'India's software firms have some weaknesses'

Q&A/Syntel CEO Bharat Desai

The irony is delicious. Bharat Desai, chairman and CEO of the Troy (Michigan)-based Syntel, was once a Tata Consultancy Services (TCS) programmer. Today, the Nasdaq-listed Syntel (2003 revenue: $179.5 million) takes on TCS in the global market. The cash rich ($136.8 million) applications and BPO company has a market capitalisation of $1.3 billion. Syntel has 4,000 employees, 3000 of them in India, and seven development centres worldwide, three of them in India (the third, at Chennai, is in the works).

Desai, 51, is no run of the mill entrepreneur "� after his family fled Mombassa in Kenya, he studied in Gujarat, at IIT, and then joined TCS, where he was posted to Burroughs in the US. After an 18-month stint at TCS, he enrolled for an MBA at the University of Michigan. He never finished his MBA. He started Syntel.

Some 24 years later, the accolades come rapidly. "Forbes" magazine ranked Syntel number two in its list of the best 200 small companies in America.

Last fortnight, Desai was in India to receive an award from his alma mater, IIT in Mumbai. He, along with Syntel CFO Keshav R. Murugesh, spoke to Ice World on outsourcing and Syntel. Excerpts:

How does a company like Syntel tackle the backlash against BPO?

This is a short term phase. If you go back in history, 20 years ago there was this huge sentiment against the Japanese. American manufacturing that had become complacent has now learned to compete. If you go back 40 years, they were talking about computers taking all the jobs of human beings. What happened? The computer industry generated lots and lots of jobs. So I am of the firm belief that when we go past this phase a new kind of job will actually evolve, and the US has always reinvented itself. That's what is going to happen.

Whenever there is a ripple in the economy, this kind of thing rears its head. It comes and it's going to go away. Look at the three key stakeholders "� the government, company CEOs and consumers.

The government is really a trustee of public funds and its responsibility is to ensure that those funds are responsibly deployed.

I believe it has to go for the best value. So anyone can challenge the ban on outsourcing. When a state government buys a phone, if there is a $250 cellphone from a US company and a $50 cellphone from a Korean company, there will be a taxpayer outcry if it starts buying a $250 cellphone. I think the same rule holds.

Secondly, a CEO's job is to make sure that he/she derives the best value for the company. They've to serve customers and shareholders and their job is to buy the best value product that the marketplace offers.

If that happens to be in their backyard, across the country or across the world, that's what they have to do. Then, consumers expect the best value for their money. The only way a company can serve that need is by looking at its entire cost structure. All the goods and services that it purchases have to be the most competitive globally.

What's the view of other US companies on outsourcing?

Some US IT companies have used this because they have been late in realising that the world has changed. Those guys will actually lobby very hard against global outsourcing, and that's what's going to cause ups and downs. When we had these issues against visas, they had these same issues. They used to complain about foreigners coming and taking away jobs.

The other stakeholder that we must not ignore is the CEO. So Coke, General Motors, Visa do not want a public outcry against them. They cannot afford to tarnish their brand. So CEOs today have a fine line to walk. They are doing what's right for their company but they are not going to come and publicly endorse outsourcing.

How did you set Syntel up?

I resigned from TCS and joined an MBA programme at the University of Michigan. I did some programming for a company in the US to support myself. About halfway through business school, I decided to start Syntel. My wife was also from TCS, so she kept her job. So we had to live on her salary for a while "� and she frequently reminds me of that (laughs).

Who was your first customer?

Korex, a little Michigan company. In 1980, the US was expanding from a five-digit to a nine-digit zip code. So we developed some software and we got some time from a company in the US, in exchange for giving it the use of the product. We developed that software and our goal was to start selling that software.

So I approached one of my B-school classmates who was in a bank. I said, 'Your bank is going to need this service so can you open the door to see your head of operations or chief information officer?' He said 'You are wasting your time, I can do that, but I do not think you are going to get very far. I am resigning from the bank and becoming the CFO of this company and it really needs some information system pretty badly because its information systems are pretty antiquated.'

So that is how we landed our first job. Soon after that we did some work for Blue Cross and Blue Shield of Michigan. Once some revenue came in, I performed some of the consulting work on that project myself.

I did project management and hired a developer to do the development work. So I would work one or two days a week and the other three days I spent banging on doors to get new customers. The first 2-3 years there was a lot of banging on doors.

What was the turning point?

It was Korex. I never considered closing the company at any point. What was my option? I knew I was going to be a horrible employee. So I learned continuously from what didn't work to figure out what was going to work.

