grow the business.

Buy into a product company that might not be making a lot of money but could have a product that is niche in the financial services space — very specific, not too big, products that are deeply entrenched with a few customers — and then take it to other customers

What kind of companies will you bet on in the mid-cap software space?

Companies showcasing focus on industry verticals are what I would look at. If overall market climate is good, I would rather look at industry-focussed companies than technology practice expertise.

Software service companies, including the frontline vendors today, swear by client mining. How do you assess the potential for client mining as a sustainable value proposition?

Client mining (securing additional business that helps to grow a client from say, $1 million to $ 10 million) is great and there is potential. In mining, the business is there to be taken. It is the most simplistic model and it actually works. But IT budgets of clients are not growing at, say, 30 per cent, which is the growth rate that the IT vendors are projecting. Hence, some of the smaller players are getting pushed out in this client mining business cycle.

Given this landscape and the growing market, if you establish expertise based on industry, then that is a good business to be. If you demonstrate your understanding and are at the cutting edge of the industry vertical, then you stand a good chance to survive, including competing with the top five. Then it is not about size. It is about industry expertise for you to survive. If you go for the technology kind of expertise, it may get lost especially when the mining takes place and IT budgets do not go up.

Even though the software industry has bounced back from the slowdown, how come the training institutes haven't really grown?

Training is an interesting story. It is a completely different paradigm. We wanted to look at schools and colleges even before we lost steam in the education business. We really wanted to do this but did not have the wherewithal. In a market like this, you would be naïve to think that competition is from the IT training biggies. Competition actually is from a set of people you don't see. We always looked at this market as education not just IT training. We had a five-year plan to emerge as an education player — not just in IT training but `vocational training'. The competition, as I saw it then, was not between the IT training players but from other generic training players. We were trying to establish a college. We set up the Aptech university immediately after the Aptech merger. Today, in this space, it is not competition between the IT training players but competition coming from schools and colleges. It is like the services business where the domestic offshore players are facing competition from the Global biggies who are now setting up offshore presence.

The leading IT training players didn't go the vocational way but vocational institutions are now doing IT training. So they have carved into the IT training players' share.

What do you consider to be the trigger for sweeping changes in the software sector?

For a paradigm shift to happen, you need a tectonic event. Infrastructure management services caught on after 9/11. Online education, online presentation and eLearning became buzzwords because of a `tech' tonic event — cash crunch post-9/11. Companies tried them and found that they worked. Today, while there is money, they have found that they need not actually spend the money on global meetings, where hundreds of people congregate in one place and that all this can actually be done easily online, at a much lower cost.

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