`Offshore outsourcing getting more strategic' -- Mr Ashank Desai, Chairman and Managing Director, Mastek

IN AN already challenging external environment, Mastek has been through a particularly troubled phase. It has been the only software company to issue two "profit warnings" in less than six months of each other. The second announcement was made in January. The first warning was over the scaling down of business by one of its top five clients and the second one over the substantial provisions of bad debt owing to excessive exposure to the dotcom sector. Meanwhile, the management has provided a guidance of 10-15 per cent growth in revenues and 100 per cent growth in post-tax earnings in FY 2002 (maintained even after the September 11 attacks in the US). Even though, Mastek is strengthening its marketing infrastructure, specially in the US and reorienting its offshore strategies, the weakening technology environment leaves it vulnerable to lower management guidance in future.

Business Line spoke to Mr Ashank Desai, Chairman and Managing Director of Mastek for his opinions on the direction the IT industry was taking and how the industry and Mastek were reorienting themselves in the software services space.

Do you think that "scalability" for medium-sized companies such as Mastek and others have been dramatically affected by the slowdown? What factors have played a role in affecting this element?

Actually, "scalability" is something which has multiple dimensions such as marketing, infrastructure and people. Now, scalability at all these levels has not been affected. We can offer quality work and undertake large projects, just like frontline companies. Getting the people is not a problem. It is not as though they are joining only the big companies. The top four companies account for 25-30 per cent of the revenues, which means that the rest is accounted for by other companies. Marketing scalability is a difficult issue. Is the slowdown affecting the scalability of orderflows? In our specific case, on the one hand, we have been able to scale our business in Europe. On the other hand, the US has not grown only due to the slowdown. The real reason is that we decided to focus on large accounts and channelled all our efforts in that direction. That we did in June 2000, which I had outlined in the Chairman's statement last year. We said that we would derive `x' amount of revenues in `y' amount of time. The `y' amount of time has been stretched on account of the slowdown and the sales cycle has been much longer than in the past. If I look back at Mastek and consider where we were in January 2001 and where we are now, we are much better placed in terms of the number of places we are in, the number of bids submitted and presentations made. Obviously, this is not showing up in our profit and loss account, but this is an early indication of the doors that we are opening everywhere. So I would only say that it is not "size" alone that matters, but also the "type of accounts" handled.

Do you think that your initial initiatives or practices starting off from, say, the front end solutions, eCRM, e-business and moving on to Microsoft.Net practice or Oracle continue to remain as relevant as they were in the past? Could the risk mitigation undertaken then been better?

If we look back at the focus areas, the slowdown has occurred and certain things have happened as a consequence. Without the slowdown, the focus on these areas might have been a great thing, but we failed to anticipate the slowdown. Second, the actual data does not say that these focus areas need to change dramatically. If we look at the data coming in, it appears that CRM (Customer Relationship Management) and eCRM are relatively less affected compared to the rest, such as Java. People are still investing in CRM and eCRM. Meanwhile, e-Business has slowed down to a large extent. But e-business does not constitute the complete range of front-end solutions. We are still doing a lot of work in front-end solutions, for instance, for the UK government which is not necessarily related to the Internet or e-business. So, each of these segments are differentially being impacted by the slowdown.

Going forward, we still feel that the focus of our initiatives will continue to be the same and when the recovery comes, these practices will move up faster than the rest. Having said that, I admit, dotcom exposures was an overenthusiastic move. We expected dotcoms to do much better and move much faster and that was a wrong calculation on our part. To that extent, we were affected. I do not deny that.

@What is the likelihood that the sharp drop in e-commerce and related software investments will retard the progress of the industry up the software value chain?

I feel today there is more interest in offshore than ever before, because of the cost-cutting options available. Most of that work has been in maintenance and related ongoing development projects. What is happening is that the new jobs that are coming in are more in these areas. So, even though e-commerce may be shrinking, I feel that offshore projects (be it maintenance or otherwise) may more than compensate for that.

What is the reason for the lengthening sales cycle for software services from Fortune 1000 companies? Is it because, it is a "strategic" offshore outsourcing decision to be taken by CIOs or is it on account of the likelihood sharp reduction in capital spending in US and parts of Europe?

The sales cycle is lengthening for software services, in any case. But for offshore, it is lengthening because the implications of cost cutting are serious this time around. Also, this cannot be done overnight because it requires preparation, evaluation and internal consultations. Those who are already doing offshore may do it faster, however, for newer players it will take time. Moreover, the mood this time suggests that offshore will be strategic and driven by serious cost reduction compared to earlier times. From our experience, we also find that the size of the orders being asked for are much larger than in the past.

From the Fortune 500 companies, the software industry is stretching its customer basket to include Global 2000 companies. Do you think that selling the offshore model will be as easy as it was for Fortune 500 companies? To this customer basket, what are the variables that are likely to sell the offshore India advantage, especially in the light of the demands for ROI (Return on Investment) justification and productivity payoffs?

I think we can penetrate the Global 2000 companies. Nearly 65-70 per cent of the companies are unaware of the offshore model and I think even those in the know are outsourcing only 5-10 per cent of their work offshore. So, the market is there. Theoretically, whatever can be done onsite can be done offshore. To address this market space, I think the variables may remain the same. Some of the companies may reduce costs, while others may improve quality or deliver in time and use a combination of these with the wherewithal to sell their business model. For instance, take the healthcare sector in the US. One needs to address this service space much more aggressively and more companies are doing it now.

In your recently announced joint venture with Deloitte Consulting, what is the likelihood that Deloitte may derive more benefits in moving down the value chain than you may enjoy in gathering consulting expertise?

Today, a customer can either go to companies like us for outsourcing work or go to the likes of Deloitte Consulting for higher-end work. We feel that today, there is no company that offers a "total solution". By working with Deloitte on this joint venture, we are aiming to offer a total solution. For the moment, we are working to bring a part of the existing onsite work undertaken by Deloitte offshore. But this is only the beginning. I think we have already started learning from the JV and the positive side is that there is a greater possibility of learning the best consulting practices at a latter date.