Premji's global march

Don’t tell Azim Hasham Premji that he’s offered to pay too much for Infocrossing, a New Jersey-based IT outsourcing company that he agreed to buy for $600 million early August. If you do, like the writers did, he’ll smile understandingly and then explain very patiently why he thinks it’s a good deal.

The man, who doesn’t believe in overpaying for anything, even if it’s just the electricity bill at his IT major Wipro’s Bangalore campus on Sarjapur road (it’s not uncommon for Premji to ensure that his office lights are switched off after him), wooed Infocrossing’s founder-chairman and CEO, Zach Lonstein, for months before he signed the deal. Although the American company had just $232 million in revenues and $9.3 million in net income last year, it’s been growing rapidly. Just the year before, for instance, it had revenues of $148 million.

In fact, one of the reasons why Premji was in a hurry to close the deal was that with every passing quarter, Infocrossing’s valuation was rising. For a moment, step into the 62-yearold Premji’s shoes and see things from his perspective. Although part of the socalled IT triumvirate, Wipro isn’t the biggest or the most valuable IT company in the country. That distinction belongs to TCS. Neither is Wipro the most mediasavvy of the three and, consequently, the most storied.

Its cross-town rival and marketing super machine, Infosys Technologies, is. To make matters worse, there’s a relative upstart in the form of Cognizant Technology Solutions, snapping at Wipro’s heels. Just to stay its ground, Wipro has to run to bag bigticket deals. And the gap in Wipro’s portfolio that Infocrossing plugs was particularly palpable.

“One of the setbacks we had on large deals was our inability to give hosting services in the US and Europe. Customers wanted a physical presence in the US and Europe and this is the expertise that Infocrossing brings to Wipro,” says Premji.

Infocrossing, which calls itself a selective IT outsourcing company for its sharp focus on a handful of services such as IT infrastructure outsourcing, healthcare IT and BPO solutions and managed services, has data centres across five states in the US, including New Jersey, Georgia, Nebraska, Arizona and California, and employs about 900 professionals. When the deal is finally sealed sometime later this financial year, Wipro will get a shot in the arm to its infrastructure services.

Says Sudip Banerjee, President of Enterprise Solutions, which is the largest chunk of Wipro Technologies, the company’s global IT arm and the one that will be acquiring Infocrossing: “This acquisition will help us upsell and cross sell to existing customers. Also it helps us to bid for bigger total outsourcing deals as we will have a strong onshore capability.”

His own CEO

Two years ago, when Wipro’s high-profile CEO Vivek Paul quit to join private equity major Texas Pacific Group, some criticised Premji for being too hands-on, others said he didn’t have the stomach for large acquisitions, while yet others said that Wipro was beginning to lag behind its peers.

At that time, for instance, just 12 per cent of Wipro’s revenues came from the lucrative BFSI (banking, financial service, and insurance) segment. Its newly-acquired BPO, Spectramind, was stuck in low-end voice business with poor profit margins, and its enterprise business (which offers services and solutions to large customers like GE and Nokia) was too dependent on telecom and R&D customers.

Today, those critics probably have their foot in their mouth. Following a management recast, Premji stepped up focus on Wipro’s BFSI business, resulting in its share in total revenue going up to 23 per cent today. Simultaneously, Premji has snapped up 11 different companies, mostly abroad, at a cost of $1.3 billion, as part of his ‘string-of-pearls’ acquisition strategy. The idea: Make Wipro, both its IT and consumer products businesses, more global. “The clear signal was we were under-investing for the future, and we have begun to right investing now,” says Premji.

According to him, investments will be made across the company in a variety of areas, ranging from training its overseas recruits (a planned five-fold increase) to shoring up its focus on 75 large mega and gamma accounts, where the company has trailed its industry peers, to recasting its top brass. (His elder son, Rishad, recently joined Wipro as Business Manager, and is being groomed for what many see as the CEO’s job eventually by Girish Paranjpe, head of Wipro’s financial services business. (See The Apprentice).

For Wipro Tech, there’s plenty of ground to cover. Over the recent years, it has been slipping in terms of leadership in key verticals. In BFSI, it stood #4 for the April-June 2007 quarter, with $173 million in revenues. By comparison, TCS did $493 million, Infosys $335 million, and Cognizant $243 million. Even in healthcare, manufacturing and retail, Wipro was either #3 or #4 in terms of revenues.

