KPIT Cummins: A lesson in growth

KPIT Cummins wants to build a global IT consulting organisation. While it is still years away from realising its dream, STANLEY GLANCY says the company’s progress provides a valuable lesson for smaller players

According to RAVI PANDIT, manufacturing, BFSI and government will be the three fastest-growing sectors by 2007-08According to RAVI PANDIT, manufacturing, BFSI and government will be the three fastest-growing sectors by 2007-08

WHAT does a company on the fast track do when size proves to be a hindrance to gaining entry into the Big League? Should it merge or partner with another player in the same space? Let itself be acquired by a larger company? Or just hold its ambitions and wait till an opportune moment? Pune-based KPIT Cummins Infosystems went for the first option while adding a twist of its own to the usual strategy.

It merged its operations with Cummins Infotech, the software arm of Cummins, its key client in the manufacturing vertical. With this single stroke not only did the company assure itself of continuing business but also a regular flow of revenue from Cummins. The move also provided the company with the leeway to experiment and gain in-depth expertise in the manufacturing vertical.

Steady course

Established in 1990 by a team of professionals from sectors as diverse as chartered accounting, management consulting and technical engineering, the CMM Level 5 company initially stuck to the much-trodden path of exporting software services to US-based entities. After establishing itself in this market, the company set up a subsidiary in the UK in 1996 to tap the European market. Since then the global software solutions provider has followed the policy of setting up subsidiaries in any new market with huge growth potential. KPIT also has a joint venture in Dubai in addition to a branch office in Japan.

Since inception the company has mainly focused on the manufacturing and banking, financial services and insurance (BFSI) segments, with the former contributing close to 68 percent of its revenues and the latter around 26 percent. Over the years KPIT has developed core competencies in several horizontals including EAI (enterprise application integration), SCM (supply chain management), data warehousing and its latest focus area—embedded systems.

KPIT has been growing at a steady rate since its IPO in 1999, which saw its shares listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). However the global economic slowdown saw revenues take a dip. This prompted the company to look for further growth opportunities. By then KPIT was doing an increasing amount of work for its star client Cummins. In early January this relationship was taken a step further—Cummins Infotech was merged with KPIT.

2003 also saw KPIT’s acquisition of Panex Consulting, a US-based SAP consulting firm, for $1.85 million. Panex, which has core competencies in SAP, business warehousing, business intelligence and supply chain optimisation, and boasts of clients like HP, Hercules, Accenture and SAP America, is expected to fill a gap in KPIT’s service offering.

Says Ravi Pandit, chairman, KPIT Cummins, “SAP was a major service gap in our service offerings. Panex met all the criteria we had set, and so we completed the acquisition early this year.” According to him the strategic partnership should provide sustained business, domain knowledge and opportunities in the consulting area.

Thanks to these initiatives, KPIT Cummins recently realised its dream of crossing the Rs 100 crore mark in revenues. The company closed its books for the year at Rs 124 crore, up 72 percent from the previous year. KPIT’s consolidated net profit also saw a growth of 151 percent, taking profits to Rs 14.42 crore. Currently, KPIT boasts of a total personnel strength of 914, including 799 software professionals. The company has been adding 75-100 people to its rolls every year. According to Pandit, attracting and retaining people has been the company’s backbone, and the reason for its ability to expand rapidly.

Customers

The company has divided its customers into three categories: strategic, star and potential star.

• Strategic customers are those that have an equity stake in the company. As of now Cummins is the only strategic customer on board.
• Star customers are those who might not have an equity stake but who make significant contributions to the company’s top and bottom line. BNP, for instance, is a star customer. Almost all the star customers KPIT has today have been with the company for more than three years.
• Potential star customers are those who can provide business of at least $5 million over a two-year period. KPIT’s top 10 customers together contribute more than 90 percent of its revenues.

Growth strategy

KPIT is currently looking at inorganic growth based on a right fit with the company’s focus. The focus is more on merging the two businesses instead of looking at it as an acquisition. In both the Cummins and Panex deal, KPIT worked with the respective companies for close to eight months before proceeding with the deals; this enabled it to judge the actual fit. Says Pandit, “We are looking at an extension of our clients and an extension of our skills. We are looking at companies that work in our verticals and have clients who can become our star customers.” The company believes that only by reaching a particular size can it be counted among the top five players in sectoral areas.

In addition to inorganic growth, KPIT is also looking at further practice areas. The company is looking at adding new skill-sets to its existing base. According to Pandit, manufacturing, BFSI and government would be the three fastest-growing sectors by 2007-08. Embedded software is another area the company is keenly following. In fact, KPIT is already involved in creating products for Cummins in this space. Pandit believes that this business segment is likely to see tremendous growth because of the movement towards creating an intelligent environment.

Business intelligence, pervasive computing and Web-based solutions are other areas in which the company is developing expertise. Says Pandit, “Business intelligence will grow because there is a need for making sense out of the huge growth in data. In addition to this there are seven to eight technologies that are going to grow strongly; we intend to develop expertise in them.”

Manufacturing vertical

According to a Gartner survey, global IT spending in the manufacturing vertical in 2002 stood at $71 billion. Globalisation, mass customisation, knowledge-based leadership, shrinking lifecycles and multi-technology products are the challenges for the manufacturing sector; these challenges are drivers for the adoption of IT. Increasing demand for compliance with different norms, regulations and other government policies have also magnified the need for intelligent vehicles, giving rise to the demand for embedded technology. For instance, by 2007 the emission of Cummins’ engines has to be 10 percent of what it was in 2003. Product lifecycle management (PLM) is another issue facing the manufacturing sector. Provisions have to be made to ensure that a product can be scrapped once it reaches the end of its lifecycle.

KPIT looks at helping companies leverage their IT investments to capture new business opportunities and share more product information with partners, suppliers and customers. The company’s offerings for this sector include application management, SCM, PLM and e-business.

KPIT recently forged another unit to work solely on embedded technology. This practice, which has 105 people, will focus on automotives and engines but will be more aligned to the manufacturing segment.

BFSI

According to Gartner, IT spending by BFSI in 2003 was $390 billion, and is expected to touch $475 billion by 2006. One advantage that KPIT has in this sector is that its key promoters are CAs and analysts; the company also boasts of its own mainframe to handle number crunching.

KPIT’s focus in this area includes domains like investment banking, credit cards, mobile payment systems, cash management, fund administration, CRM and EAI. The BFSI practice boasts of 165 people, and three of KPIT’s star customers are from this vertical.

Fast forward

Though the BFSI practice has been growing at a rapid rate, KPIT is looking at developing one of its star customers in this space to a strategic customer. This move, it believes, will provide it with the expertise and skill-sets required to further tap the potential of this segment. Pandit believes that the company will have another strategic partner by 2007. The company is also looking at increasing its revenues from the insurance sector in addition to acquiring at least two star customers every year. KPIT also plans to add non-English-speaking markets through local partners.

The company is currently setting up another centre in Pune that will accommodate close to 5,000 people. The first phase, which will accommodate around 1,500, is expected to be completed by the end of this year. The company has already made an investment of Rs 22 crore towards this end.

After crossing the Rs 100 crore mark, KPIT has now set its sights on being a $100 million company by 2006-07. Judging by the company’s plans this seems to be achievable. Pandit expects $30 million worth of business to come in from Cummins. The rest will come from its star customers and potential star partners. The planned acquisitions and mergers should also see the company meeting this target.

KPIT aims to create a situation where instead of projecting itself as an Indian company looking at business opportunities abroad, it can instead say, “We are a global company with an Indian base.”

stanley@expresscomputeronline.com