Jerry's Interview with Equity Master
"We are committed to the revenue side of the clients P&L rather than the cost side"
A native of Banglore, Mr Jerry (Jaithirth) Rao, 48, is an alumnus of IIM(A) and University of Chicago. Prior to founding MphasiS, Mr. Rao worked with Citicorp. In a career spanning 20 years he worked in Asia, Europe, South and North America in various positions that included Head of development division of Citicorp and Chairman and CEO of Transaction Technologies Ltd. Mr. Rao left Citicorp to start the erstwhile MphasiS that is now MphasiS BFL.
In an interview with Equitymaster.com, Mr. Rao shared his views about the future of the software industry, technology and IT enabled services. Mr. Rao also shared his future plans for MphasiS BFL.
EQM: How do you see the software sector growing in the future? Are Nasscom figures achievable? What will be the impact of the US slowdown on MphasiS?
Mr. Rao: For the next five to ten year period the sector is going to have very high growth rates. Simply, because every thing we touch, we breathe is software related. There is software in elevators, motorcars, music you name it and software is there. I can't see any slowdown over the period in question. There might be temporary blips but IT, as an industry, is going to continue to be very solid. The Nasscom figures are eminently achievable.
So far the slowdown has not affected us. But that does not necessarily mean it would not affect us going out into the future. So far what has happened is for every problem with some client who might be postponing a project there is some other client who is brining other project forward. So far on a topline or a gross margin basis it has not affected us. But clients are talking, saying "we are concerned". Twelve months ago nobody cared what price they paid. That has changed. People are now being more selective. But it has not affected our financials so far.
EQM: What are the areas that will drive this growth globally? Where is the opportunity for India?
Mr. Rao: I think the main growth will continue to be in what we call heavy-duty integration. In more and more spaces key product winners are becoming quite clear but integration still remains an issue. And how things can completely change that remains an issue? If you look at it for instance suppose you develop an excellent product in WAP and then it suddenly disappears and some other standards comes. This lead to problems for some companies but for the overall industry it leads to opportunities because there is a new set of growth initiatives by a new standard or interface. Therefore, heavy-duty integration will grow because we have not reached a situation where we can put the best of products like building blocks together to get a complete solution. You still need integration.
There are still large areas of Legacy systems, which will continue. People say this legacy system is disappearing, that is disappearing but each of these have long depths. They don't disappear easily. They have a long tail to their final distribution. So it takes a long time for them to finally disappear. And again you have to integrate them with new products and platforms. So this business of integration certainly looks to be a profitable one for the next five to ten years.
EQM: What kind of technologies do you think will lead the race?
Mr. Rao: Well, any product vendor who is trying to sell proprietary closed technology is finding it virtually an uphill task. So we find two kinds of players here one who are genuinely open and the other who are very clever, saying we are not open today but in six months we will have open platforms and are trying to gain some time that way. But I think those who are the genuinely open one are going to make it. Those who are saying we will be open are already six months to late. Everybody has to be open. That does not mean every single person who has an open platform will make it.
Primarily, key deciding criteria would be functionality and ease of integration. Some systems have fantastic functionality but are so difficult to integrate. The product vendors you have to track over the next five years are those who are genuinely, who are innovative in their functionality and in the ability to get functionality to integrate. No point in having functionality on paper that does not work.
Mr. Rao: As far as the integrators are concerned I think there will two kinds of integrators who will be big one will the big ones like the big five who will be huge who will have billions of dollars in revenues and who will integrate across all platforms, all industries, all domains, technologies and systems. Then there will be specialist integrators who will specialize in certain kinds of integration. This is where MphasiS BFL fits in. It has that kind of a positioning. I think the company has a very good future.
One other cut with the integrators may be the whole domain of testing, maintenance and deployment as against development integration. Testing, maintenance & deployment integration is already beginning to have a life of its own. It's no longer simply an extension of development. Till now we have been seeing development and testing somehow adjacent to each other. They might separate into completely different disciplines. That might be another direction in, which IT services companies will split into.
EQM: How do you see the future for IT enabled services?
Mr. Rao: As distributed computing goes on more and more devices in homes and offices are distributed computers and there is no central data centre to maintain. Therefore, the need for intelligent help desks at a fairly decent economic price becomes very high. You cannot afford to have people at US $ 100 an hour people in the US maintaining helpdesks. It just does not work and of course as telecom costs as well as quality continue to improve financially, you have a huge opportunity for remote IT enabled services. In bound call centres, out bound call centres, email response centres remote processing its just enormous and this sector might have growth rates, which might stun what we have been accustomed to in the IT sector. We have promoted a small subsidiary called MSource, which is into remote helpdesks and is doing brilliant business. The sales are done out of US and the operations are done out of Pune and Bangalore. We plan to start a Mumbai centre also. The telecom centres are in California and Texas.
EQM: What could boost the development of the IT sector?
Mr. Rao: All PC duty rates should be slashed all computer equipment should come into this country at zero duty. We must end the monopoly in situation in the telecom sector. We must have free choice. We know that there is plenty of bandwidth around the world but we don't have access to it due to the quasi-monopolistic situation prevailing.
EQM: What are the growth rates MphasiS is expecting in the next two years?
