Info-tech

Road to revival, the MindTree way

K.Venkatasubramanian | Updated on March 12, 2018

Mr Krishnakumar Natarajan, MD & CEO, MindTree Limited

Mr Rostow Ravanan, CFO.

A conversation about the company's lessons from the past.



As one gets talking to Mr Krishnakumar Natarajan, MD & CEO, MindTree Limited, it doesn't take long to realise that he is every bit an industry veteran. He possesses a deep understanding of the dynamics under which companies in the IT services space operate. Along with CFO, Mr Rostow Ravanan, an incisive and sharp mind, the company looks to scale challenges and put behind a turbulent 4-5 quarters that MindTree has had. Here they draw a map to the revival path and the way forward. Excerpts:

With the macro-environment deteriorating in developed markets, what has the reaction of your customers been in terms of IT budgets and their decision making process? What difference do you see between now and what happened in 2008?

Krishnakumar (KK): The one big difference that we see with our customers is that in 2008, everything froze so suddenly. Consequences were sudden. Companies took knee-jerk reactions, it was not thought through. The tendency was to go to the bare essentials and save oneself. This time around, it is very different. Corporate America is making money. The sovereign debt problems were well-known and tracked keenly. Customers are in for a little bit of ‘wait and watch' mode, but there are no knee-jerk reactions.

Rostow Ravanan(RR): The companies are sitting on large amounts of cash in the balance sheets this time around and debt levels are low, so they are not freezing or slowing their business or operational decisions. With the US Fed expected to keep interest rates at near zero per cent levels, the demand environment will continue to be good.

However, in a way the fundamental premise or backbone for the world markets was that the US was AAA. That premise is altered. Implications of this are not fully known. It remains to be seen if this will be the ‘new normal' and how the world adjusts to it. The markets may be volatile. But as KK said corporates continue to do well. Most of our customers even in the BFSI space (Banking, Financial Services and Insurance) are mid-sized and are not directly exposed to the capital markets.

But if the uncertainty persists, customers, when they sit and finalise budgets for next year, might take a cautious approach.

Do you see pricing being affected as a result of the uncertainty?

KK: After 2008, because of the suddenness of events, clients cut budgets, slowed or stopped decisions and negotiated hard with vendors on pricing. But when demand started picking up, vendors came back and asked for pricing revisions. Frankly speaking, that cycle is still not over.

This time we see no negativity as far as the pricing environment is concerned. People could get cautious with budgets for CY12. The optimism with which budgets were finalised for CY11, may not be repeated for CY12. But as far as we are concerned, we do not see any negativity from our clients.

RR: So for instance, cloud computing may hold a lot of potential, but customers may not experiment with it if the environment is uncertain.

From being focussed on manufacturing and telecom, there has been an increasing thrust on BFSI over the past 4-5 quarters. Is this a paradigm shift? Also, with too many verticals such as retail, media services and government, aren't you spreading yourself too thin?

KK: Starting from this April, we have decided that we will focus on fewer areas. So, in areas where we or not making significant headway or where we are not a dominant player, we will de-prioritise. Segments such as telecom applications, energy and utilities are the ones we are exiting, even if there are some customers.

Our continued thrust will be on manufacturing, travel and transportation and of course BFSI because that is where the biggest share of outsourcing comes from. But within BFSI, we have not gone to serve the big-bulk sort of banks. That is an area that is already well-served by the larger IT players.

MindTree's focus is on mid-tier financial institutions. Many of these had not been outsourced earlier. For business continuity and for them to remain competitive, they needed to cut down IT delivery costs. So MindTree made sense to them. After coming out of the recession, these institutions were bothered about costs and are now actively looking to outsource. Growth in BFSI is coming from there.

Manufacturing after a period of lull is showing significant traction over the last couple of quarters.

Where you will see a change is, while earlier we were focussed on product engineering services to the extent of over 40 per cent of revenues, now the mix is going to be increasingly in favour of traditional IT services that is nearly 64 per cent now. It also helps us because IT services tend to recover faster after a slowdown. Product engineering services lag at least 2-3 quarters in terms of growth.

