Human-heavy models won’t work in the future: Ganesh Ayyar

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Singapore: The innovation quotient of Indian information technology (IT) firms has to increase significantly before they can secure contracts from new-age companies such as Google Inc., Amazon.com Inc. and Uber Technologies Inc., says Ganesh Ayyar, chief executive of Mphasis Ltd.

Indian IT firms’ traditional business model of relying on human talent is set to be disrupted as the level of automation rises, and human-heavy models won’t work in the future, he said in an interview.

Ayyar, a Singapore citizen, has been at the helm at Mphasis since 2009. Blackstone Group LP recently bought a controlling stake in the Bengaluru-based IT services provider for $990 million.

Edited excerpts:

Most large Fortune 500 firms are clients of IT outsourcers. Since the Fortune 500 firms are themselves getting knocked down, are Indian IT vendors facing pressure to win new business?

There is a direct correlation only if all big players are getting pressurized on their IT spends. In some cases, it is true, but those are exceptions. In general, these trends are not defined by size, but the industry vertical the company is in—if the manufacturing segment in Europe is hurting, then large players in that space tend to optimize their budgets. I see a common trend which is related to a fundamental shift in the technology scene. Customers are going for significant optimization, and they are investing in innovation, which includes digital. Clients have to decide if they are going to defend or attack. Then the service provider can either be reactive to what the customer wants, or you can help them achieve their own aspirations based on their plans. So, will IT players slow down the disruption their clients face, or will they accelerate and help their clients become the disruptor—that is the choice that is ahead of us.

A lot of the firms that have made it to the ‘Forbes’ list or the new additions to Fortune 500 are from China. Why have Indian IT firms struggled to win large outsourcing contracts from the largest Chinese firms?

Indian IT companies are successful when it comes to winning contracts from companies that have a global mindset, rather than just being large. In my view, Chinese companies have become large and successful, but their adoption of a global mindset is still evolving. Indian IT companies tend to do a lot better with clients who have a global mindset. It will, therefore, take time to win contracts from Chinese companies, especially since these are non-English speaking firms.

The other set of new firms in the Fortune 500 are the likes of Amazon, Alibaba, Facebook, Google, Uber…these were all start-ups at one time, and they typically do not outsource massive work. Can this be another reason why Indian IT vendors are whining about demand drying up? When do you see Indian IT vendors being able to win outsourcing work from some of these “new-age firms”?

It can be one of the reasons, but in my mind it is not necessarily the main reason. Predominantly, the Indian IT services industry relied on human talent to be very successful. We are in the so-called early stages of massive automation in the industry, and that tends to replace the current talent-based model. This is one more example why traditional demand is changing or being reduced—but at the same time, there is a new kind of demand which is emerging, where human-heavy models won’t work. But demand exists.

We don’t do any business with these new-age firms (Google, Amazon) and, therefore, I don’t have knowledge of their demands. Just sharing one perspective—in order for Indian IT firms to add value to such companies, our innovation quotient has to go up significantly. It is not necessarily the scale game that is going to be of interest to some of these firms.

Something that is a lot closer to Mphasis. How do you see the future of captives? Do you see a scenario where captives do the basic ancillary tech work for the parent firm that is headquartered in US/Europe, while the parent firm does the cutting edge work?

Interestingly, when you look at captive, there are two cross-currents that are diagonally opposite to one another. One school believes that innovation, digital and high-end precision work has to come to us (captives), and it can’t be given to anyone else. So there is one trend of firms setting up more captives. The other line of thought is that the rate of change and disruption is at an ever-increasing pace, and any organization’s ability to have access to newer technology and newer talent becomes questionable—so one is better off partnering with other firms that can bring concept of speed and innovation to the clients. I am seeing both these trends in the market. The first trend is companies saying, “I will set up a captive as I don’t want someone else as part of my value chain who brings in innovation”. But I genuinely believe that to bring in innovation, a company is better off by having a good set of partners, who are able to demonstrate a high innovation quotient and also bring in different values. I genuinely believe the world has shrunk today, and you cannot have a position that the parent firm will do the cutting edge work while the captive does the ancillary work. It is a thing of the past to believe that only one part of the world is capable of innovating—this is my personal opinion. Many of the captives in India are doing cutting-edge research and development (R&D) work.

For most Indian IT vendors, the biggest money generating business was from the areas of application development and maintenance, and maintaining IT infrastructure for clients. As most larger Fortune 500 firms are looking to move their applications to cloud computing, will Indian IT vendors see a massive hit on revenue? Indian IT vendors’ model is based on “per human hour” billing.

When one goes for shared model and utility model combined together, the work moves towards higher level of standardization. The higher the level of standardization, the lower the market size for customization—hence, that market is literally evaporating where people used to have a package and 9-15 months’ window of customizing the package. The traditional model of per human hour of billing will change. It is definitely bound to change. It is no longer that I will hire 60,000 employees—we need to focus on what is the revenue growth per employee. We have to complement key assets—our people—with tools to enhance the revenue per employee. Instead of the current model where having a large number of employees is a strength, it could potentially become a weakness.

