Debugging Hughes

Back in June 2000, when Hughes Software Systems (HSS) president and managing director Arun Kumar went on a recruitment drive, he probably had little clue about the days ahead.

In six months, he recruited some 500 professionals. Within a year of the telecom software firm's initial public offering in 1999, its stocks sky-rocketed to about Rs 4,800 a share. Between 1998-99 and 2000-01, income rose 140 per cent to Rs 209.5 crore and profits a whopping 243 per cent to Rs 62.9 crore.

Business acquisitions were at an all-time high and HSS's clients, besides the US-based parent company Hughes Network Systems (providing over 50 per cent of its business), included top telecom original equipment manufacturers (OEMs) like Alcatel, Ericsson, Nokia, Cisco, Motorola and many promising start-ups.

For Kumar and his team, it was a honeymoon period. Demands were high and there were no full stops "" R&D spendings were as high as 16 per cent of revenues (average spend for the industry was 7 to 8 per cent).

But then, in 2001, the downturn struck. And, like everyone else in the IT and telecom sector, it caught HSS by surprise. One of the mistakes HSS made then was that "it did not see the downturn early enough," admits Manoranjan Mohapatra, the company's executive vice president and chief operating officer. The second mistake, he says, "was that we thought the downturn is short-term and will recover fast."

The term "growth" became passe for the telecom majors, and many of HSS' clients "" like Alcatel and Cisco "" began ramping down business; several start-ups shut shops. HSS started losing business and some projects were also scrapped. Profits declined 17 per cent in 2001-02 and by about 27 per cent in 2002-03.

The result: the company downsized its 1,500-strong workforce by some 100 employees "" many were fresh campus recruits; some offer letters were also taken back. Every possible step to control costs was taken "" free meals to employees were restricted and so were bus and cab services.

The downturn forced HSS to rethink and realign strategies "" not only to cut costs but also to de-risk and diversify its business. The changes it implemented and a revival in the tech business saw HSS making a solid comeback in 2003.

Q3 profits for the current fiscal year are up by 110 per cent over the same quarter last year and income up by 67 per cent. For 2003-04, HSS projects profit growth between 106 and 114 per cent over the last year.

With top telecom OEMs ramping up business "" many of whom are HSS clients "" and HSS acquiring more customers (for instance, 17 in Q3, 2003-04), analysts predict that the company should not have problems meeting its targets. HSS is also back on a recruitment drive: some 250 professionals have already been brought on board with another 1,000 to be added in 2004.

Before the downturn, HSS was doing a lot of work with start-ups and that turned out to be its biggest headache. With markets shrinking and the start-ups fast disappearing, the company was saddled with bad debts and collection problems.

"The biggest lesson we learned was with respect to start-ups and we did take some write-offs. A key step, thus, was to strengthen our customer qualification process. It now involves due diligence of all non-global 1,000 customers," says Kumar.

The second step was to limit HSS's exposure to start-ups to a manageable number, so that the impact would not be so significant in case the industry faces rough weather again. "Focus now is on tier 1 and tier 2 firms "" primarily the global 1,000 companies. The good thing about large companies is that they pay," says Kumar.

According to Mohapatra, "Earlier, we were dependent on triggers from the sales channels only, but now we're building deeper relationships with companies across multiple levels. We now have multiple-trigger points and interfaces that help us get the warnings much earlier."

While staying focused on the telecom domain, HSS brought in some key changes to its business model. Before the downturn, its primary business was providing R&D services for new product development and design. Now it offers the full spectrum of services, including R&D, sustenance/support and testing services.

"Earlier we were doing a brahmin's job "" new product development design and core work "" and not a shudra's job of providing maintenance and support. We were writing proposals that if you want to build a product, we have the domain knowledge and capabilities to help build that product.

We never pitched in, saying, that while you are building a new product, if you have a high-maintenance-cost legacy product deployed on your network, we can take care of it and maintain it at lower cost. All that has changed now," says Mohapatra.

Another key change in the business model is from a telecom OEM perspective. Besides infrastructural software development "" such as those for switches, radio networks and antennas "" for OEMs, HSS is now also concentrating on application development for business support services and operational support services (BSS/OSS) such as building customer-care apps, inventories and so on "" again all in the telecom domain. HSS has also diversified into enhanced services "" SMS, multimedia messaging and so on.

Other strategies to realign business included following an inorganic growth model and diversifying geographically to derisk the business. "We are making concentrated efforts to reduce our dependence on the US market," says Kumar.

Three years ago, 70 per cent of HSS's revenue came from the US, 25 per cent from Europe and 5 per cent from the rest of the world. But the last fiscal saw some change in equations with 53 per cent of the revenue from the US, 30 per cent from the US and 17 per cent from other countries.

In February 2003, HSS got into a $ 30 million multi-year outsourcing relationship with Lucent Technologies, a telecom OEM major, which it says will help strengthen its focus in the European market. The deal allowed HSS to set up a near-shore centre at its facility in Nuremberg, Germany, and take charge of Lucent's Bangalore development centre.

Analysts say the move provides HSS more visibility among the OEMs in the European market. The company claims that revenues from Europe has increased from 25 per cent in Q1, 2002-03 to 38 per cent in Q1, 2003-04.

Further, in July 2003, HSS acquired a Bangalore-based 3G and IP (internet protocol) network software services firm Tenet Technologies in a Rs 18-crore deal, primarily to strengthen its focus in the tough Japanese market where it has a significant sales and support presence.

"We are planning to double our revenue from Japan in the current year over the previous year. Three years ago, Japan accounted for 5 per cent of our revenues, but we are looking at excess 10 to 12 per cent our revenues," says Mahopatra.

HSS also entered the BPO space in 2002 to reduce the risk of limited IT/telecom vertical. BPO contributes up to 7 to 8 per cent of the company's revenue, but all its business comes from HNS, the parent company in the US, and, as such, it has not diversified into new verticals.

Soon after the launch of the BPO facility, Kumar had said that HSS will also focus on the banking and financial services vertical, but he now seems to have postponed the idea. "With tremendous growth opportunities in the telecom vertical, we want to remain focused on it. There's no point in entering a new area at this point."