Singapore: Earlier this year, in its largest bet in India, Blackstone Group LP paid close to $824 million to buy out the majority shareholding of Hewlett Packard Enterprise’s 60.5% stake in Mphasis Ltd, a $1 billion information technology (IT) services company. The deal was one of the biggest acquisitions in the country’s outsourcing sector. Ganesh Ayyar, chief executive officer (CEO) of Mphasis, remains at the helm after the transaction.
“Blackstone is bullish on Indian IT services and especially in digital, an area of strength for Mphasis,” Ayyar said in an interview. “There is a swagger at Mphasis and people are excited about this deal. Blackstone comes with deep pockets, which will allow Mphasis—a company with a good track record—to grow our brand and footprint further.”
“Our business prospects have become even brighter,” he added. “It has also removed future uncertainty with key clients,” said the 55-year old CEO, who has led Mphasis since 2009.
Ayyar’s reference was to Hewlett Packard (HP), a key customer for his company. Orders from HP have steadily declined over the last few years and its contribution decreased to 34% of the total revenue in the year ended 31 March 2015 from 71% in 2010.
“Our HP business had been declining at the rate of 20% every year, for the last four-and-a-half years,” admitted Ayyar. “Blackstone’s acquisition now has contractually ensured a revenue commitment from HP of $990 million over the next five years. This will naturally bring more stability.”
Another significant advantage for Ayyar is the potential for Mphasis to generate additional business from Blackstone’s portfolio firms. “The addressable market is $1 billion,” he said. “Even if Mphasis can get 30%, this is $300 million. For a $1 billion company, this is exciting.”
Blackstone is betting that India’s IT industry will continue to grow in double digits as companies move to high-margin digital services to offset a cut-back in routine IT spending by clients. “Indian IT services players so far have acted within the boundaries of IT spend,” Ayyar explained. “But now they can play in the digital space, which is game changing. Digital is not a cost centre. It is a way of doing business.”
According to Ayyar, this trend is exciting for a company like Mphasis. “We plan to ride the wave of combining technology prowess with business domain expertise to lead the digital revolution. We want to make our customers successful in the digital era.”
He predicted that the whole cognitive computing or artificial intelligence wave will disrupt the IT services value chain in a big way for BPOs (business process outsources) or firms selling traditional IT-related products.
“Indian offshore industry got built around asset-light and human-heavy model,” he said. “Going forward, it will be reverse plus automation heavy.”
Ayyar, a soft-spoken man with a genial, playful manner, joined Mphasis from HP. At HP, he rose through rank and file, and within a decade became the India president in 1999. He returned to Singapore after two years in a senior management regional role for Asia Pacific marketing, and later co-led the merger planning for HP-Compaq.
He has been instrumental in leading Mphasis to the $1 billion revenue club. When asked how he did this, he replied: “Make your customer successful and they will make you successful.”
Mphasis provides IT services to some of the largest American banks, insurance companies and capital market entities.
“A more symbiotic relationship between an American MNC (multinational) and its Indian IT services provider is the future. This will ensure success for both,” he said.
The current political debates in the US around outsourcing are coloured by an old world-view and do not accurately reflect the reality on the ground, according to Ayyar.
“An unsuccessful, uncompetitive American multinational is more harmful to the US economy than a successful one that can continue to provide jobs to US workers,” Ayyar said. “Can an American MNC increase their labour cost today and compete effectively in global markets? Can you take three steps back and hope to win the marathon?”
Ayyar, a chartered accountant by training, speaks candidly about growing up among three siblings in a middle-class house in the small town of Domah in Madhya Pradesh, with his professor father and a homemaker mother. He was schooled in Hindi.
“My cultural vernacular is deeply rooted in India. But I had to find my feet when I moved from Hindi medium to English medium at Madras University,” he recalled.
He has since seen continual change and embraced it.
“Even though I was trained as an accountant, I started my career in sales at HP and became quite successful at it,” he said. “I also jumped from the comfort of a big company like HP to a smaller one such as Mphasis. And now I am leading this (Mphasis post-acquisition by Blackstone). I am a lifetime student of change. I think it is transformational.”
