Lacking Emphasis #Press #Media #HP #MphasiS

Earlier this year, MphasiS, the bangalore based software services player, unveiled its new logo with great fanfare. The logo had a new visual appeal, with the subtext ‘Unleash the Next’, in place of ‘An HP Company’ earlier.

Speaking on the occasion, Ganesh Ayyar, the affable CEO of MphasiS, said the bigger purpose behind the rebranding exercise was to convey the company’s focus on ‘new age solutions’ in the digital marketplace and cloud. On a prouder note, he announced that MphasiS had achieved the billion-dollar mark in revenues, setting the stage for its next phase of growth.

The razzmatazz and the celebration at the event, however, appeared to gloss over the poor run MphasiS has had since becoming a part of the HP family, having failed to live up to the promise it held in the early part of the past decade. Today, the company is struggling to play catch up with its peers in the evolving IT services industry.

The numbers bear out MphasiS’s plight. Over the past four years, its revenues have grown at a compound annual growth rate (CAGR) of 8.35 per cent compared to 18.3 per cent for the industry over the same period. Even Infosys, with its much bigger base and unique challenges, has grown at 17.1 per cent, while a more comparable company in terms of size such as MindTree has grown at 24 per cent.

Worse, MphasiS’s net profit in absolute terms was lower in 2013 at Rs 743.7 crore compared to 2009 — Rs 908.7 crore. During the same period, the headcount at MphasiS declined by about 10 per cent to around 37,000 employees whereas those at its peers nearly doubled.

The markets, too, have been alive to MphasiS’s stumbles. If someone had bought MphasiS shares in April 2009, he would have lost 8 per cent of his investment by the end of 2013; in comparison, the CNX IT index has given a return of 970 per cent. A MindTree, Hexaware, KPIT or a Zensar Technologies would have given a 6-8x return on investment during the period.

So how did MphasiS, once considered the next big thing in Indian IT industry, stumble so badly? More importantly, can the company revive its fortunes? While Ayyar is optimistic about his company’s future prospects, in reality, things may not be easy at all.

Life Before HP
To answer these questions, one needs to put the MphasiS business in perspective. The company was started in 1998 by Jerry Rao, nephew of Infosys chairman N.R. Narayana Murthy and the man who had played a crucial role in the re-entry of Citi into India. Citi was one of the largest IT outsourcer and a marquee client for several Indian IT companies — albeit with a reputation for squeezing its suppliers.

When an opportunity arose to capture some of Citi’s IT backend business, Rao teamed up with another technology industry veteran Jeroen Tas (at present CEO, Healthcare Informatics, Solutions & Services at Dutch conglomerate Philips) to establish MphasiS Corporation. Though Citi Group had a history of investing and acquiring stakes in Indian IT companies such as Polaris, i-Flex (which it sold to Oracle) and e-Serve International, it did not do so in the case of MphasiS.
The company’s big moment came in 2000. The Kolkata-based Bangurs were looking to exit their listed IT business, BFL Software, and MphasiS swooped in on the opportunity. The acquisition gave MphasiS size, scale and diversity of customers.

BFL had gone public in 1993, the same year as Infosys, but struggled to grow as the ‘old economy’ Bangurs did not pay much attention to the ‘new economy’ software services business. MphasiS BFL, as the new entity was called,  retained its listing on the Indian stock exchanges.

Under Rao’s and Jeroen’s leadership, the company grew rapidly, mainly providing application maintenance and BPO services. However, in 2006, the promoters of MphasiS sold a majority stake to EDS, the company started by Ross Perot and which was the original outsourcing pioneer. This is where the MphasiS story took an interesting turn

HP’s Services Ambition
In May 2008, Hewlett-Packard (HP), one of the world’s largest technology companies — with revenues of $112 billion in 2013 — did a mother of all deals and acquired EDS for $13.9 billion. MphasiS, which was owned by EDS but operated as a separate listed subsidiary in India, came to HP as part of the acquisition.

Until the EDS acquisition, HP had been known entirely for its strengths in the personal computer (PC), printer, server and networking equipment businesses. But selling commoditised hardware was increasingly becoming less profitable. HP looked at its global peer IBM with envy, as the latter reinvented itself under Lou Grestner to become a software and services powerhouse by shedding its unprofitable PC business, which it sold to Lenovo.

The global IT services business is currently estimated at $1.2 trillion, with IBM as the biggest player in that space generating revenues of a whopping $60 billion. HP wanted to emulate IBM’s success, but the software services business with its multi-year contracts and high margins was not an easy one to get in. So, buying EDS seemed to be the best way forward for HP.

By 2008, the global IT services business had also undergone a transformation. Indian IT players who entered the western market to address the low-end work of the Y2K bug ended up building lucrative businesses based on shipping work to a lowcost workforce in India. Large global companies like IBM, Accenture, Capgemini and CSC also scaled their India operations so as to remain competitive with India-based players in such a scenario. As a result, today, some of these global companies have more employees in India than in their home countries. IBM, for instance, employs 150,000 people in India alone out of its total global workforce of 400,000.

At the time, HP, which had a services arm operating globally, had a small footprint in India. It, however, lacked the scale of any of its global peers and the EDS buy was seen as a move to rectify its late start. MphasiS, which had a strong application maintenance and development (AMD) division along with a back-office management division, was seen as a strategic fit to HP’s global ambitions. It could leverage the large pool of lowcost, high-value MphasiS manpower to become a serious global services player.

