When iGate completed its $1.2 billion acquisition of Patni Computer Systems in May, the two offshore outsourcing providers instantly leapt over their mid-tier outsourcing peers to become one of the biggest IT outsourcing providers in India.
The merger is hardly one of equals. iGate was known for its fast growth and risk taking, most notably in its embrace of business-outcome-based pricing. Patni, nearly three times its acquirer's size, was a pioneer in Indian IT services but had seen its growth stall in recent years and was known for high volume, lower value work. Patni's upper management (many of whom were subsequently fired) were not involved with the buyout negotiated by the company's large investors. iGate leveraged its purchase of Patni, leaving it with a heavy debt burden.
Now, the combined company, with nearly a $1 billion in revenue and 26,000 employees, faces big obstacles as it attempts to compete head-to-head with much larger offshore rivals including Tata Consultancy Services, Infosys and Wipro.
iGate Patni CEO Phaneesh Murthy, who made a name for himself as an Infosys sales and marketing executive in the 1990s, says these hurdles can-and will-be overcome in the next year and a half. CIO.com talked to Murthy about acquiring a larger competitor, clearing out Patni's executive suite, and why the IT services market has not yet embraced business-outcome based pricing.
CIO.com: Prior to your investment in Patni, iGate was unique among outsourcers for its willingness to challenge industry norms, such as by embracing outcome-based pricing. Why do you think you weren't able to capture more of the offshore outsourcing market with that unique proposition? Phaneesh Murthy, CEO, iGate Patni: Actually, we were growing quite nicely. We grew over the last five years. Our earnings growth was number one in the industry based on our differentiated business model. We hit two roadblocks. First the mortgage market collapsed, and we had a lot of mortgage business. Then the financial services market fell through a hole. In spite of that, we were one of the highest earning [IT services providers] in India.
The fact is that, for most of our clients, there is an intense amount of scrutiny from their procurement [offices]. Procurement likes to be able to compare your offer to five other offers, but what we offered was different from other providers.
The investment in Patni makes you a much larger company-one of the top ten in India. But you're still smaller than the real heavyweights TCS, Infosys and Wipro, which are five to seven times your size. What will differentiate you in the offshore IT services market?
It will still be our outcome-based model, which has been our differentiated theme historically. We plan on shifting a lot of the Patni revenues and clients to this model over time.
How difficult will it be for Patni-known more for high volume, low level work-to adapt to the iGate model?
It will require lots of role models, lots of town halls, lots of communication, lots of leadership workshops. It's a fairly large effort. It's one of the biggest risks [in this acquisition] that the markets are pointing out-combining a fast, high-growth, more profitable company with a global company offering non-differentiated services.
You face intense competition for big IT outsourcing deals. To date, iGate has had limited success signing large deals. Do you plan to go head to head against the big firms or to be more selective in account targeting?
We've always been competing with the large players, just maybe not for the large deals. Our clients are a who's who of industry. With the twist of [the] 2009 [financial crisis], the number of [customers] in the financial services industry that can sign millions in outsourcing deals has shrunk to 15. So scale suddenly became more important than it's ever been. We've always been innovation-oriented, but we need scale now.
Are clients more willing to let iGate Patni in on larger deals now that you are a billion dollar company with 26,000 employees?
Clients are letting us into deals anyway, but not because of the change in size yet. I think we will see that evolve over the next twelve to eighteen months.
Your announcement of the Patni deal made clear that there had no Patni executives had been involved with the transaction. Isn't that a risky way to start a merger?
This was a stake sale from large shareholders of Patni. To that extent, other than the CEO and CFO, we didn't have a lot of access to management. But discussions were going on for two years. I felt I had enough external feedback, and I reached out to [the leaders] I knew were truly performing.
How come you cleaned out the Patni executive suite?
I don't like 18-person executive teams, which is what Patni had. I want a smaller team so we can get aligned quickly on vision. I like growth of people to happen under-rather than parallel to-the executive team. So first we had to size down. Second, I took the recommendation of the Patni CEO who said he was going to let some people go anyway, people that weren't performing. So that made it easier.
The rank and file at Patni must have grown nervous seeing you fire so many executives. How are you handling employee morale?
First, I've done a lot of town halls. Second, I've made it very clear that beyond the executive level, I'm not letting anyone else go. Third, we've shown a huge difference in transparency between the way we do things and the way Patni did. That's gone a long way with people. Things are quite positive right now, but it will take a few quarters to work everything out. If we grow revenues quickly enough, people will trust us.
You made a commitment not to lay off anyone? That's an unusual post-merger promise.
I operate on a general principle that people are our most important asset. As one of the top three most respected companies to work for in India, we didn't let go of a single employee in 2009, when our revenues fell 15 percent. Our broad philosophy is that employees are a long-term asset. Short term problems... they are what they are.
How far along is the integration of iGate and Patni?
On the front end, sales and account management are completely integrated. We have one go-to-market proposition and one go-to-market team. On the delivery side, there's still a lot of work to be done because there's 24,000 people there. That will take 18 months. It goes much, much more slowly. In terms of shared services-IT infrastructure, common HR practices, reporting, etc.-that will be done by year end. The actual delivery will take the longest because that's where the armies of people are.
You're the only big player in the Indian outsourcing industry with a heavy debt load. How does that impact your decision-making?
We still want to grow revenue and grow profitability. Fundamentally everything is the same. The debt load is balance sheet optimization. Given today's market, the debt was cheaper, and that's the reason why we chose debt. Tomorrow if equity is cheaper, then we will choose that. From a management perspective, we also have $70 million in cash in the combined company so we have enough cash for investment. We will continue to do things right for the long term.
The combined company has a lot of offerings across a variety of industries. Are you spread too thin?
I think we will make financial services, insurance and health care the focus. Right now, [those three] account for 50 percent of revenues, and over time that will go up. But as a billion dollar company, you have to diversify.
Some industry observers said the acquisition was an act of desperation, given the relatively high price you paid and the debt you incurred. What is your response?
I don't think it was a high price. What we paid was a discount on EBITDA. The market believes the price was good. [During the course of negotiations], we never bid up our price. We were a high-growth company. We don't have to do anything by way of desperation.
But you had been looking for an acquisition for some time, first at Satyam. Did you need an acquisition to survive?
We were largely in the financial services market and we went through a dramatic restructuring of that marketplace. The [financial services] companies that remain look at size as important metric. This was a strategic choice.
Read more about outsourcing in CIO's Outsourcing Drilldown.