Sneak Attack!

There are more than 1,000 software companies in India but only six earn annual revenues in excess of $1 billion each. The industry is littered with companies that started with great promise but could never get past the $500 million mark. Mastek, Sonata, NIIT,

Polaris and Hexaware are all stuck in the $300-million bracket. Even the venerable Patni Computer, one of India’s oldest IT companies, has revenues of only $720 million, compared with its younger cousin, the $4.6-billion Infosys Technologies.

If anything, the gap between the big boys and others has only widened in the last decade or so. Just one company, Cognizant Technology, has managed to break out of the mid-tier and join the top league in this period. That’s why the goal set by MindTree, a 10-year-old company in the below-$300-million category, to join the list of top six companies in the industry could be  intriguing.

Image: Mallikarjun Katakol for Forbes India

POWER PLAY: Ashok Soota chairman of Mind Tree, rejects price undercutting and niche focus

History shows that once a company gets past that $1-billion mark, its further rise gets to be more rapid. Infosys took 23 years to make its first billion, but only three years for the second. That’s the scale effect for you.

This reality has not been lost on MindTree’s chairman, Ashok Soota. Soota, who had been vice chairman and president at Wipro and quit that job to lead the founding of MindTree in 1999, has read the book A Blueprint to a Billion by David Thomson. The book says only one in 20,000 ideas fructifies into a billion dollar company.
Is MindTree one such idea?
Soota thinks so. In April this year, he announced a big target: MindTree must reach $1 billion in size by 2014. At a compounded annual growth rate of 35 percent, it seems like a Herculean task in this economic environment. Infosys, the industry’s stock market darling, says its revenues will shrink this year by 3-7 percent.

Right now, the going is tough. MindTree’s revenues are shrinking due to weak global demand. As per its own guidance, it will not be able to cross even $300 million by the end of this financial year. “The asking rate for achieving the billion-dollar vision will go up because of global situation and current year results, but we believe it will be a manageable challenge,” says Soota.

Soota is confident that there is room at the top. “This is not the auto industry,” he says where the top three players account for 80 percent of the market. No single player has a vast market share in the IT services business. Even IBM, which gets $60 billion from this segment, only has 10 percent.

Acquisitions to boost size can bring their own problem beyond a point. “This is a people’s business and you will end up with a humongous organisation if you consolidate,” he says. That means companies have to plan for growth using their internal strength.

Run Your Own Race
The timing of MindTree’s billion-dollar quest can’t be more adverse. This is an industry that moves to the so-called “megatrends” — massive phenomena like the Year 2000 bug or the dotcom mania that make customers of software services to spend more on technology. In such times, more and more customers veer towards biggies such as Infosys and Tata Consultancy. “When we approached clients like Lehman Brothers, the calling card was ‘you work with TCS, Wipro and Infosys. Why don’t you work with us? You can be a big fish in a small pond,’” says Krishnakumar Natarajan, CEO and managing director of MindTree. But while MindTree would get meetings, it wouldn’t go anywhere. Large procurement consultants like TPI and neoIT do not usually invite MindTree for their important bids. In the four years to March 2008, the top three Indian companies Tata Consultancy, Wipro and Infosys had increased their share of the industry from 26 percent to 46.6 percent.

So, how on earth does MindTree hope to join the bulge bracket?
First, MindTree can’t play the big boy’s game. It won’t get anywhere if it does. Instead it is using what it calls the Trojan Horse strategy. The allusion is of course to the wooden horse which had Greek soldiers hiding inside and opening the gates of the city of Troy for the Greek army to conquer. MindTree’s horse is expertise in a set of areas where it can match the big boys. In those select fields, it can compete with the best and win the client’s trust. It wants to use this expertise to sneak inside the client’s business and use it to open the doors for more and more services.

For instance, it will use testing services to gain entry into large companies and, once there, it will slowly expand these accounts by cross-selling a full suite of services. This is because testing is one area where the gap between the big companies and MindTree is narrower than in other fields. “If you take ADM (application development and maintenance), MT has 8,000 people and Wipro and Infosys will have 80,000 people. So the headroom is very large,” says Natarajan. “But in testing, they would have 5,000 people each and MT will have 2,500 people. We are within a catching distance for customers to look at us for these services.”

