New Delhi: After its 2007 acquisition of Xansa UK Ltd, a company with a significant business process outsourcing presence in India, Steria SA, among Europe’s top outsourced information technology (IT) and back office service providers, has been aggressively expanding its India presence and service delivery from here. Today, it counts one in three of its global workers in India.
Click here to watch video
In an interview, Francois Enaud, chairman and chief executive officer of Steria SA, visiting India last week, and Mukesh Aghi, CEO of India operations talk to Mint about the wave of protectionism sweeping the outsourcing industry, effects of the financial meltdown, Steria’s acquisition strategy, focus markets and India’s role. Edited excerpts:
With the Vatican the latest to join Obama and the anti-outsourcing bandwagon, what’s your world view on the industry you operate in?
Enaud: For sure, the (financial) crisis has an impact on the global economy and it does change the rules a bit. (But) particularly for the IT industry, I don’t see it represents any threat for offshore development. What we observe in different countries is probably more related to the whole employment issue that developed countries can have in this tough times.
If you take the US example, for sure Barrack Obama has a political interest to protect in the US. It is important for him and for any US citizen. That does not mean that is against the global economy or against any outsourcing project.
Future path: Francois Enaud (left) and Mukesh Aghi of Steria. Aghi says that after the acquisition of Xansa in 2007, attrition in the company started to go down because people saw that opportunities were growing. Harikrishna Katragadda / Mint
Secondly, IT is very specific because the more you develop offshore in the IT industry, the more you develop employment onshore. They are very connected to each other. You cannot develop an only IT business without having any onshore activity. Our business requires a close proximity with the client.
Offshore is a matter of competitiveness – more you are competitive, more you grow. More you grow, more you create employment onshore.
But there is still a wave of protectionism sweeping through the industry, isn’t it? For instance, would you be offshoring to India any work in your recent deal with the UK passport office?
Enaud: Partly, yes. For this business, we are particularly in charge of the BPO part of this business – national ID cards and to process these cards and for the UK government. Naturally we will mix resources from onshore and offshore – from UK and from India. I don’t see any real obstacle to develop offshore as we did in the past. What has changed probably is the fact that the crisis has changed the behaviour of the customer. The crisis has decreased a bit of the volumes of the activity probably; (to that extent), for sure, we are as well impacted. …our clients (are) much more risk averse and they take much more time in any decision. The consequence of that is we have a bit less opportunity of large programmes to engage new offshore resources in these programs. It’s very temporary and I am sure that from next year we will be again in a very good momentum of offshore acceleration.
Aghi: All the rhetoric on protectionism is just temporary. The long term impact is minimal and I believe business sense dictates that you got offshore to compete globally, to be able to bring more profits to your stakeholders. I think offshoring will keep on going up the value chain in the long term.
Back to the passports contract, what could you offshore to India?
Aghi: You have to also deal with the security issues of a country. In India, if we have something that we feel has an impact on the security we will not offshore to another country. Same with the UK; we deal with NHS (National Health Service), almost 800 employees in India support patient’s records.
Enaud: That (NHS work) is a good example that offshore is not incompatible with business in the public services. Not just for the UK, in continental Europe we (have started) to discuss offshore or outsourcing with the public administration to help them to reduce their cost base and running cost. This issue will become more and more critical for any country in Europe because the public deficit is so huge; the crisis has increased dramatically this deficit. They have no option but to ask their suppliers and their partners to help them to reduce their costs.
Aghi: And it’s not just cost base for public services. It’s also improving services with lower costs and their leverage offshoring from that perspective.
Enaud: The motto for offshoring and for clients is to do more with less. That is definitely for public services necessary to deliver better services to the citizens because citizens are more and more demanding to the public and the administration. They have at the same to time to reduce cost dramatically.
There are not many options and the main option is to outsource – to partner with a company like us and letting this partner organise the service in the most productive way.
Sometime ago you talked of how your expansion strategy would not include the Americas. Could you explain the rationale behind keeping away from the largest outsourcing market?
Enaud: It’s quite simple. First, I am deeply convinced that if you want to increase the value on services and if you want to increase your market share, you have to target you clients, your market, precisely. You cannot be chomping everywhere. Only a few brands in the world can have this ambition. Even IBM has to be selective and it’s obviously a lot more true for a company like Steria. That is why we have decided to be very selective in terms of geographies – our selected geographies are Europe and Asia which is already a huge market. We are as well selective for the type of industries we do advise with our service offerings.
That is why we made a good decision some years ago; Steria is heavily engaged in service industries and not at all in manufacturing which is particularly more involved in these times of crisis. We do all our business for public administration, utilities, banking, insurance which is where the IT intensity is higher, where the volatility is lower.
