New CEO at the helm explains why the move makes sense in these times of slowdown..

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 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.

http://www.thehindubusinessline.com/ew/2008/09/22/stories/2008092250090300.htm