`Bubble has burst... but healthy pace will continue' -- Mr Vivek Paul, Vice-Chairman and President, Wipro

Krishnan Thiagarajan

Bharat Kumar

OPERATING from Santa Clara, US, the heart of Silicon Valley, Mr Vivek Paul, Vice-Chairman and President of Wipro Technologies, has played a crucial role in transforming Wipro into a software powerhouse. Wipro Technologies represents the global IT services business of Wipro and accounts for 57 per cent of Wipro's total revenues of Rs 3,092.20 crore in 2000-01. After losing four key executives in 1999, Mr Azim Premji handpicked Mr Vivek Paul to spearhead the Wipro's software and services division. Since then, Mr Paul has been instrumental in orchestrating the long-term strategy and direction of its software services business and imparting greater visibility to India's offshore value equation in the US. Despite a gloomy outlook for the US tech sector, Mr Paul says he is ``inherently optimistic'' and strongly believes India will emerge a dominant force in the offshore outsourcing business.

Excerpts from the interview:

What is your perception of the economic slowdown in the US? Do you think that ``overinvestment'' in IT technologies triggered the slowdown or other factors did?

I think you have to consider the slowdown in context. The reality is that the Indian software industry was growing really well. The last year-and-a-half saw a bubble form. It grew very fast and that was unsustainable. The bubble burst and there is a bit of angst all around. But does that mean that the world is going to end? No. We will continue to grow well after it. Why do I have this confidence? Because we have a sound value equation. It involves taking great technological breadth and quality process that is the world's best and offering it cost competitively. So whether it is a product or service, the three together form an unbeatable combination. My feeling is that maybe we may not have the superheated growth we have had in the last 12-18 months. However, the IT industry has been growing for years and the outlook continues to be strong.

There appears to be a chain of events that triggered the bubble -- spreading from profit warnings from semiconductor companies, PCs, wireless, telecom carriers to the optical networking domain. Given these interconnected chain of events, do you think the US economy will spring back to shape through Mr Alan Greenspan's (the US Federal Reserve Chairman) rate cuts alone?

(Laughs) We are entering the danger zone. You are making me play the economist. One has to be very careful. My personal economic analysis is that we need to differentiate between IT and technology spending. The Internet as a tool came to life and sparked an enormous amount of spending on Internet access modes. Until the Internet came along, the PC penetration had plateaued because most people could not figure out what to do with their PCs beyond a point. With the Internet, it became a tremendous Internet access tool. That led to a tremendous upsurge in consumer spending. And corporate spending caught rode this wave. Thus, if you did not have an e-story to tell, you were considered old-fashioned. Then, there were the enterprise service providers who said that consumer demand for the broadband would be exponential. Extrapolating the demand to ridiculous heights based on the premise that everybody would broadband, interactive multimedia... As a fourth stream, we had dotcoms that were spending like crazy. As one of the top executives in a large IT company said: ``For a while we thought that the only role of these dotcoms was to funnel money from their shareholders to us.'' We could not figure out what the dotcoms did. So you had all these four hypermodes. However, at some point, the Internet access market plateaued on the consumer front as enough households had got onto the Internet bandwagon.

With a high level of penetration, we had reached the next stage of the penetration plateau. At the same time, enterprise service providers were spending heavily. Not only because they expected the consumers to access this interactive broadband services, but also because they expected voice to go away (essentially become free). But voice was still a healthy part of their revenues and this interactive broadband medium had not grown at all as a part of their revenues. But because of the competitive intensity, the cost they were putting into telco (telecom services) services (especially for wireless services) was phenomenal. These players had to suddenly scale back and all the four factors that went into hypermode were going into reverse.

Since, all these four hypermodes constituted a sizeable chunk of the economy, it had an impact on the solid players too. For instance, Cisco or Sun may not be affected by this substantially. But the reality is that when the big elements of their customer base stop buying from them, they are affected. In turn, these players cut back on their suppliers -- semiconductors get hammered. And the contagion sweeps through the whole economy. Earlier, it used to take at least three months for a CEO to get an assessment of what is happening. But, now as a result of instantaneous information, it spreads really fast.

But this was only the genesis, what do you think will be the final outcome?

The outcome is that those hyper-spending modes are all going to go away. But the same service providers will continue to invest in upgrading infrastructure. But not at the earlier feverish pace. There will be more consumers willing to spend on PCs and other Internet access devices. Corporates will not spend on IT in terms of creating e-avatars of themselves, but they will spend on cost productivity and customer relationship management. Again, not at the same frenzied pace. Although the bubble has burst, I feel that this nice healthy pace will continue.