Mr. Rao: Narayan Murthy saying industry average or better that's something we have to be otherwise why should we be around? Earlier we have stated we will close the year above US$ 60 mm and the next year (FY02) at US $ 100 mm plus. We are not changing the figures. Beyond that it's a little early to say.
EQM: How long will the amortisation of goodwill last in the consolidated income statement?
Mr. Rao: It might go away. Remember law does not require all these statement we are giving under the US GAAP. We are giving it as a sign of integrity of management. Under the old rule you had to amortize goodwill and you had to split the amortization of goodwill into two pieces. One, which you associated with options and the other, which you associated with the non-optional shareholders. And you had to amortize the amounts in different parts of the income statement. According to the latest FASB (Financial Accounting Standards Board) proposal that is going around that you can do away with the amortization of goodwill entirely. And of course we would like that. We had deliberately gone on the conservative side and said let us show in the worst-case scenario in our number. We will continue to show it until the FASB ruling comes which is expected in sometime then we will stop showing the amortization of goodwill. If you notice we have not shown US GAAP balance sheets, this is one reason we have to wait and see what comes out.
EQM: What is the percentage of repeat business?
Mr. Rao: Most of our business is repeat business about three quarters, 75% easily. We do not add fifty or seventy clients we are very selective. We are a niche player and certainly are not a general, all-purpose software company. We don't want to be that. We turn down as many clients as we accept. We want to be clear and in the higher value addition space, not just any business that we get we will do. If we do not add value specifically then we will walk away from it.
EQM: Right now 68% of the revenues is accounted by top five clients don't you see that as a risk?
Mr. Rao: The way I would like to deal with it is no single client to exceed 10% and today we have one client who exceeds 10%. The top 10 clients contribute anywhere between 60% to 80%, which is okay. We don't want it to be below 60%. We don't want to be to scattered then you are not giving enough attention to the client. If we have that kind of a break up we will be okay. We are looking to do business primarily with global 1000 companies so theoretically the maximum number of clients we could have is 1000. In a steady state if we have 200 to 250 clients we are doing pretty well. Today we are at 60 clients. We don't have a huge market penetration in the financial sector but virtually all the top ones are our clients. We may have little to go in Japan or Europe but in the US the top three ones in the banking side who are not our clients could join us soon. We still have to start penetrating the mutual fund and the insurance industry in the US.
Again, it depends on how you look at it. For one of our large courier company clients we work with four different divisions of the company. Similarly with one of our big finical company client we work with five or six different division. So it depends how you want to count it. No doubt excessive client concentration is bad. At the same time we do not want to have to many 50, 000 dollar clients either.
We are not looking at adding customer per se unless there is meaningful strategic value for both sides. It's a little different strategy than traditional Indian IT services company, as our history is a bit different.
EQM: What does MphasiS do to establish a long-term relationship with the clients?
Mr. Rao: First of all, we are very very committed to understanding our client's business strategy and we are committed to the revenue side of the clients P&L rather than the costs side. We do not go and position ourselves as someone who can reduce your development cost. We tend to position ourselves as someone who can improve your business for you to get more revenues, to get more customers and to retain more clients.
We are not in all verticals. We don't call on manufacturing. We are very clear about whom we call on. We call financial companies, logistics companies we work with them and technology companies of a certain kind. We are very committed to these domains. The second thing is that we use very senior people as our customer relationship managers. For every relationship manager who is looking at a large customers is drawing a base salary of six figures in dollars. No junior $ 50,000 � $ 70, 000 developers. These are senior people. They try to establish a relationship at the CIO level not below. The customer relationship manager is something that we took from the big five and the big consulting companies. That makes us different. We are not always going to the out sourcing manager and trying to get business. We are trying to position ourselves strategically.
EQM: Three people who have influenced you the most?
Mr. Rao: J. Krishnamurthy, Niradh C. Chowdhury and probably Narayan Murthy.
J. krishamurthi is basically important because he believes you have to define your own parameters of success and failures of every thing. It cannot be externally imposed it has to be your own. That is a very powerful idea. "Truth is a pathless land and you have to find our own path".
I think Nirad Chowdhury is probably the greatest Indian intellectual of the last century. Again the whole concept of the maverick individualistic person which is quite alien to our society he kind of symbolized. Also he symbolized the best of the bhadralok syndrome, which tried to combine the best of our traditions for the other parts of the world. Not the worst, not the lowest common denominator but the best on both sides.
Narayan Murthy I have known him for a long. He is related to me, he is my uncle. He has always tried to create something world class out of India and do it simply, systematically and methodically without too much noise is something that I admire from a distance.
EQM: Three books that have influenced you?
Mr. Rao: T.S. Eliott Four Quartets is the book that has influenced me the most. I read as many times as I can. I am assuming I would like all books by Nirad Chorudhary and J. Krishamurthi. Standing separate I would say probably Heinrick Zimmer "Myths and symbols in Indian art and civilization"
EQM: And what does Jerry Rao do in his spare time?
Mr. Rao: Live, breathe that's good enough isn't it. To stay alive is an achievement in itself. I write travel a lot and spend time with my family and read. I like writing. I write some business columns for some magazines and papers. I published a book on poetry.