IT Calls the Shots
Jerry Rao on the value of tracking technologies that can redefine business
CIO - India, December 3, 2006

In this interview to CIO, Jaithirth (Jerry) Rao, chairman of MphasiS, looks at the future of domestic outsourcing and warns companies of inevitable death if they don’t give their CIOs a voice in the boardroom. His certainty seems to spring from the conviction that IT has a defining role in creating and sustaining business, and he wants CIOs off the benches.

CIO: Forrester is pitching for the idea of ‘business technology’ to replace IT. What’s your take on this?
Jerry Rao: Whether technology is a means to an end in business or whether technology itself can define the contours of business is a fairly important debate that we’ve been having for at least two decades. Till now, we have seen technology define the constraints of a business. In the last few years, we’ve been looking at technology in its role in defining the opportunities of a business. Companies such as Amazon and Google have shown that.

We tend to underestimate what some traditional industries have done. Airlines, for instance, now allow customers to print their own boarding passes. I don’t see business and technology as two separate yet intersecting circles, but as one complex ellipse in and of itself.

How should other CXOs look at this?
I think it varies from industry to industry and from company to company. But if you aren’t even asking the question in your boardroom, then it's likely that you are missing out on something — and one day somebody will redefine your business in such a way that technology will no longer be a tool but a central piece itself. When that happens, you’re not going to be ready.

So, there's no one macro prescription for all CXOs, but there's certainly a need to engage and grapple with this.

Can you illustrate how technology will take such a defining role?
Think of the music industry and the whole idea of what intellectual property is.

If every single song — from Beethoven to The Beatles — costs 99 cents, it's not technology but business that's been redefined. The nature of IP in music has been redefined. And so has the value of a label, a group and a singer.

Turn to our own industry — IT services — for instance. We should pay more attention to the possibility that objects are being created, which, like building blocks, are mass manufactured, thereby reducing the need for customized software, which is our bread and butter. Closing in on the other side, programming is becoming simpler. So maybe, customers who give us programming jobs today may want to do it themselves.

This may still be five years away, but it’s something that changes the nature of business itself and we need to keep tabs on it. No longer is technology a lever; technology is something that redefines the whole constraint and opportunity matrix.

Given these changes, what should CIOs tell their managements?
CIOs should do an honest job of stating where things are, particularly in an existing company. If you have a whole set of legacy platforms and technologies, be very clear about what it costs to run and why it doesn’t make sense to change all of it. You can’t get off one horse mid-course and get on another.

This is not to say that you shouldn’t invest in changing legacy technologies over a three-year period — that would be a mistake. CIOs have to get that across to management.

What you need is a parallel process, a two-track process for new deployments and fixing legacy systems. You need a sinking fund with a program on how hardware and software will be exited. The sinking fund cannot come from an annual budget, or it could lead to budget cuts that, in two years, will make a company even more rigid. Every quarter, CIOs must present how many apps they've closed down and how many new releases and functionalities they’ve added.

One of our customers, a large investment bank, has such a system of reviews.

This isn’t necessarily in the context of outsourcing?
No, this has nothing to do with outsourcing. We are talking about deployments. Just like good CFOs increasingly share how the street is looking at their companies and how analysts view them, good CIOs need to share what others think of a company.

I haven’t seen many people do serious inventory of the current landscapes to figure out what they have, what they need, where the constraints are, and where opportunities lie.

That clout comes from being on the board. Should CIOs be part of top management?
That’s a non-question. If you don’t have CIOs as a part of top management in this day and age, you will have backward organizations. Essentially, you will have organizations that will die. I don’t know how many CIOs in India are directors on boards, but they should be.

Very few, in our experience.
Well, companies that don’t have CIOs in top management — not necessarily as directors — are going to run into trouble sooner are later. With growth and competition, they are going to face problems.

But there’s a perception that CIOs are twice removed from end customers…
They aren’t anymore. They have a lot of interaction with customers and their systems are interacting with customers all the time. So, they should be out there helping make business decisions. Today, at most financial companies, the largest channel for acquisition of customers is the Web, and the CIO runs the company’s Internet site.