Murugesh: The culture of (retaining) a customer for life came from this.

Desai: I was the only sales guy for quite a while. When I made 10-20 phone calls a day, I kept getting rejection after rejection. I thought, this is tough. In that frustration, I resolved that if I ever land a customer, I am going to do such a great job of servicing him that he will have no reason to go somewhere else. So even today, we have this very strong focus on customer service.

We actually started as a body shop for the first 10 years. For almost a decade we only hired American citizens or maybe a couple of green card holders, largely permanent residents, and provided their services on a contract basis to customers. That was our first phase.

How did this work? Did you hire programmers and lease them to customers?

Correct. That was the model that prevailed in America at that time. A lot of companies did that. Ours was the first Indian-run company to enter this base, because we entered it in 1980. Indian software companies came 10 years later. TCS took a while before it started building any momentum at all. So the bulk of the market in the 1980s was all Americans only.

What happened after that?

We saw that the market was going to expand. We also saw in the late 1980s that customers were going to reduce the number of vendors that they would interact with. So we said we need to expand our company (at that time, we probably had roughly 70 employees). We said we're going to start servicing customers in other parts of the country.

If you have a customer in Chicago, the only American who is willing to work there is, typically, one who lives in Chicago. I couldn't hire somebody in Detroit and ask him to go to Chicago. In Detroit sometimes a guy would say, I am not going to drive 10 miles and go for that project. So I said, people from outside the country would probably be good candidates for the positions we had.

We were still in the staffing business at that time. So we could service customers that needed staffing services in Chicago, Florida or California centrally from Michigan. The best thing to do was to get people from Australia, New Zealand, England, mainly senior people like project managers, senior analysts and then very large numbers from India who were developers.

So the first such wave was in 1988-89. And then we saw the difference in the quality of people from abroad and people from the US. We started almost exclusively hiring people from abroad. They were more highly qualified, from IIT and BITS Pilani. Their attitude was much more professional, they were more willing to serve the customer. And the American programmer at that time was a gun for hire, because every day he was getting two-three phone calls from a recruiter trying to hire him. So he thought he was God's gift to mankind, and that's the way he acted. So customers dealt with him out of necessity but hated it.

What was the next stage?

We had almost 1,000 people. We had brought in a very large number from outside and we said, this is clearly not a sustainable model. We had long ago thought that computer work would start happening in India through satellite links. In the early 1990s, we set up a centre in Mumbai at SEEPZ. So we did a couple of projects and they were quite successful. It became very clear to us that the value proposition was so compelling that we had to start focusing on that.

By then, Syntel already had a $100 million staffing business. So we started the change from being a staffing company to an outsourcing offshore company.

How did you do that?

It was very, very painful. In the last two years, we said, we have a pretty large back office function in the US. The cost structure is crazy, because Infosys, Wipro and TCS did not have this problem.

Secondly, I felt that if we had this problem, other companies too would have this problem. If we could learn to figure out how to start servicing our own back office functions from India, we could take this to market to our customers. So we systematically moved each function to India. So Keshav is the only person in India who is the CFO of a US-registered NASDAQ-listed company.

What are the weaknesses of the Indian companies?

The big challenge that they are trying to overcome is cultural alignment with the customer. It is difficult for them to relate as well to the customer. They are trying to close the gap by hiring people. But when they do that, they will realise that having American employees is a different ball game.

Secondly, from the customer's standpoint, our CEO, a strong market facing team and a group of senior executives sit in the US. Wipro has Vivek (Paul) but the others don't. That is a disadvantage.

The third advantage that Syntel has is that we have a group in the US, a permanent employee base of several hundred that has grown with us and is performing more market facing roles.

What are Syntel's weaknesses vis-a-vis your Indian competitors?

They have campuses, we don't. It makes a difference to customers and employees. Employees love the brand that a campus offers. They have done a great job on this. We are doing a 40-acre project at Pune and are looking at at a 100-acre project in Chennai.

What mistakes did you make?

When we started the offshore model, we should have completely stopped the staffing business. There was a lot of tension between those two groups. One group saw the other group taking away their business. That was the biggest mistake.

I think very early on, I should have found a good coach. I had to learn everything through making the same mistake three or four times.

The third mistake I made 10 years ago was not focusing on building a brand in India. In India when an employee, a fresh graduate or anybody decides to look for a job, they ask their relatives and friends which company should they work for. They want to work for companies that are known.

Murugesh: But nobody knows Syntel.

Desai: Keshav calls it the best kept secret in India, but we don't want to keep it a secret too long!