Nortel Networks was one of your biggest clients in the third and fourth quarter. It recently indicated that it was freezing its proposed investment in India and is unlikely to offer fresh orders to Indian software companies. Similarly, even its international outlook has gone from bad to worse between December 2000 to March this year. How do you view the future prospects of your biggest client?

I do not comment on any one customer specifically. However, if you consider a customer such as Nortel, we saw a growth in the Nortel account from 8 per cent in the third quarter to 9 per cent in the fourth quarter. Instead of one customer, you need to take a look at our portfolio of box-makers such as Nortel and several others. We have a separate entity called Telecom and Internetworking division. The revenues from this division actually grew in the fourth quarter and it is expected to continue growing despite all this. Some accounts will flatten, but others will accelerate. But, this entity will show growth.

Do you think your Technology Solutions (or R&D Services) division -- one of the chief contributors of your Global IT services business segment -- will grow at the same pace as in the past, given the slowdown in IT spending by global majors such as Nortel, Cisco, Motorola, Ericsson or Alcatel?

It is tough to tell. The past was a bubble and now we have returned to reality. Let us say the Indian software industry grew 40 per cent two years ago and 55 per cent last year. Will it go back to 40 per cent or 45 per cent? I think it was too early to say and frankly not necessary because it is better to be vaguely right than precisely wrong. Why try and predict an exact number.

Do you think that a slowdown in high-end services provided by your R&D services division will impact Wipro's movement up the software value chain and affect its operating margins in the long run?

I continue to believe that our R&D services business will do well because it comprises of three parts. One is the Telecom and Internetworking unit -- which we expect will grow. Second is the embedded systems unit, where we work on software that goes into different companies such as the computing platforms of, say, HP. This unit is growing well and is expected to do well even in the present environment. The reality is that software proliferation into new devices is happening very fast. The third part is the telecom and network service providers. There is a whole breed of companies such as ISPs or hosting companies that have unique IT needs and whom nobody was really servicing. We have gone after this sector and the unit is growing well. If you add all this up, we have a pretty healthy overall technology business that is driving our growth. The Internet and telecom service provider unit that we created last October, accounted for 3 per cent of our revenues in the fourth quarter.

In the Enterprise Solutions division, while e-commerce has remained fairly strong, the contribution of application development and maintenance has come down significantly. How do you account for this decline and what is your strategy on this front?

On the enterprise solutions business front, you have to consider that the numbers have been affected by GE (General Electric) leaving our client base. Whether you look at growth rates or revenue-mix changes, the GE exit alone shifts everything. For example, we did more legacy stuff with GE than we did e-commerce work.

With the benefit of hindsight, do you think scaling down your revenues from GE to zero by June 2002 is a prudent move in a market that is wobbly in the US?

Knowing what I know today and having looked at the last discussions [we had with GE] in terms of pricing and the kind of work, I would still probably make the same decision. The business relationship with GE was just not working out. And if I wanted to get business at those rates, I would have no trouble in filling my coffers.

After the announcement of the fourth quarter performance, Wipro announced that it was increasing the number of marketing professionals from 70 to 110 to target Fortune 1000 clients. Do you think this is the right time to aggressively target the US market?

Absolutely. There is so much opportunity out there. This is only a transition. This is the time to invest and get your people in place so that when you return to normal times, you are well-positioned to enjoy the benefits. We have a solid value proposition and that is not going to go away. We have had more leads from our Web-site in the fourth quarter than we have ever had. The reality is that the interest in offshore outsourcing is rising.

Do you think the time is ripe for the Indian software industry to make acquisitions?

I think the time is ripe for a good acquisition. We have to work through some of the issues -- which is that many of the US companies are facing exactly the same uncertainties. We also have to ask ourselves if this is the time to dig deep into our pocket and pay for a company that is not sure about its own visibility. Nobody really knows what is going on. You may want the dust to settle, but if you wait and do nothing until then, you will probably fall behind the curve. We are talking actively to multiple companies, not in terms of buying them, but in terms of building company-to- company relationships -- maybe we can work together or collaborate in some way. We are investing in that, in due-diligence capability, in training people on integration and integration issues. So we are doing a lot of `readiness' stuff. So for the moment, I would say we are probably 90 per cent ready to make an acquisition. But I think the market circumstances have to gel a bit more, and we must gain a little more confidence to explain to analysts what they should expect when we make this acquisition. Our goal is not to buy a weak company cheap, but to buy a good company at a fair price.

In selecting an acquisition candidate, do you think domain or technology will be the overriding consideration?

Our perspective is that we know technology. There is not a single technology in the world that we think we do not know or cannot get to know quickly. To us, what matters is a brand, a market presence and a industry functional skill. Those are the skills we do not have. That is the complimentarity.