So, why Asia? What progress have you had in your businesses here and are you happy with that strategy?
Enaud: We are happy. And as a result of this strategy and as a result of this focus, Steria resists quite well to these times. Better than the competition if I compare with our direct competitor, our peers in Europe. It’s not by accident but due to the strategic decisions that we made in the past.
You’ve always employed M&As as a way to grow and to expand into new markets and you’ve had a few acquisitions in the last decade or so. Can you give us an insight into this strategy?
Enaud: If I may, I would like to correct you a bit. If you observe Steria over the last ten years, Steria has grown a lot looking at the revenues. It is a good combination between organic and external growth. It is not only external growth. We grew over the last ten years by 8% average per year when the market grew only by 5%. We are an organically growing company as well.
Yes, we did manage successfully large acquisitions but we didn’t acquire just to increase revenue. We did acquire big companies like Xansa to get new strategic dimension (that) we could not get organically. We do not want to give up this approach. With Xansa, we have got two strategic dimensions, the offshore model, a very advanced and mature model, and the BPO model. (Because) of the merger between Xansa and Steria today Steria is one of the leading players in the BPO industry.
Looking back were there any acquisitions that didn’t work out so well?
Enaud: We’ve made three acquisitions. First was in 2001 – Integris, all the service activities from Bull. The strategic aspect of this acquisition was we began the transformation from a French company to a European company. We became in one shot a real European company with a strong market share in any large country in Europe. The second significant acquisition we made was three years later was in Germany – Mummert Consulting – to become a leading player in Germany with a strong brand and secondly to increase the consulting activities of the group, to become a consulting brand as well. The third significant acquisition three years later was Xansa.
Xansa was acquired in late 2007. You’ve made rapid strides in India since then. How has that acquisition turned out?
Aghi: Three things. Xansa was focused only on UK and by having this merger with Steria it has been focusing on 16 new geographies. It did a couple of things for us. I did an analysis of our attrition rate before the acquisition and after the acquisition. And one of the key things people stay at companies not because of salaries, they stay on because of salaries and opportunities to grow. Our attrition after the acquisition started to go down because people started seeing opportunities to grow across continental Europe into different geographies, different verticals.
If you look at it from a European customer perspective they saw an opportunity to leverage our integrated model of delivery which is time tested between UK and India to be brought to continental Europe. They are seeing more and more as you go on a potential to leverage our experience, our methodology, our processes within our domain also.
The other factor which is very important, which Francois mentioned is India is 30% of headcount. In the mid future it’s going to go (to) almost 50%. We’re also using India for multiple other things. For example it is becoming a knowledge centre for the company. It is becoming a research centre for the company, training centre for the company. We are the first company in our business to set up our global academy in India. So our employees from Europe come into India for training and education. We are also using India to explore the possibility of going to the rest of Asia Pacific. So India is playing a very important role not only for delivery but for research and training and also marketing.
As a CEO are there any gaps in your business strategy that you’d like to full, any industry verticals that you’d like to start offering services in, or markets that you’d like to tap?
Enaud: To be very fair and direct with you I do consider the full potential to explore all that we have acquired, develop the company by collecting more people together, sharing more experience together we have a huge potential just by doing things better rather than by running after new things we have not yet got. So that s our challenge of the group today much more about sharing experience, cross sharing our solutions, connecting people together from a country to another. Being sure that any country in Europe will use our Indian platform. That for the next three years is a huge opportunity for us to grow just by doing that properly.
Do you see yourself making anymore acquisitions?
Enaud: For sure. If it is not incompatible acquisition for us, I will never consider an acquisition just to compensate for lack of organic growth. That would be stupid and not a good idea for our shareholders. Acquisition has to create value to the company by adding something new – new dimension, new offering. If we can identify a good acquisition – a good strategic target. Obviously, we will consider it seriously.
Any in India? Any coming up?
Enaud: In India (too), it will be for the same reasons. It will not be about volume. It could be about acquiring strategic offering. We have not identified a target at present and we have no plan of that. Again, our short term plan is much more about connecting, leveraging and using fully our potential.
Where do you see Steria five years from now in terms of market share or revenue?
Enaud: In the next five years we will definitely consolidate our position among the top ten operators in Europe. We have very strong ambition in term of growth and we would like to be a double digit organic growing company which will position us among the fastest growing companies. In five years from now we will be organically – because it is difficult to predict an acquisition –be roughly 2.5 billion euros (revenues). India’s contribution to revenues then will represent 40% of our target revenues.