Since it sold so much hardware, HP could also leverage MphasiS to become a player in system integration and infrastructure management services apart from AMD, testing and package implementation. Analysts, competitors and markets said EDS (MphasiS) and HP would be a powerful marriage of interests. Markets were excited and hoped that HP, which owned 60.49 per cent of MphasiS, would eventually buy out the minority shareholders at a premium to take full control of the company.

As part of the transformation, Jeya Kumar, who was then CEO of MphasiS, stepped down. Ganesh Ayyar, an HP veteran of two decades who had in his most recent assignment run its managed services business in Asia Pacific and Japan took over as the CEO in January 2009.

Short-lived Honeymoon?
In the full financial year following its acquisition by HP, MphasiS reported its best ever profitability. In 2010, with revenues of Rs 4,919 crore it clocked a net profit of Rs 1,091 crore. Given the prevailing exchange rate, MphasiS became a company with a billion dollar in revenues. With 40,000 employees and growing, everything seemed hunky dory. HP had started channelling so much business to MphasiS that it was, at one point, contributing more than 70 per cent of its subsidiary’s business.

Then things started SVGgoing downhill. HP started squeezing MphasiS’s margins. As its single-largest customer and its majority owner, HP had a disproportionate say in what MphasiS did and how. Sanchit Vir Gogia, chief analyst and CEO of IT outsourcing advisory firm Greyhound Research, says: “HP has completely mismanaged MphasiS. In global deals where MphasiS is a part of its offering, HP structures them in such a way that MphasiS gets squeezed. HP’s internal business which it gives to MphasiS are at low margins.”

According to Gogia, “HP unfortunately has not been a good steward of the company. The more MphasiS diversifies its business away from HP, the better it will be for the company and its minority shareholders. All this would not have mattered if MphasiS was a mere inhouse captive of HP, but the interests of minority shareholders needs to be protected.”

Ayyar is quick to defend HP. “While some quarters may believe it to be that way, there is not an iota of truth in that. We have an independent board and have worked only in MphasiS’s interest.” He also defends HP right to decide which vendor it gives business to. “Just because we are majority owned by HP doesn’t mean that we will get its business automatically. We have to compete to bag its business.”

From a high of 72 per cent, HP’s contribution to MphasiS’s overall revenues has fallen to nearly 38 per cent. Ayyar, however, claims that the right way to look at it is that the company has been growing the non-HP business rapidly.

According to Sudin Apte, research director and CEO of Offshore Insights, a firm that brings together technology outsourcers and service providers, MphasiS rarely figures in conversations amongst his clients. “They have not invested adequately in SMAC (social mobile analytics and cloud) technologies. They are coasting on their  erstwhile strengths in the BFSI (banking, financial services and insurance) space,” says Apte.

“The only future I see for the company is that HP sells it and it is picked up by an European player looking to grow its lowcost India base quickly. I don’t see any Indian or India-established multinational player making a play for MphasiS. HP seems to be disinterested in the company and it maybe in everybody’s interests that it sells and exits early. Unless there is clarity, potential customers will be hesitant to give business to the company and it may be hard for the company to attract talent,” he adds.

D-word Doing The Rounds
While rumours of HP selling its stake in MphasiS have been doing the rounds, Ayyar vehemently denies this: “Ownership and management operations are two different things. I have no such knowledge (of stake sale).” Ayyar also claims that MphasiS has not lost any business nor has any existing client raised concern regarding ownership of the company. “As far as talent goes, my inbox is flooded with resumes of senior talent wanting to join us. While we have had our share of challenges, there has been stability in the top team here.”

According to Ayyar, MphasiS has made several acquisitions of its own, including Fortify Services, an infrastructure management company that provides platform using open source software, four years ago. “HP has a competing platform but MphasiS spent cash to acquire Fortify because that was in the interests of our company. We are not circumscribed by HP in terms of where and what markets we operate in. We have made four significant acquisitions in the last four years,” says Ayyar.

While MphasiS is present in six major industry verticals of banking, insurance, manufacturing, healthcare, transportation and logistics, it has decided to focus on and invest in only banking and insurance. A former senior MphasiS employee, who prefers to remain anonymous, says: “Irrespective of claims to the contrary, HP decides what MphasiS focuses on. In manufacturing, for instance, HP is strong and may not want MphasiS to play.” Ayyar denies any such move saying the emphasis on banking and insurance is meant to ensure better focus. Even in terms of geography, the company wants to focus on the US and UK markets rather than emerging ones like Asia and Latin America.

A detailed questionnaire to HP seeking to know its India headcount as well as whether it was looking to sell MphasiS or buy out its minority shareholders elicited a generic statement from company spokesperson Alistair MacIntyre-Currie: “HP India is one of the largest and most diverse sites for HP outside the US…. MphasiS is a strong partner to HP and we partner to bring customers a unique value proposition and we have worked together with global customers from various industries…”

While Ayyar says the focus on select verticals and geographies will ensure that company will grow 1.5 times the industry growth, past track record indicates that it maybe only a matter of time before MphasiS gets delisted or sold. Either way the ball is in HP’s court.

Source: BusinessWorld