So, in such times, when their traditional model is getting disrupted, how can Indian IT vendors get more business and retain margins?

We have seen disruptions in other industries—bigger disruptions. When digital cameras came, we all know what happened to Kodak. It is not that Kodak did not have intelligent leaders. It all boils down to one factor that either helps you to overcome the disruption and become a success, or you become a victim—that is your ability to cannibalize your own business.

Sticking to cannibalization, what are your views on automation and hyper-automation. With newer technologies such as automation tools or platforms, you don’t need armies of engineers to carry out updates. Since automation is cannibalizing revenue, what does this mean for Indian IT firms? Will net hirings in IT firms fall significantly?

First, automation is definitely playing a big role in shaping the industry, and it is here to stay and accelerate. Let us come to the point of hiring plans and fresh graduates. In my mind, the place that will get squeezed out big time is the middle layer of Indian IT firms, because our organizational model—we’ve borrowed it from the armed forces—we have a command and control hierarchy. In those days, when perfect communication was not possible and one needed physical supervision, people started defining span of control. Over time, when productivity tools came, they started pushing span of control objectives. Now, with instant and multi-modal communication that is possible, the traditional physical human supervision will undergo a change dramatically—hence, the middle portion of the organization will get squeezed big time, versus the bottom—the individual contributors. Many of the fresh graduates who are coming in, they are conversant, or can quickly become conversant as they have grown up in an environment to expertly using automation tools. My view is the size of the pyramid may get chopped off—the repetitive task may be replaced by tools, but fresh graduates will continue to enjoy reasonable levels of job opportunities.

Coming specifically to Mphasis, or even other Indian IT firms, where do you see your new business coming from? Should Indian IT firms look at a consultative-led approach, where, in addition to having sales people, they can sit down with a CXO and help bring transformational gains, rather than just cost-saving measures. Traditionally, clients looked at Indian IT vendors as cost savers. When will they start looking at them as strategic partners?

There is enough business available for Indian IT players to grow. One needs to have that agility, flexibility and knowledge to grow in the new areas and last, but not the least, the commitment. Just scale won’t do. The other element is how will they be prepared to deal with cannibalization of their business. These are the two big factors.

Indian IT firms need to realize what is their core, regardless of which firm it is—if you are going to go too far away from your core, then it will be a problem statement. In the case of Mphasis, we don’t bring business knowledge, but business techno-knowledge in specific domain areas of certain industry verticals. We can’t be everything to everyone. So, for select areas in BFSI (banking, financial services and insurance), we aspire to have best-in-class business techno-knowledge. Four years ago, for every salesperson, we used to have half domain expert. Now for every salesperson, we have two domain experts.

In my view, that change (of considering Indian IT firms as strategic partners) has already happened—clients no longer look at Indian IT firms as mere cost optimizers. They are now looking at us and asking, along with cost optimization, what value can you bring, or what knowledge can you bring? I believe that many players in the Indian offshore industry have stepped up their game.

Looking at Mphasis, how big a challenge is it for mid-tier IT firms to move beyond the $1 billion revenue mark? Be it Mphasis or Polaris, or Geometric, you’ve all been bought out.

All the companies that are at $10 billion in revenue today, at some point of time, they were at $1 billion, and I am sure the same questions would have been posed to them. I would contend that today, if you are $1 billion, you have some distinct advantage versus the super-large firms, because transformation is better handled in a slightly smaller company. You are not too small to be cast aside by a big wave, and you are not too large to have a turning radius which one can’t afford. That is the advantage. Can $1 billion become $10 billion in three years? That is a very different question because the market is changing. Increasingly, I focus on what is the value that I am creating to shareholders, and not just revenue growth. Mphasis does not give guidance—thinking aloud, our objective is to grow at market growth rates, and more objectively, grow in relevant areas. I believe in specialization, getting into the path of relevance with your client, and growing becomes very important, rather than just growing.

Blackstone’s 80 portfolio firms together have more than $85 billion in revenue. How much of the IT spends of these firm do you expect to get?

Blackstone made a public statement that our addressable market is to the tune of $1 billion per annum. They have done their due diligence and announced these numbers. The question is, how do I target this $1 billion? Assume that we can penetrate 30% of this over the next three years, this is literally a new stream of business for us. When Blackstone acquired Intelenet Global Services, the (latter’s) revenues went up significantly due to contracts from Blackstone’s portfolio firms. This is Blackstone’s unique differentiator, promoting intra-portfolio business. We are very bullish on this as this is a new revenue stream for us. I am also bullish that we have secured a minimum revenue guarantee from HP (Hewlett-Packard Co.).