However, in utilities and product engineering, it was top of the heap. Premji’s focus on the large customers no doubt stems from the fact that Wipro Tech’s annualised revenue per client from the top 10 clients for the last four quarters (July 2006 to June 2007) hasn’t grown as fast as it has for TCS, Infosys and Cognizant. TCS, for example, managed to increase its annualised revenue per client (top 10) from $90.35 million in July-September 2006 quarter to $128.48 million in April-June 2007.

Premji’s top executives have already heard the message. “Wipro wants to be among the top three players in all the businesses it has entered and in the top 10 globally for its IT business,” says Suresh Senapathy, Executive Vice President (Finance) & CFO, Wipro. The jewel in Premji’s crown is, of course, Wipro Tech, and he’s getting it to reach into newer market segments and geographies globally.

Infocrossing is a classic example of that. Indian IT vendors haven’t been able to break into the infrastructure business because customers usually demand multiple onsite data centres. “Infocrossing will give Wipro an edge over its Indian rivals as it chases truly large outsourcing deals on the global stage,” says Apurva Shah, Head of Institutional Research at Prabhudas Liladhar.

Other analysts also think the Infocrossing deal will brighten Wipro’s prospects of bagging larger deals worth upwards of $200 million. A Kotak Institutional Equities report on the stock says that there are “visible signs in Wipro’s growth trajectory” due to increased participation in large outsourcing deals. Most recently, Wipro closed a $130-million, five-year deal in Europe with a utility. It already has 12 to 13 similar-size contracts, a growing base of smaller $50-million contracts, and a dedicated sales force for such contracts, notes the report by Kotak’s Kawaljeet Saluja and Rohit Chordia.

In BFSI, business head Girish Paranjpe has been driving growth at 45 per cent CAGR for the last three years. But if Premji’s vision of turning Wipro into a truly global corporation has to come true, then one of the engines that will have to fire is the enterprise solutions business. In 2001, it accounted for 55 per cent of Wipro’s global IT business and even today makes up 44 per cent.

Sudip Banerjee, President (Enterprise Solutions), Wipro Technologies, points out that his division has been stepping up its presence in geographies such as Latin America (Brazil), Eastern Europe (Romania) and China (Shanghai). “Even in healthcare, considered a weak area for us, the Infocrossing acquisition will help us earn an additional $100 million a year.”

Similarly, A.L. Rao, a Wipro veteran who was named COO in the wake of Paul’s departure, says telecom and outsourced R&D employ 18,000 of Wipro’s 53,000 people in the global technology business. While Wipro does outsourced R&D work for the likes of Nokia, GM and a host of other customers, the spate of captive R&D centres being set up by some of these companies in India has had some impact.

Says Rao: “However, given that we are better able to spread our costs because of shared services model and our ability to scale up and down quickly, provides us an edge over captive centres. On a growing revenue base, we have managed to continue contributing a third to our topline.”

To tackle the competition from captive centres, Wipro has started stressing on innovation. In 2006-07, it got 7.5 per cent of its revenue due to innovation. Says Premji: “I am pleased with the progress and we are ahead of our target. We hope to get 10 per cent of our revenues due to innovation in the next couple of years.” Rao points out that the company has filed close to 20 invention disclosures (the first step in getting patents) in the last two years.

While Wipro was a pioneer in providing services to telecom equipment manufacturers such as Nokia, it was late to tap telecom services providers. But it is fast catching up. “Apart from areas like security and storage, it is services and solutions to medical electronics, automotive electronics, industrial automation and aerospace that will provide the next growth wave for our part of the business,” says Rao.

Growth drivers

As Premji lines up Wipro for its global march, he is clear that there will be just a handful of industries and markets that will drive growth at least for the company’s global IT business. “BFSI, infrastructure services, testing and the telecom provider market, where large operators such as Verizon, AT&T and BT are spending heavily on IT, will all drive our growth,” says Premji. That aside, Wipro, like its peers, wants to do more of the ‘valueadded’ consulting work. Premji says that he would like to see consulting revenues go up from 4 per cent today to 10 per cent in three years. According to Wipro’s global rivals, that won’t be a walk in the park.

