Arun Jain is bifurcating Polaris to make it a billion-dollar business
Arun Jain hasn’t always had the best of luck. In December 2002, the founder and CEO of mid-tier software company Polaris (then Polaris Software Labs, and now Polaris Financial Technologies) cooled his heels for a few days in an Indonesian jail when a visit to a client turned sour. More recently, India’s stock market regulator Sebi pulled him up for an insider trading case involving a transaction that dated back to 2000—a case that Jain thought was long settled.
When his company hits the front pages, it’s usually as the target of yet another acquisition by yet another MNC—a prospect Jain doesn’t exactly relish. His close colleagues describe him as very committed, very hands-on and emotionally attached to the company he founded 20 years ago. On the stock market, the company trades at 5-6 times earnings, compared to, say, its peer MindTree, which is about the same size and not exactly a star, which trades at 15 times. Jain doesn’t relish this either.
Jain has now decided that the sum of the parts is greater than the whole, and is restructuring his company into two—one to sell products and the other services. Over the years it has developed a suite of software products that it licenses to the banking, finance and the insurance sector—competing with IT products companies such as Temenos and Oracle (Flexcube). IT services remains its biggest revenue earner, for which it competes with other Indian offshore players, including TCS and Infosys.
This is his biggest internal restructuring exercise after he took over Orbitech, the software arm of Citigroup, 11 years ago. Products account for a fifth of his Rs 2,000-crore-plus revenues, and he has appointed three CEOs to focus on global transactions, core banking and insurance. There’s, of course, another CEO to head the services business. These changes, he hopes, will make each of his three product divisions at least $100 million each in size. Together with services, which he expects to grow to $500 million, Jain expects to shift to the billion-dollar league. In the IT business, you start mattering only when you cross a billion dollars in revenues.
Jain’s moves are being watched not only by Polaris shareholders, but a host of others in the mid-tier IT industry, which is facing tough times. “On the one hand, some of the largest providers such as Tata Consultancy or Cognizant are growing and, on the other, only select specialist companies—such as KPIT Cummins or Persistent—are growing. Also, in parallel, Indian outfits of MNCs like Accenture and IBM or top US tech firms’ captives are expanding their bases in India. Squeezed from both sides, it has been a big struggle for many undifferentiated, sub-scale companies,” says Sudin Apte, CEO & research director of Offshore Insights.
If Jain succeeds it would not just be a story of one man overcoming a jinx that has haunted him for a decade, but also how good strategy can help a company surmount the constraints posed by the seemingly immutable laws of industry structure—scale begets scale. The question, of course, is: Can he pull it off?
THE REJIG
Jain likes to explain the ongoing changes at Polaris by drawing three intersecting circles—one each for strategy, structure and skill sets. And then, he draws one more circle in the middle touching all the three—and that’s the customer. It’s on this theoretical framework that a lot of real work has been done during the last several months at Polaris.
Over the last couple of years, when Jain was meeting his clients—all of them in financial services—he saw them falling into three broad categories, not only in terms of how long they have been around and to what extent they have been using technology but also in terms of what they expected from their tech vendors. The first set of clients had a long history, both as institutions and users of technology, and was based in the developed countries. The second set of businesses was huge too, but came up in the emerging markets in the last 20-30 years. And finally there were small banks in the emerging markets.
Polaris had, over the years, built—partly by acquisitions—product lines that would cater to all the three. And these products were growing faster than the company average, reaching some degree of scale. They were contributing 20-25 percent of revenues.
But the company also had a much larger services business—and that was how it was being perceived, as a commodity player in services. Software products and software services are different animals. Building products and intellectual property (IP) typically demanded significant investments upfront, a different approach to marketing, and often very different skill sets.
They were riskier, but also rewarded better. Services, on the other hand, were mostly about managing scale—the ability to attract and retain a large number of engineers who can deliver what the customer wants. Managing scale is not easy (as the plight of even the big IT services companies show), but services are different from products.
THE ROAD AHEAD
(This story appears in the 26 July, 2013 issue of Forbes India. To visit our Archives, click here.)