In 2008, Subroto Bagchi took on the decidedly odd role of ‘gardener’ at IT services firm MindTree where he is one of the co-founders. This doesn’t necessarily mean that he spends his days hunched over Bonsai plants. Instead, it refers to the grooming of human minds that Bagchi took on the responsiblity for, by focussing on expanding the company's leadership capacity beyond just the founding team.
You would imagine that this human resources guru would have abdicated his role after being appointed chairman with effect from April 1st this year, but that isn't so. "It (gardening) is not yet over and that is what I do. My role now is going to be the chairman of the board, but the work I have been doing in terms of nurturing talent will continue," says Bagchi.
Bagchi's role is probably more important now than at any other time during the firm's existence. For one, its charismatic co-founder Ashok Soota left to establish another IT services company, Happiest Minds. Now, the major challenge facing Mindtree is its modest size, which limits its ability to compete for bigger deals. For most mid-sized IT services firms, this was a big problem during the last economic slowdown which hit the export-driven IT services industry badly. One way out for IT players was to develop niche areas of specialisations.
Setbacks
Consequently, Mindtree decided to combat this problem by acquiring Kyocera's Wireless captive R&D centre in order to instantly establish its credentials as an important player in the telecom wireless domain. Unfortunately, just as it entered the space, the telecom product arena's dynamics began to change, limiting MindTree's opportunities and triggering a wave of less-than-ideal events.
The company scrapped its smartphone product business which in turn raised a big question about MindTree's ability to make savvy bets on the future. MindTree started losing market share; profitability took a hit due to allocation of funds to repair the hole created by the Kyocera investment. The real shocker came when Soota decided to call it a day.
"The exit of Ashok (Soota) is a big loss for me at personal level. Because of my long association with him, we had developed a unique capability of communicating with each other without communicating," says Bagchi. "But the issue is not the exit of one or two individuals. The organization has to continue to run independent of any single individual. The results are there to speak; the sales continue to do well; profitability is good. We are getting newer and even larger customers. All the things we have done in the last 12 months have made the company stronger and better prepared than it was ever in the past," says Bagchi.
The results seem to amplify Bagchi's words. In the fourth quarter ended 31 March, 2012, MindTree more than doubled its net profit to Rs 70 crore when compared with Rs 31 crore reported in the same quarter a year ago. The company's revenues went up by 34 per cent to Rs 525.7 crore on YoY basis. For the full year (fiscal), MindTree's net profit jumped 66 per cent to Rs 216.5 crore and revenues moved up 27 per cent to Rs 1,915.2 crore when compared with the previous fiscal.
"MindTree's realigning of focus on its core business which are its areas of strength, has started bearing fruits which is quite evident in their performance in the recent quarters. MindTree is one of the best performing stocks in the last one year; it has moved up by almost 35 per cent," said Sanjeev Hota, AVP, research (IT) at brokerage firm Sharekhan.
Despite the number of active clients dropping to 237 at the end of Q4 of FY12 from 277 during the same period last fiscal, the company's revenue per client has improved by almost 30-35 per cent to $2.36 million at the end of FY12 when compared with the beginning of the year. This is because the quality of clients that it added and the revenues it derived from existing ones was much better than the previous year. For example, it improved the number of $1-5 million clients to 60 from 53 in Q4 of FY11 and the number of $5-12 million clients to 10 from eight from the previous fiscal.
Less is more
Posting such impressive numbers required some painful but necessary decisions. "Clearly, customers today are demanding expertise from their service providers. This necessitated us to clearly articulate who we are and who we are not. This made us to make a choice of certain segments in which we wanted to be experts and exit from certain segments which were not our core. So, we had to effectively drop about 50-60 clients because they were not into segments which were strategic to MindTree," said Krishnakumar Natarajan, CEO & MD of MindTree.
"The whole focus is clearly reflected in terms of having fewer customers but penetrate far deeper into those. The customers are certainly feeling 'Yes, MindTree is a company which has depth in this domain and to that extent, is more a long-term partner'," he added.
After its decision to scrap the smartphone product business, MindTree went through an organisational restructuring with the aim of focusing more on its core IT services business. As a part of this rejig, the company chose to move out of certain segments while consolidating some of the verticals. The company decided to have two market facing segments —IT services and product and engineering services (PES)—with effect from April 1, 2011. The company said the IT services business would comprise of four major verticals—banking and financial services and insurance, manufacturing, travel and transportation, amongst others. Similarly, under the PES segment, MindTree consolidated its R&D services, software product engineering services and its wireless units.
"Post the setback from the Kyocera Wireless acquisition, Mindtree has renewed its focus on the core services business. The IT services business of the company has grown with a focus on large deals while it has renewed some large contracts in the banking space in the US," said Amneet Singh, country head, India, Everest Group.
The billion-dollar dream
Still, the question that has now become a prominent one is if Mindtree can achieve its elusive goal of becoming a billion dollar company. The company was hoping to achieve this both through organic as well as inorganic routes, but shrinking global demand has put a dent in that plan. Still, the company has been aggressive on the acquisition front. For example, in the last 13 years of its existence, MindTree has made six acquisitions including Aztecsoft and 7Strata which helped it to strengthen position in certain areas and foray into newer areas.
"We are a $400 million company today and growing at a CAGR of 20 per cent over last 13 years. Even at this rate, we will be within spitting distance of becoming a $1 billion company in 2014-15 by just focusing on organic growth," said Bagchi. But the real issue, he says, is not about how quickly you want to achieve this revenue milestone. "The issue is do you want to be a billion dollar company or do you want to be strategically significant vis a vis your clients?" he questioned.
Courting a select client cohort comes with its problems. Analysts fear that because of its selectivity, the company has also slowed down in terms of acquiring new clients. "While Mindtree has done well to expand business with existing clients, its ability to acquire new logos has been somewhat restricted when compared with other Indian IT providers. This raises some concerns on their ability to drive considerable growth in the future," said Singh of Everest Group.