RR: The other advantage with IT services is that it lends itself more to derive larger and long-term deals. In engineering services the engagement period is shorter and of smaller value. We are also increasingly realising that the skill sets required for both is mostly similar.

More than 90 per cent of your revenues come from traditional services such as application development and maintenance (ADM), testing and IMS tech support. Does this service-mix make you immune in the current environment and derive steady annuity revenues?

KK: We started off as a projects company focussed on end-to-end solutions but there was volatility of revenues. So, we decided that for projects that we complete, we will also bid for the maintenance, to be able to bring a certain level of annuity revenues.

As we sought more annuity, testing offered an attractive option, especially in accounts where there were entrenched players doing applications maintenance. As we had considerable expertise in testing, it gave us entry into new accounts as well.

So over the last 4-5 years, as we focused more on annuity revenues, our service-mix took its present shape. But even now, we have far less annuity as a proportion of total revenues, compared to larger players.

RR: The game plan was to choose fewer customers and build deeper relationships with them. The idea is to have at least one customer giving more than $50 million annually, nearly double that of our current top client's run-rate.

Are you confident of surpassing Nasscom's growth target for the industry this fiscal? We have heard that you would ideally like to grow at 1.5 times the industry.

KK: The growth target of 1.5 times is frankly an internal target. Specifically for this year, at this point in time, we are confident that we will definitely be ahead of what Nasscom is predicting of 16-18 per cent growth.

You have 88 per cent of workforce offshore which makes costs very competitive. Is this likely to continue, especially as protectionism in the West increases? Will you need to recruit more onsite?

KK: Clients are not specifically asking for onsite or near shore presence from us. Some of our services are eminently offshore-able. On the IT services side, as we keep moving up the value chain, the need to have local presence is clearly going to increase, as protectionism rises.

RR: As long we deliver value at an ideal price point to customers, they are not bothered about where you do the work from. There is no ideal offshore-onsite mix that we are targeting.

Your attrition rate has been very high. How are you dealing with it and are any further wage hikes planned?

KK: Over the last 12 years, MindTree has had average wage hikes that are in the sub 15 per cent category. Clearly, we want to get it to higher levels in the 15-16 per cent range, but it will take 3-4 quarters to get there.

With the industry stopping hiring immediately after 2008, and with lot of people in the 1-6 years experience category leaving the industry to pursue higher studies, we had a huge supply-demand gap. So salaries had to be hiked.

In October, when we abandoned the smartphone project, there were as many as 700 people. We gave a choice to them to move to services. Not too many people opted for that. That increased attrition levels during the last 2-3 quarters. In our IT business, we have a manageable 16-17 per cent attrition.

In hindsight, do you feel you gave too little time before abandoning your smartphone project?

KK: The project involved investing as much as $40-50 million. We also had to take the risk of sales and marketing as well as inventory. So the question was, do we bet our company and its stakeholders against it. Taking all risks including the branding exercise of the product was our responsibility , which was not our core competence.

We have clearly understood that in the consumer devices business, we have to know about the downstream process in terms of how to reach the customer quickly. We then decided that we would abandon the project. It wasn't an easy decision as such decisions create an organizational churn.

There have been too many hurdles in recent times - the Kyocera ramp down, smartphone project abandonment and Mr Ashok Soota's exit. How are you handling this?

KK: The organisation has tremendous depth and capability. We have become more focused in terms of what we do over the last 8-9 months. Such setbacks build an obvious muscle tone to the organisation. It is still early to judge, but the June-quarter has been good and in all probability, the current one will be good too. Clients have not moved away.

RR: Despite the fact that we have had all kinds of issues, the abandoned smartphone project, people exiting and so on, we had a 21 per cent revenue growth last year, which is among the best in the Industry. All this created margin erosion and I am not running away from the fact that we had self-created problems. But the top-line growth is intact.

Published on September 18, 2011

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