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Amid shifting market dynamics, mid-size information technology company Mindtree is making a conscious effort to become an expertise-driven partner for its clients rather than just a generic service provider. Among other things, the Bangalore-based company has narrowed its focus, restructured its business, and has identified potential leaders who will steer it to the next level.
The first thing on the company's mind is to outgrow the "best mid-size-company" tag which it has stayed with for long now. The trigger to make this evolutionary leap came two years ago when the management realised that clients were no longer looking to engage with generic IT services companies, which, while promising cost arbitrage, failed to bring something out of the ordinary to the table.
"About two years ago, we realised that you can't be just another generic IT services provider and tell customers that we can save 30-40 per cent cost for you-so tell me what to do and I will do it for you. In doing that, I think we had gained the position of being the best mid-sized company, but the fact is that will not last long," Co-founder, Chief Executive and Managing Director Krishnakumar Natarajan told Business Standard.
To begin with, Mindtree narrowed its focus to four verticals-banking, financial services and insurance; retail; travel and high-technology. It also aligned its older verticals with this new structure by merging some businesses and exiting others. In July, the product engineering services business, which accounted for over 30 per cent of Mindtree's overall revenue in the past, was made a part of the hi-technology vertical. The company also exited some verticals, such as public sector, medical, defence and aero, which it did not see as strategically important. As a result of this, the company's client base fell to around 220 in the quarter ended June 30, 2013, from about 330 a year ago. But investors were not complaining. Mindtree's share price has nearly doubled on BSE from Rs 690 on January 1 to Rs 1,140 at close of trade on Wednesday.
In a recent note, brokerage house Motilal Oswal Securities pointed to this focus on select areas of strength as one of the advantages for Mindtree. Natarajan believes fewer verticals have helped the company become more proactive in getting contracts.
"In short, it (the makeover) was mainly to prepare us for the next stage. It involved a whole lot of repositioning and rethinking on how we could position ourselves with the customers," says Natarajan.
Mindtree has worked with several external agencies over the past two years to change its perception among clients. Branding consultant Siegel+Gale, human resource planning expert Connery Consulting, and Great Places To Work are helping Mindtree in this transformation. These agencies have advised the company on various facets such as rebranding, identifying a leadership pipeline, and improving customer experience. Some of these agencies will continue to work with the company over the coming years until the makeover exercise is complete, Natarajan says.
"In a business like ours, it's not the business alone that makes the difference. It's like a choir where everybody needs to sing the same note," he says. "They (agencies) need to continue over four-five years so that we know that the kind of changes we are making are yielding results."
Apart from strengthening its brand image, the company is also focusing on grooming the next generation of leaders. It has identified 100 employees who will be trained to take on leadership positions in the future.
However, despite the huge investments in personnel overhaul, grooming and building capacities, retention of talent continues to be a challenge. In the recent past, Mindtree has seen several high-profile exits, including that of Anjan Lahiri, chief executive of IT business, and Tridip Saha, head of sales in Europe. However, Natarajan sees this as part of the game.
"We cannot constrain them from exploring opportunities outside, and to a certain extent what we see is that when it happens, it gives an opportunity to others in the company to move up. So in a way, it creates a natural churn," he says.
The company, which currently has around 12,000 employees, plans to hire 1,700 fresh graduates, of which around 430 have already been brought on-board during April-June this year.
To fuel growth, the company is also looking at the inorganic route to expansion. It is scouting for acquisition in the US and Europe, and may buy a $30-$50 million firm to strengthen its offerings in infrastructure management and package application solutions, says Natarajan.
The buyout will be aimed at building domain capabilities in the four industry verticals picked up by the company and will be funded from the $200 million it has in cash and cash equivalents.
In 2009, the company had bought Chennai-based IT infrastructure management services provider, 7Strata. The company was integrated into Mindtree's platform and re-branded as Mindtree.
Reaping benefits from these efforts, Mindtree is confident that its performance in FY14 will be better than a year ago. Natarajan says he is hopeful of seeing higher growth in the second half of FY14 in comparison to the first half.
"Demand is definitely better than what it was a year ago. We certainly believe that FY14 will be better than FY13," he says.
As the company's efforts yield results, brokerages see it as a top pick for investment. "Deal wins and growth coming from both services and products business give us confidence in its future prospects," Ashish Chopra and Siddharth Vora of Motilal Oswal Securities said in the report. The two analysts believe that the company will see an increase in investment from its top clients. "Healthy deal signings in the last two quarters lend growth visibility," they said.
Credit Suisse, which also considers Mindtree among its favourite pick from the mid-size IT pack, said the company's positioning "represents better opportunity for revenue growth relative to peers". However, the biggest challenge for the company in the near-term will be to ensure improvement in profit margins which have been impacted by the heavy investment on overhaul, say some brokerages.
