Bangalore: When chief executive officers (CEO) of information technology (IT) services companies talk of depressed IT budgets, engagement models shifting from the old, input-based delivery model, and the ‘C-suite’ play, they are talking about large global companies such as Royal Philips Electronics and the tough talk of executives such as Philips’ chief information officer (CIO) Jeroen Tas.
A co-founder of Mphasis Ltd (now an HP company) with Jerry Rao, Dutch-born Tas is no stranger to Indian IT and Bangalore. Philips has an IT budget of €1 billion (for calendar year 2012) and has just signed five-year contracts with Cognizant Technology Solutions Corp. and Wipro Ltd. Tas, 55, spoke in an interview about the changes in the industry, how and why IT budgets are headed down, and what it means for Indian IT. Edited excerpts:
Last heard, Philips had a plan for €800 million savings on IT costs, with some 4,000 jobs shed in IT. So IT spend as a percentage of revenue is definitely headed down, and not just for your firm?
The saving is not just from IT spend. We are in the middle of a big business transformation. From the background of a product-oriented company, we will be a truly markets- and customer-driven organization, where we will optimize our value chain, simplify processes, use data, increase time to market, reduce the cost of business and, therefore, along the way, reduce IT cost. It is not a goal by itself, but an outcome of increased efficiency. The 4,000 jobs shed figure includes contractors.
Our IT spend is going to go down. I have committed to bringing down IT spend a couple of hundred million euros, over a couple of years, through streamlining investment decisions, productivity, portfolio changes and lean operation models. We want to simplify the landscape—some things can be done out of the box. Why would we create 50 different ways to produce a credit note? With standardization, we can focus on where we really need to differentiate.
How much of this €1 billion is outsourced, how much off-shored? And where do these two large deals you have signed with Cognizant and Wipro figure?
A large part of this spend is with partners. I am not so much interested in how much is off-shored, as to this big shift towards output- and outcome-based models. Earlier, it was all people based. We would get people and put them in the office. This is not an efficient model. Our partners (IT vendors) do not have an incentive to create value. The only incentive is to come to the office and send out their invoices and hope to come back as long as possible! Now we are saying, we will pay on the basis of delivery and quality, and I don’t care how they do it.
Is this the first time Philips is doing this?
On this scale, yes; from last year. We are making a distinction between output and outcome. Much more attention is being paid to the business case. When a project is done on time and on budget, that is the output, that is when the work starts. It is about taking a stake in the business outcome. The same applies to my own team within Philips.
I spent the last two days with our partners (Cognizant and Wipro). You can see that they are not talking about how many people they have, how many on bench and so on. They have to prove to me how they can deliver value. That is a big change in the industry. They have to do not just traditional applications work, but architecture, create a new Philips landscape. I tell them, you are here not to manage our past, but to help us create the future. I am positively surprised by how far some of these companies have come. In the last eight weeks, 1,100 people from these partners have already transitioned. (A third vendor, Mahindra Satyam, does testing work). The split is along three core platforms, mapped through business processes—idea to market, which is R&D (research and development), product development; market to order, which is marketing, sales, and customer relations; and order to cash, which is manufacturing, supply chain, warehousing and logistics.
How are companies such as yours looking at vendor consolidation?
For solution delivery (application development and maintenance—ADM) partners, my view is we need minimum two, maximum three. We have to give them a pie that is large enough for them to put good people on and develop the required knowledge. We have other partners (like Capgemini), but the bulk will be with these two.
And there is a C-suite play in this?
Absolutely. I sit on the seventh floor with the executive. I spend 50% of my time with senior leadership, making sure I can explain what IT can do, and also figure out where they are taking the business.
You mentioned being positively surprised by Indian IT’s capabilities. Where do you see them heading?
I had the same discussion with the leadership of Cognizant. My advice: continue to do what you are doing, get better, get higher in value chain, in intimacy with the client, designing business process management and understanding business process standardization. What we are doing, other companies will do, too. We are taking the plunge, we are ripping out a lot of the legacy, it will just pay for itself a couple a few times over. We can’t do that without the help of companies like Cognizant and Wipro. We selected these companies on their templates, frameworks, what IP they could bring to the table. They should also sell the kind of engagement we have with them. In this model, I don’t care how they do it, I want the business outcome.Whether you do it with software, put people, or put robots on the job.