The Hindu Business Line : `IT products still not a commodity market'

FLEXCUBE is probably the fastest-ever banking software sold. It gained points on account of its mission critical architecture, by virtue of its young age, availability of different channels, scalability and the India advantage. Mr Deepak Ghaisas , CEO (India Operations) and Chief Financial Officer, i-flex solutions.

Mr Deepak Ghaisas CEO (India Operations) and Chief Financial Officer, i-flex solutions.

When Mr Deepak Ghaisas speaks, his maturity and adeptness at handling analysts, media and investors shows up clearly. First, he puts the interviewer at ease, then begins to anticipate the line of questioning and warms up to the discussion. As the CEO (India Operations) and Chief Financial Officer of i-flex solutions, he is a key member of the core management team which has spearheaded the company's fortunes since its IPO in June 2002. Mr Ghaisas spoke to Business Line on the nitty-gritty of the packaged software market in the banking sector and what keeps i-flex ticking.

Excerpts from the interview:

What kind of competitive advantages do you see for FLEXCUBE vis-a-vis your competitors such as Temenos or Misys?

Let me tell you that the product market is not a commodity. This is the beating heart of a bank. And you do not take chances with that. So, the advantage that we have today is the India Advantage. The cost of production is substantially lower in India than in Europe or the US. These people are also trying to establish shops in India. They can produce another FLEXCUBE, but the costs will be very high and there will be the time disadvantage.

There are indications that sales cycles in the banking sector are lengthening and implementation of packaged solutions have been slower than expected in the recent past? What is your opinion?

What is happening is that, say, in Europe, multicurrencies have gone and the euro has come. So, banks are relooking at the business plans. Since the banking sector is globalising, there has been some deferment of technology implementation decisions of the bigger banks.

These banks are re-looking their business model, , validating it first and then looking at the technology decisions, rather than at technology first and then worrying about how to fit that into the new business plans.

Polarisation, restructuring of business and the lack of new banks coming up have had a kind of deferment of decisions. That is one side of the story.

On the other side, in the overall market, out of 100 banks, 85 per cent of the spending was in-house software. Banks were having their own IT departments, working out their own solutions and implementing them. This has been on since the 1970s and the 1980s. Only 15 per cent of the banks were looking at packaged solutions. Our observation is that those companies which were in the in-house mode have been really looking at packaged solutions. And the classic example is Citibank. It has gone in for the same packaged solution for 90-100 countries. Similarly, the Development Bank of Singapore used its own mainframe solution. When it looked at 13 other overseas banksoutside Singapore, it also switched to packaged solution. UBS Warburg alsowent the same way. The point I am making is that even though the negative side is there, there is this positive side which keeps the momentum. Because the companies in the 85 per cent category are realising that in their long-term strategy, they will move into the packaged solutions.

However, the cost-consciousness is increasing and, therefore, they are looking at the value that they are going to get out of each solution. And not the brand or where it comes from.

Second, FLEXCUBE — the way in which it has progressed and the first 100 customers that we got in four-and-a-half years is probably the fastest-ever banking software sold. FLEXCUBE gained points on account of its mission critical architecture, by virtue of its young age, availability of different channels, scalability and the India advantage.

Can you tell us the relevance of tank size, average deal size and its linkage to revenues?

Tank size (contracted, yet unbilled licence fees for products) is a combination of two elements: The value-wise addition and number of customer addition.

Analysts then start worrying about the average deal size (licence fee per deal) and so on. The point is that you need to have half a million dollar clients and five million dollar clients. In a particular quarter, if I do not get two $5-million clients, I will not be worried if I am getting six half-a-million dollar clients and one $5 million client.

Hence, the tank size will still be $8 million. There can be situations where my revenues in a quarter are higher but my tank size is lower and vice-versa. Mostly, I will keep oscillating between these two positions, but will always be attempting to move to the fourth quadrant.

Only when both revenues and tank size are falling, will I be worried. So, the tank size on a standalone basis will not give the right picture. One also needs to look at the revenues accrued.

In one quarter, $10 million may come in, but $12 million of revenues may be recognised. Then, I am in a situation where my tank size is lower, but revenues are higher. Tank size is the inlet and revenue the outlet.

Assume I have got one dollar licence fee in Year 1. In six years, the licence fee will grow to $32. But I do not get $32 as the tank size. It keeps getting added on account of three reasons.

One, the number of customers or branches keep going up for the bank. Two, the number of new modules are added and, three, the bank acquires bigger size. Whenever we say, we have added ten customers, these are much different from a services company adding 30 customers.

When we say, ten customers, they will remain with us for next seven-ten years. No CEO would like to go through another core banking change in another ten years.

Why have you chosen to work across the entire banking spectrum, be it corporate or retail or small or big banks?

We work with a corporate start-up at the lowest level to a universal bank at the highest level in a developed market. Corporate start-up is low while universal bank is the highest as far as licence fees is concerned. I would be glad to have every slice in the pie. I would never say that I will not take this type of clients. Because a corporate start-up will ultimately turn out to be a big investment bank.

Why we require smaller kind of banks is because their sales cycle is small. And your revenue recognition is faster because implementation becomes faster. In this case, the revenue recognition may be less than a year.

Whereas for bigger banks, the sales cycle is long and implementation takes longer. For this, the revenue recognition may be 24-36 months away. That is why we need to have a balance between these two.

How are you gauging the market potential of the overall banking market and pricing across different geographies? How are you building your marketing efforts in the developed markets of Europe and the US?

The prices that we are offering in India or Far East or Africa are different from Europe or the US. If I am taking a bank in India and a similar sized bank in Europe, the prices will be different. Because they are used to a different kind of pricing. That is universally true.

If you look at our geography pie-chart, you will find our presence in all markets. That is why the markets get more encouraged when they see a German sale or Japanese sale than an Indian sale.

So, we feel that the rise in selling and marketing expenses in the developed markets is an investment for the future. What we are spending today is on financing a brand and future sales.

If it is general and administrative expenses, then you can ask me ten questions on that. Let me assure you that we are spending these sums in these markets to penetrate.

While it is true that these markets give a better price and profits, the penetration priming costs are also high. In Europe, you just cannot go in today and sell tomorrow. Especially when the competition is Temenos and Misys.

That is what takes to strategic alliances with local players and employing local people. As an investor, you should be assured that the fact that the company is spending more money on marketing and focussing on these markets, it will bring results and benefits in the future.

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