Do you think that there has been a drastic deterioration in the fundamentals of the IT industry? Although there were signs of trouble evident even in October-December 2000, there was no talk of a slowdown/cancellation of orders/layoffs at that time? What has changed in the past three months for the industry to undergo such a drastic de-rating?

The bubble burst. Different people have different reasons for why the bubble burst. Whether it was the last straw on the camels back or whether butterflies fluttered in China and created a tornado in the US -- who knows what happened. As the bubble burst, the fact that the global economy is interconnected and information is now instantaneous, the contagion spread rapidly.

But the fundamentals are still there. People are going to still want IT. The Internet will still deliver productivity, still deliver an unprecedented level of customer intimacy. So many of the fundamentals will still be around. We are facing a transition. There are different expectations. Some say, the transition phase will only be six-nine months. By the fourth calendar quarter we should recover. Others say, the transition may be a quarter longer. But nobody expects it to be longer than that. Essentially, everybody drank heavily during the bubble boom, and there is a bit of hangover now, but life goes on.

Do you think that the absence of a clear-cut ROI (Return on Investment) criteria for several projects (say, broadband, 3G etc) was responsible for the crisis and overinvestment in the US?

Yes, it is right to an extent. Just like dotcoms, we also saw the emergence of these new age service companies -- these were all dedicated optical networks expected to provide broadband services. They are all in deep trouble. They were being funded despite losses. We have several of them. In reality they are wondering how to cut costs for survival. As a part of that exercise, they have started looking at India, something they never looked at before. As they start doing that, just like the dotcom excess, there will be a shakeout in these new age companies as well. Eventually what will happen is similar to what happened in the US railroad industry. Initially, there were 840 railroad companies and all of them were laying tracks. At the end of the day, there were only three companies that survived but all the miles of track were used. What happened there, may well happen with these new age optic fibre companies. Many of the people who laid the fibre are never going to make money. But somebody is going to buy that fibre cheaply, put it to good use and consumers will ultimately benefit.

Has the US slowdown made any difference to your marketing initiatives?

What we decided for our plan for next year was to invest in productivity. We are going to invest in productivity through quality management (our Six Sigma programme) and by e-enabling our own organisation. We are going to swallow the same pill we dish out to others. And we are going to redeploy that productivity and tighter cost management into our future investments such as training facilities or innovation.

Do you think that being in the US helped you anticipate the slowdown ahead of the rest of the Indian industry?

On December 20, I remember sending a note to Mr (Azim) Premji that there was something going on. I had just had meetings with the top guys at Sun, HP and Cisco. One of the suppliers of Cisco had told us that Cisco had cut down its orders by a factor of a third. But the Cisco guys denied the prospect of a slowdown (and this development). So as far back as December, we saw the first signs of trouble, but it was too early to make a call. As we could smell something in the air, we cut down our discretionary spend. From 920 advertisements in the third quarter, we reduced them to 440 in the fourth quarter. 440 was also too much... but it takes time to come to a halt.

Do you think that cancellation/slowdown of orders, springing from a slowdown in IT spending and drop in billing rates could take a toll on the outsourcing potential from India?

Like I said, you have to work through a transition. Nobody has a crystal ball right now. All that can be done is look at the estimates that range anywhere from the fourth calendar quarter of this year to the second calendar quarter of next year.

Do you think that decisions on outsourcing to India are likely to get delayed because of the trauma of the layoffs the companies are going through now?I do not think so. The trauma associated with layoffs are there anyway. The reality is that the slowdown forces the point at which the decision is made. If you go to an engineering manager and ask him to lay off 10 per cent of his staff and outsource more, he may not want to go through with the pain. The CEO that looks at that situation and says that the people are expecting to make the same amount of money on lower revenues and drive more productivity, may have a completely different view of the situation. I think that it does change the dynamics of how decisions are made and more outsourcing is going to CEO-led than anything else because productivity gains are what he/she values the most.

From your personal experience, what is the visibility for the outsourcing model in the US like?

Let me put it this way. I used to meet people who had not heard of the outsourcing model in India. But in the past six months, I have not met any individual who did not already know about it. I am not talking about the man on the street, but about the IT professional. If you take that as a representative sample of the overall universe, the story is out there.

What is the status of in-house entrepreneurship within Wipro in terms of incubating ideas? What is the status of these initiatives given the slump scenario?

We launched a formal initiative called Innovation about four-five months ago. The goal was how to generate more revenues from ideas around intellectual property. What we have done is picked certain themes and tried to put together a process by following a disciplined approach. It is too early to expect anything from it. In the past, we have had excellent technical ideas with very mediocre market success. This time, we are trying to tie up all technical and marketing loops tightly. I would first like to see a win in this initiative, before I declare victory.