Sunday, January 22, 2012

IT Market Challenges

It's not a great year to take over as CEO of an Indian IT services
company. The US economy, from which India derives about 50 per cent of
its revenues, is weak. And the Rupee's volatility against other
currencies is giving industry captains sleepless nights.
But Jeya Kumar, who stepped into the shoes of Jaithirth (Jerry) Rao as
CEO of MphasiS this February, seems to have a clear idea of what the
company needs. Rao moved over for Kumar after running the company for
more than a decade and MphasiS selling out to EDS, which, in turn, has
been acquired by HP. Read on for the laser-sharp focus that Kumar
brings to the table, in his first ever India posting:
How are your clients reacting to the turbulence in the US economy?
Financial Services is still an anchor vertical for the company. Even
though I was not happy with the June quarter results, we have seen
early signs that customers are not cancelling orders.
If you can create enterprise value for customers, they will stay with
you. Discretionary projects may get cancelled, but in the projects we
are in, customers see value.
But the procurement cycle is taking longer. That would happen. In
every business, when you get to the state of where the sub-prime is,
you don't have money to spend but only to invest. If it used to take
one month for a particular IT spending decision, it now takes between
three and four months.
What difference does the longer cycle make to you? What levers do you
pull to manage margins?
I believe in driving utilisation absolutely — be it cash, space or
people. Utilisation is the denominator of the whole business. We have
driven the bench to a level we are very comfortable with. Recently
(August) utilisation was 76 per cent, up from 68 per cent including
trainees at the time I joined.
By the end of December this year, we will carry it up to 78 per cent.
This is the main lever. The other is attrition. We have brought
attrition down to 13.5 per cent, from 16.5 per cent last fiscal.
The other portion that we will change is fresher mix. MphasiS has
always been a lateral company (i.e., most of its employees come in
with experience) and that shows in the cost of revenues.
I am breaking that. In the applications services, freshers form close
to 20 per cent of headcount. This will go up next year to 40-45 per
cent. That is the right model for this business.
What would such a hike mean to the quality of your offerings, your
training capacity…
It means we would double existing fresher base. Of the 12,000 we have
in applications, about 2,500 are freshers. That would become 5,000. In
terms of training capacity, we have a facility in Bangalore that can
handle 1,000 people at a time.
At the same time, we are diversifying portfolio. The length and depth
of the US slowdown will trigger Outsourcing 2.0. Since the '80s,
companies have simplified, standardised and then outsourced. (That
would pick up momentum.) Over the course of next year. We have to take
in about 1,000-1,500 net recruits a quarter for the next five
quarters.
Outsourcing advisory companies have indicated that with the slowdown
will come the demand for those with seven or more years of experience.
How would that hit your margins?
Experienced people form about 85 per cent of our workforce. I don't
have that problem but have the other problem. If it is all FTE
(Full-time equivalent) based, then you have that problem, but in
managed work (or fixed cost projects), it delivers better
profitability moving into the fresher space. You have to change the
business model before you change the resource structure.
We have changed our business model — we do a lot of intellectual
property-related transactions, we are working on platform BPO but
importantly, our fixed price contracts are gaining ground. So, once I
get the service level agreement (SLA), it does not matter to the
client how many people I use. That drives efficiency and hence
margins.
Since coming on board, we have started creating a separate portfolio
and focus only on digital solutions. What we call platform BPO or
eBPO. We are piloting it and we will shortly have a global rollout for
customers in accounts payable solution, on subscription basis, reduce
cost per invoice by as much as 80 per cent.
The industry has not seen too much action on the non-linear growth
that you are talking about.
One thing I notice is the culture in India. A lot of innovation
happens at the customer end and not in the vendor company in India.
That's a cultural deficiency. You want your best and the brightest
working on innovation. A lot of bright people in India are working on
customer projects so that it looks good on their resume. But they
rarely work on internal projects. That attitude needs to change. You
need to build the next wave…
Whether you get the person billed or you get an idea billed is the
question. The latter is non-linear. If you hire a great person, you
tend to ask when you can get him billed, and not when can I get his
idea billed.
Do you have Jack Welch's formula for the bottom few per cent performers?
We used to have a manager:employee ratio of 1: 6.5. That is, one
manager supervises 6.5 persons, we are changing that to 1:10. A lot of
managers are now suddenly redundant. We deploy them elsewhere where
they are good. I want the best among the lot to be managers. It's not
a privilege, you have to earn it.
How do you evaluate them?
We do the annual appraisal of the employees — employee feedback on how
they feel working here, reflects on the manager's capability to manage
a team. I am a strong believer all my career that for you to get and
retain the best, you simply need to weed out non-performers. It's a
harsh reality.
If you don't weed out a poor performer, then the best are over-taxed.
You have one guy you don't trust, and if you have an assignment that
cannot fail, you have to give it to the best guy who will deliver. So
why over-work him?
