CEO at the helm explains why the move makes sense in these times
K Bharat Kumar
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
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
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
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
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.