“Accenture holds a distinct edge over Indian vendors like Wipro because we have a broader set of offerings and long-term relationships with our clients,” says Kevin Campbell, Group Chief Executive (Outsourcing), Accenture.

Perhaps, but that’s not going to keep Wipro from moving into newer markets. According to Premji, emerging IT markets such as Canada, Asia-pacific and India will be key to Wipro’s fortunes. “We see ourselves as a complete solutions provider in the domestic market and our business is growing at 40 per cent in this market,” he points out.

Unlike its peers, Wipro focussed on the domestic and Asia-Pacific market early on and, as a result, boasts of $700 million in revenues from these geographies, although profit margins are in single digits. “It is nothing to be ashamed of, we make good money,” shrugs Suresh Vaswani, President, Wipro Infotech.

Sixty per cent of Wipro’s India revenues comes from selling hardware, but Vaswani says there are certain benefits of operating in a demanding domestic market that don’t show up in the profit figures. For one, just the fact that domestic customers tend to beat down prices hard means that Wipro gets better equipped when it pitches for global contracts. “It’s not just a value question, it is also a question of complexity of the projects,” explains Vaswani. “Our partnerships here with companies such as Sun, EMC and SAP have helped us better understand our customer requirements.” The bottom line, Vaswani says, is to turn the India and Asia-Pacific business into a $1-billion operation by 2007-08.

Another Wipro division that is gearing up for accelerated growth is Wipro BPO. “We entirely missed the transition, since we saw ourselves primarily as a call centre company and did not move towards these higher value areas,” rues T.K. Kurien, CEO of Wipro BPO. It’s making up for lost time. It has moved away from work such as outbound telemarketing calls, where there’s just too much competition and not enough of value-added work.

Not just IT

While IT is the most exciting and valuable part of Wipro, Premji is keen to lend heft to Wipro’s legacy business of consumer products. Just in July 2007, Wipro acquired Singapore-based Unza for $246 million to expand the reach of its consumer care and lighting businesses into Asia Pacific. “The Unza acquisition increases our turnover by 80 per cent and gives us access to markets such as Malaysia, Singapore, Indonesia and Vietnam,” says Vineet Aggarwal, President, Wipro Consumer Care and Lighting.

Not that the division was doing too badly. It has grown at 30 per cent in segments where the growth is 10-12 per cent, says Aggarwal. And just like the IT business, consumer care has been busy plugging gaps in its portfolio. “We’ve made acquisitions in several new categories ranging from electrical switches to glucose powder to bath soaps, and will continue to look at this option to grow our business,” says Aggarwal.

Wipro Infrastructure Engineering, which manufactures hydraulic components, acquired Hydrauto 10 months ago for $31 million to boost its presence in Europe. At home, this business is growing rapidly. “We’ve been able to get 60 per cent share of the Indian market for our products, primarily from the booming infrastructure market,” says Anurag Behar, the business’s CEO.

Despite the revamp at Wipro, company watchers and analysts say that there are several issues that remain to be addressed. Take, for example, the hardening rupee. While it has hit almost all IT companies, Wipro has been worsehit, with its most recent quarter-on-quarter net profit declining 15 per cent (although year-on-year bottom line was up 17 per cent). Reason: “it was not adequately hedged on forex at the start of the June quarter,” notes a report from CLSA Asia-Pacific’s Bhavtosh Vajpayee.

Another thing that worries analysts about Wipro is its higher rate of attrition, which is at 20 per cent compared to 15 per cent at TCS or Infosys. Once again, Wipro added the least number of people (at 15,702) in the last four quarters among TCS, Infosys, and Cognizant. Not surprisingly, Wipro recently decided to bring forward its annual wage review by two quarters in a move that is seen as a bid to stem attrition. “We were just realigning ourselves with the industry, since because of our lag there was some attrition,” admits Pratik Kumar, Corporate VP-HR, Wipro. “Wipro will need to pull back attrition to stay on course for its utilisation improvement targets,” says the CLSA note on Wipro.

Notwithstanding such challenges, Premji is clearly positioning Wipro as a global company. For the IT business, that means having delivery abilities in ‘best-shore’ locations and not just offshoring. For the consumer business, that means a larger footprint across Asia-Pacific. While Premji has clearly steered Wipro on a global course, it may be his son, Rishad, who, a few years hence, completes the 61-year-old company’s transformation as a global corporation.