We have the top 10 per cent, next 10, critical 70 and then the bottom
10 per cent.
The bottom 10 are told that they are not making it, and also told what
happens to them if they don't improve. If they don't measure up, they
can look for a job inside the company in another project or outside.
That's part of the price of being in a high-growth organisation. When
a company grows 30-40 per cent year on year for a while, there is a
probability that people would rise to their own level of inefficiency
a lot faster than they would have otherwise.
Around the time you came in, there were reports that MphasiS had sent
out 200 people…?
We have never fired people, unlike other companies. If you are
non-performing, you are told so and to look for another job, if other
groups are hiring then, you can apply. If no other groups are hiring,
then they have to go out.
The change we have brought about is the review is bi-annual, though
your increments are yearly. The worst thing in a performance
management system is for an employee to know at the end of the year
that he is not doing well. So, they need a quarter or two worth of
warning before we take action on them.
Bottom 10 per cent may or may not leave the company's rolls. They may
still be part of the company in another role or function.
BFSI is still bread-butter-jam for you. But growth came from
healthcare, manufacturing and retail… in the June quarter
Manufacturing, both auto and non-auto, is getting stronger.
As a new vendor trying to get into auto, it would be difficult. But we
have been there for a while. So you would either be out or become a
trusted advisor.
We get a lot more pressure on price. Vendor consolidation works on two
things — greater volume, reduced margin. So we have to drive
efficiency a lot more. But we haven't been out of a client in any
circumstance. In the last quarter, we have moved up the selection
order in vendor consolidation than moved out.
What are your capital expenditure plans and funding requirements?
We are still doing the math. If land costs go down, that could bring
return on investments to 3.75 to 4 years and that becomes attractive.
At five years' time for RoI, it's not that glamorous. MphasiS does
three-year plans, so if you need space to get another 15,000 employees
or more, then why not get land and building and allow for scaling to
additional 15,000.
Considering that we are not 70 per cent in STPIs and the remaining
manpower is in SEZs, it's an opportunity for us to move into SEZs (to
take advantage of tax benefits).
I am a big fan of tier II and tier III cities. We are looking at
Coimbatore, and are already in Mangalore, Puducherry, Indore, Baroda
and Ahmedabad.
Recently, you had touched upon a ramp-down in the BPO business. A
layman would think that BPO helps keep lights on for clients. So why
the ramp down?
That wasn't major. This one customer in BFSI decided to cut back.
Nearly half my BPO business is in India. When the rupee dips, it does
hurt revenues. Also, for BPO, we are finalising a delivery centre in
the Philippines and one in Eastern Europe, expanding centre in Mexico.
For software services, onshore centres in Australia and New Zealand.
There is nothing to worry about in BPO, we just need to get higher
billing for international projects. We are increasing our Philippines
centre head count by 120 per cent end of this year.
You want to bring down the number of your delivery facilities from 33
to 16. How far are you down that road?
We are 80 per cent done, and should be fully done by November.
Your BPO utilisation is lower than that for IT.
That is a function of attrition. That drives bench size. So you hire
in anticipation. In the last two months, BPO attrition rate has
dropped by 50 percentage (points) — right now, BPO attrition rate is
down to about 35 per cent.
Bangalore-based IT outsourcing services provider MphasiS, an EDS
company, is reducing hiring plans by almost 50 per cent.
At the beginning of this financial year, the company had guided the
Street that it would recruit around 8,000 people. It now plans to
recruit just 4,000.
MphasiS has historically been strong in the banking, financial
services and insurance (BFSI) space. It derives over 40 per cent of
its revenue from this sector. Two of the world's top five brokerage
firms are its clients. AIG, which was recently bailed out by the US
government, is also one among its customers.
Earlier this week, Hewlett-Packard (HP) — which bought IT services
company EDS last month — said it would make 24,600 staff redundant
over three years.
Jeya Kumar, Mphasis CEO, attributed the slowdown in hiring to a higher
employee utilisation rate.
"Overall, hiring has slowed down in the industry. We tend to drive
more towards productivity and operational improvements rather than
hire more numbers. Over the last eight months, we have driven up our
utilisation rate 10 percentage points. That's why we need fewer people
now," he said.
Kumar admitted that though the company did not see any immediate
impact from the global financial crisis, the effect going forward
could be "severe".
"In the last few quarters we noticed that clients have not cut back on
projects but the decisions are taking longer. Given what has happened
over the last seven days, we expect the decision-making process to
take even longer," he explained.
Perceiving the sluggishness in the BFSI sector, MphasiS is now
focusing on other sectors.
"Anyone who uses money to do business will face some kind of impact
due to the credit crunch, though it is most pronounced in financial
services. Still, we see good growth in telecom, manufacturing and
healthcare, which will keep us in business," he added.
In 2007-08, the MphasiS group recorded revenues of Rs 2,423 crore with
a net profit of Rs 255 crore. The company which derives close to 60
per cent of its business from the US, and 25 per cent from Europe, is
planning to focus more on the Asia-Pacific region to maintain growth.

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