Ayyar has a track record of transforming businesses and cultures. When he joined Mphasis, the company was doing $600 million revenue with a stock price of Rs.148 and 20,000 employees. In two years, under his leadership, revenue touched $1 billion, stock went up to Rs.790, employees to 38,000. Business started flowing. He started to get noticed in the industry.
“This worried me as we were relying mostly on HP. 72% of our revenue came from it. Non-HP direct business was stagnant from 2006-11. So our concentration risk was very high,” he says.
He decided to grow the company’s direct business significantly. Starting with 2011, Mphasis narrowed its focus to banking, capital markets and the insurance industry and reduced its markets from 16 countries to eight and then five.
After announcing this strategy, Ayyar recalled, in the next quarter, HP’s business started dropping. This happened for the first time in the company’s history. Share price dropped by 27% and went below Rs.300.
“I did not anticipate this, obviously,” he said. “Market got spooked because HP business started declining.”
But he remained focused on his strategy. Under his leadership, Mphasis rebuilt its direct business from 28% to 77% and HP’s share declined to 23%.
“It was a hard battle from 2011 to end of 2014. Transformation is a big and over-used word. The physical aspect of it is easy but the chemical transformation is very hard. You have to rewire talent.”
He credits his team in large part for this transition. “We are not a collection of stars but collective stars. We don’t play a game that others are good at. We play our own game.”
Given by what he has done at Mphasis to date, his game seems to be working.
Edited excerpts from an interview:
How do you plan to lead the company through this transition to manage change effectively?
Our employees today feel more confident than ever. I have done face-to-face town halls with 8,000 employees since the announcement of the transaction to communicate our new vision and goals. Blackstone is a financial investor that has high returns in mind in a set period. Our job would be to generate those returns without compromising on our high trust, empowering and nimble culture. Our culture is our soul. We have to protect and nurture this to generate returns. Of course, Blackstone will have best practices that we will also learn from and incorporate.
How do you think the digital revolution will shape the future of markets and economies?
The digital revolution, much like the industrial revolution, will disrupt business as usual. It will lead to more and more co-existence of employment and unemployment opportunities globally; industry definitions will get more blurred and new definitions of what is “a valuable service or product” will emerge.
Cognitive computing will dis-intermediate many things humans can do today.
What is the challenge of being a CEO in an intensely competitive, fast-changing digital world?
If you want to be successful in the digital world, first and foremost, CEOs have to self-transform. A CEO has to understand that digitally savvy companies that are successful in today’s markets have two traits in common. One, the rate at which they act and react to market; and two a higher innovation quotient than their competitors. Mphasis has to advise leading banks, insurance companies and capital market players in the US on what combination of technology and process it will take to compress cycle time and become more innovative to compete effectively.
In order to advise my clients better, I decided to look inward first at Mphasis and me as the CEO and fight my own ghosts to change the company systems. I picked 20 customer-facing positions that are essential to our company’s success and gave them the same power as my executive council so that this team can make faster, high-level decisions with respect to our customers without securing EC (executive council) approval.
Second, in order to cut bureaucracy and compress cycle time for internal decision-making, I made reimbursement of business expenses and employees seeking leave on an auto approval process. So, our staff does not need their boss’s permission to take leave or have his expenses approved by him. I am of the belief that 99.5% of the employees are responsible and ethical and they should not be penalized for a minor fraction of employees who exploit the system. Of course, behind the scenes, we do sample checks and will fire any employee abusing this privilege.
Third, I removed the bell curve strategy for staff appraisals. If you are an Mphasis supervisor and you want to rate everybody on your team as five, go ahead, if they deserve it. But, if you are generous because you want to be popular, your good employees will leave because they want to be differentiated. So you are taking a risk by exploiting this strategy and using it unwisely.
Fourth, in order to be intensely innovative, I instilled a culture of experimentation and took the fear of failure out of the company. As a leader, I must learn to tolerate and even celebrate failure.
This is not easy, as Indian society does not largely tolerate failure. Add to that we have a hierarchical culture, innovation becomes an elusive concept. But I have survived and excelled because of my mistakes. My motto is that I have the right to be wrong. So, I want my staff to keep pushing the boundaries.