“Midsize companies often have to compete with lower prices or focus specifically on niche segments” says Siddharth Pai, managing director of TPI India. But MindTree says it will do neither. “Big companies will invade whichever domain you go to and playing the price card is not sustainable” says Soota. The only time MindTree tried specialisation was when it started with a focus on dotcoms and telecom. Both the businesses folded up quickly.

So, instead of focusing on just one business segment or technology, Soota has identified a clutch of service lines like product engineering services (where companies outsource product development to third parties), testing and business intelligence and data warehousing and infrastructure management. These service lines are new and are growing fast.

Last year, MindTree acquired AztecSoft to strengthen some of these service lines. For example, in product engineering, MindTree was strong in the hardware side while Aztec was strong in software. Now MindTree can offer a complete range of services. Says Mayur Sahni, senior market analyst, IDC Asia Pacific, “They have managed to create the framework. The question now is can they scale each of these capabilities?”

A Spot under the Sun
The last guy who scaled the billion-dollar mark thinks MindTree’s plan needs some sprucing up. “MindTree is a good company but the problem is that it does not have a clear positioning,” says Lakshmi Narayanan, vice chairman of Cognizant. Narayanan credits Cognizant’s success to a clear position — Cognizant would be among the top five companies in the world in financial services and healthcare — and relentless execution. Even today, 55 percent of Cognizant’s revenue comes from these two segments. “I am unable to associate MindTree with anything. It seems to be too many things at this point in time,” says Narayanan. In the last ten years, MindTree has gone through three different changes in strategy — from consulting to access, agility and attention and now to this “collection of niches” strategy.

What MindTree needs is one, great execution and two, superb leaders for this is a people’s business. To enable execution, the company has been split into five business units complete with a CEO, profit and loss account and separate staffing and marketing teams. So Soota and Vice Chairman Subroto Bagchi have handed charge to the next generation of leaders. On April 1, Natarajan took over as the MD from Soota. While Soota will focus on finding new business models and M&A (25 percent of the new target will come from acquisitions), Bagchi will be in charge of grooming the next generation of leaders. 

Now each business unit CEO must raise his business to a size of about $200 million in the next five years. To achieve this, he can do pretty much his own thing short of raising finance or changing the company’s logo!

The CEOs have much more freedom but they must be up to the task. The biggest reason many companies have remained stuck in the middle layer, says Bagchi, is because they got physically and mentally tired. “Creating a company is a very intense process, many of these first generation entrepreneurs simply burn out by the time they reach their fifties” he says. Soota is turning 66 this year and Bagchi, Natarajan and S. Janakiraman, all co-founders, will turn 52.

Last year, Bagchi stepped down from his operational role and now works full time to groom the next generation of 100 leaders, one of whom, he says, could become the chairman of MindTree by 2020. Bagchi has created one-on-one leadership programmes for each one of them. “If these leaders expand, the company grows,” he says. Bagchi works alone without involving the HR team and is answerable only to Soota and the Board of the company. In July this year, Bagchi was elevated to the vice chairman’s position. People close to the company say Bagchi will spend time in Europe handling some of MindTree’s more important customers, Volvo and Arcelor Mittal. Soota says, “The role is global and would not be restricted to any specific geography.”

Clearly, Soota is willing to take risks — by creating non-structured roles such as Bagchi’s — to safeguard MindTree’s future. This is why he has stated that 20 percent of MindTree’s revenues will come from new pricing models such as outcome-based models where MindTree will not be paid for effort but for results.

If MindTree succeeds, it could even break the vice-like grip that large companies like Infosys and Wipro have on their old clients. For example, one of MindTree’s largest customers AIG, (which it shares with TCS) is now re-tendering projects. The company wants its vendors to bid on the basis of a fixed price for three years, commit productivity improvements and reduce the cost of maintenance.

Before the slowdown, MindTree had very little chance of taking a larger share of these application development and maintenance contracts.  But if it wins some of these contracts it could improve its market share in business.

Just like the Greeks, MindTree has left the Trojan Horse at the shores. It is hoping that clients will now take it inside the gates of their organisations.