So, the CIO has a strategic role, more than support?
The individual defines his job. There isn’t a simple formula. Many CIOs voluntarily say, ‘Hey I am not a business person.’

That contradicts a need for CIOs to have a strategic role.
Companies that don’t encourage their CIOs to be business-savvy and take strategic decisions will not do well in the long run. They will lose market share.

What's the business case for Indian companies to outsource?
The business case in India is actually stronger than it is in the US because companies here find it hard to attract and retain talent. If you were a talented software engineer, why would you work at a manufacturing firm, when an IT company could give you better pay, bonuses and a better career plan?

CIOs of Indian companies will only get second-rate talent. It seems to me like it's a case for talent rather than cost.

How should Indian CIOs view outsourcing?
They should leverage outsourcing from a talent stand and not cost. Many Indian companies also have the advantage of not having legacy problems that their American counterparts face, so they can actually have very dynamic IT.

In the financial services sector, for instance, there are areas where India is ahead of the US. We have T+1 settlement. From what I hear, ICICI Direct has one of the busiest sites in the sector anywhere in the world.

Do you pursue contracts with Indian companies?
We have started. In the last two years, we have had a small measure of success: an airline, a bank and a telecom firm.

But aren’t margins lower?
Gross margins are definitely lower, but selling expenses are also lower, so operational margins — while being definitely lower than with the American customers — aren’t that far off. Return on capital is roughly the same to slightly lower if you take away tax arbitrage because, with Indian businesses, we don’t need to invest in capital intensive telecom, etcetera.

So, why haven’t Indian IT services made inroads at home?
Indian IT spend as a percentage of GDP is small. India is still backward in this; we leverage our IT talent to boost other people’s productivity and not our own. But this will change. If the fastest growing cell phone company in the world is in India today, change is coming.

Will the West account for the bulk of revenues in the next decade?
Yes. Growth and the sheer dollar volumes there are higher.

How do you view your CIO’s role in expanding EDS’s business in India?
It's a tremendous role. Unless he gets our actions vis-à-vis the domestic market right, and gets us reliable and consistent systems and comes up with new ideas, we aren’t going to be able to crack the domestic market. Re-treading what we did in the US won’t work.

Give us two examples of ideas he’s given you.
Abnash Singh, MphasiS’s CIO, has come up with clever ways of keeping control of costs, while ensuring an archival and retrieval ability we need while recording calls in our BPO business. He's also brought in real-time monitoring technologies and processes into our network operation centers, which will be very useful as we grow the remote infrastructure management business.

What’s your interaction with the group CIO of EDS?
First, I am a vendor to him. When he's creating a new generation of infrastructure management software, which is the bread and butter business of EDS, I am trying to be a vendor to him. Two, we've begun giving him ideas of new technologies, platforms and an open system he could use.

I read about the number of patents Microsoft files from India in a newspaper. I want to send EDS’s CIO that clipping and tell him that in the next three to five years, India must play a prominent role in EDS’s IP creation. That's the kind of dialogue I want with him.

What do you think of software as a service?
It’s fascinating. If you look at the models of companies like Salesforce.com, you turn on a switch and you expect the lights to come on. Can we do on-demand software of that variety for inventory control and so on? It's early days, but it's a major business opportunity.

We are doing something in the area of tax return. We've built software, which our US customers use to prepare their tax returns. The software belongs to us and we charge them per return. We have started doing something, but still haven’t got very far.

Isn't this a threat to offshoring?
Of course, self-help is a threat to offshoring! But there's so much work now that it’s not an immediate threat. In five years, who knows?

What would you like improved at MphasiS?
Our biggest problem: we are a Rs 900-crore top-line company. But we still operate with the non-integrated systems of a company half that size. Our challenge is to migrate our internal billing and time management systems and dashboards, so that they are integrated and run in real-time.

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