Patni guns for Top-5 slot in Indian software sector

Having missed the great Indian software services boom by a mile, Patni in its rejuvenated avatar wants to make up for lost time by growing faster than the industry, using a radically different business and pricing model. Srikanth R P has the details

Deepak Khosla says that Patni invests in building relationships —a strategy that he believes has paid off today with the largest proportion of revenues coming from repeat business

They were among the first software players in the country. However, from that small group of pioneers, only TCS went on to occupy the top slot and now has the distinction of being Asia’s largest software services player. Now, one more old-timer from the list, Patni, is looking to break into the leadership league with some bold moves.

Patni is currently ranked sixth among India’s top software exporters, with revenues of Rs 914 crore ($193.6 million) in 2002-03, growing at a CAGR of 40 percent for the last four years. Even during the last two years, which have radically changed the course of the IT industry, Patni managed to beat the industry average, registering a growth rate of 42 percent for calendar year 2001 and 32.5 percent for calendar year 2002. Clearly, impressive growth in trying times. And the company believes it will continue to outperform the industry by a wide margin in the years to come.

Leaving the past behind

Patni’s marketing manager Deepak Khosla admits that though the company missed the first software services bus, it is now more than ready to make up for lost time and predicts that the company will continue to beat the industry average, as it has now fully restructured itself. Previously, the one thing that stopped Patni from going all out on the software front was its hardware operation, which had gained precedence as a brand in itself. This not only diluted the brand image of the company, but also meant that valuations came down as margins in the hardware business are typically far lower.

So Patni separated the hardware part of the business, which is now called PCS, from the software part that is now called Patni. Once the separation was done, GE picked up a stake in the company, giving credence to Patni’s strengths.

Next, Patni approached management consulting firm McKinsey & Co to review the company’s operations and business performance. McKinsey advised a change in the structure of the company, from a delivery- and project-based approach to a vertical strategic business unit (SBU) approach. Accordingly, the company was broken up into nine different SBUs, each focusing on a different vertical. The vertical SBU-focused approach has paid good dividends with Patni not only bagging big orders but also gaining domain expertise in different verticals. Having set its house in order, Patni now wants to grow much faster than the industry. But in current times, are such growth rates possible, or even realistic?

Gameplan for growth

Very much so, believes Khosla, thanks to the dominant model that Patni follows. Patni derives close to 52 percent of revenues from fixed price contracts. Unlike the cost-per-employee model or cost-per-hour model, Patni executes more projects on a fixed cost, which is spread over a number of years. Fixed price contracts remove the burden of close monitoring and shift the responsibility of project management to the vendor. These contracts carry more risk and hence deliver higher margins.

Explains Khosla, "A fixed price contract is an excellent way to boost the client’s confidence in the company as it means strict adherence to not only time schedules and quality, but also billing rates. On the other hand, as billing rates are not re-negotiated year-on-year, our billing cycles are not affected and we can predict with certainty our growth rates and accordingly modify our business plans. Additionally, if we can cut down our costs by an increase in productivity gains, the savings come to us and need not be passed on to the customer." Patni has also been able to achieve significant productivity gains year-on-year as it follows Six Sigma quality practices (which has percolated down from client GE) for almost all its projects.

Patni’s revenues from fixed price contracts are in complete contrast to the rest of the industry. For instance, the next major on the list to derive a majority of revenues from fixed price contracts is Infosys, which derives around 37.2 percent and Wipro follows with 34 percent. Other than fixed billing rates, fixed price contracts also help a vendor like Patni to build long-term client relationships and increase the scope of the contract. Patni’s success here can be seen from the fact that over 90 percent of business comes from repeat customers. This trend is particularly relevant in the current scenario where a majority of Indian software vendors have lost clients over billing rates issues and have also have seen a steep fall in their billing rates. For example, GE, considered one of the shrewdest negotiators in the industry, has been with Patni for almost 15 years and currently contributes 45 percent of Patni’s revenues. Patni operates one of the biggest global development centres for GE with a staff strength of 1,900 people and along with TCS accounts for 70 percent of the business that GE outsources to Indian firms.

Another example is insurance major Guardian. Initially, the company began with a staff strength of only 30 for servicing the account. Today, the account has grown to 125 and Patni recently won a deal worth $35 million (Rs 164 crore) from Guardian, spread over seven years. Other famous names on Patni’s list are Japanese giant Hitachi and US consumer products firm Gillette. Patni claims that it has around 150 clients spread across 15 countries—and more importantly, all of them are active clients. Khosla says that the company invests in building relationships—a strategy that he believes has paid off today with the largest proportion of revenues coming from repeat business.

Patni also believes that ‘maintenance-based work’ can not only lead to more opportunities but also ensure stability of revenues. Says Khosla, "While almost every segment has been affected by the slowdown, one segment that continues to see growth is the maintenance of legacy systems. We not only help our customers in maintaining their systems but also help them migrate to new systems." While most analysts would say that this is low-end work, it is also a fact that following such a model helps the company get a steady flow of revenues. Currently, maintenance-based work accounts for 48 percent of Patni’s revenues.

Inorganic momentum

While the fixed price model and maintenance-based contracts assure Patni revenue stability, it will not give Patni the momentum it needs to grow faster than the rest of the industry. The company realises this and has decided to fuse the organic growth strategy with an inorganic one to give it the required momentum to capture new markets.

For instance, the company recently acquired a US-based firm called ‘The Reference’ for a consideration of $7.5 million. This is the first acquisition for the company since it was incorporated around 25 years ago. The Reference has strong domain knowledge in the financial services space, including portfolio analysis and futures trading.

Khosla believes that as the market demands more and more vertical expertise, the need of the hour is to buy capability rather than waiting and investing in building capability to seize opportunities. The acquisition strategy is a step in the same direction. Interestingly, The Reference is only a 44-team firm—a number that Patni probably hires in a day. What is important to note here is that Patni wants to acquire only those firms that can not only give the company domain expertise in new verticals, but more importantly, fit in well with Patni. While Patni officials are tight-lipped about new acquisitions, one can certainly expect more acquisitions of small firms in the areas of healthcare, retail, energy and utilities, where Patni wants to play in a big way.

There is no problem of funding either, as the company now has sufficient resources to fund its inorganic growth strategy. Last year, private equity investment firm General Atlantic Partners (GAP) made an investment of $100 million for a minority stake in Patni. Incidentally, this is the largest investment that GAP has made in Asia.

Future

As Patni still derives a majority of its revenues from GE, the plan is to bring this figure down to 35 percent by the year-end to de-risk its business model. The transition from a family-controlled firm to a vibrant New Economy organisation is evident by the extensive use of knowledge management initiatives. For instance, the company recently received a RFP (request for proposal) at the last minute and had only four working days to work out a proposal for the project on offer. Previously, this would have been considered impossible. But armed with the new knowledge tools, the company not only managed to put out a decent proposal but went on to bag the contract.

That, in essence, is the new rejuvenated Patni, looking to break into the Top 3 Indian software exporters club through a judicious mix of technology, safety (pricing model) and growth (acquisitions). As one analyst says, "Patni’s model is like a mutual fund, which invests both in equities and debt securities. In Patni’s case, the equities can be compared to acquisitions, while the debt securities can be compared to the pricing and business model. While investing in equities are risky, they promise growth. On the other hand, debt securities are safe but don’t promise great returns. However, the right balance can provide both." Definitely a model that many other Indian software firms would like to follow too.