New Delhi: Arjun Malhotra, chairman and CEO of Headstrong, a global consultancy firm passed out from Kharagpur IIT, before joining DCM. In 1975, six friends Shiv Nadar, Ajai Chowdhury, D.S Puri, Subhash Arora, Yogesh Vaidya and Malhotra started Hindustan Computer Ltd (HCL).
23 years later he founded Techspan with funding from Goldman Sachs and Walden International. In 2003, Techspan merged with Headstrong and Malhotra led the seamless integration, resulting in Headstrong’s recognition as one of the fastest-growing IT-based Financial Services companies. Livemint met the U.S based Malhotra on his recent visit to India. Excerpts from a freewheeling interview:
You were in Calcutta for a long time…
I remember the great biologist, Sir Julian Huxley coming and staying with us. My grandfather, Dr Sundarlal Hora, was a scientist, specializing in fisheries in addition to being president, Science Congress, in 1954.
In fact, you could say I was born in the museum. Grandfather was director of the museum at the time and we stayed at the nearby Rippon street. I studied in Loretto, St Xaviers, St Columba’s, Doon School and IIT Kharagpur (B.Tech. (Hons.) in Electronics & Electrical Communication Engineering). After we started HCL in 1975, I went back and opened the Calcutta office, managing their eastern operations for a year.
From HCL to Techspan and now Headstrong. Tell us about the transition.
After graduation, I joined DCM as senior management trainee and was with them for five years. Fortunately, when they got into electronics I was one of the few electronics engineers in the company that was essentially into fertilizers, textiles and food products.
With the Monopolies & Restrictive Trade Practices Act, DCM found it could not make a foray into computers. So the six of us moved out, convinced that microprocessors would change the world and that we would do things on our own. Sans a business background or plan, armed only with bravado and a feeling that if technology companies like IBM and ICL could sell junk to the country, we were sure we could do better. It was more of patriotism than logic and the conviction that technology would make a paradigm shift, changing everything along the way that determined our decision.
We started in my grandmother’s barsaati in Golf Links with Rs1,75,000 with two employees. Rs1.25 lakh went into buying the Bangalore office, leaving us with Rs50,000 of working capital, with which the company started. We were bootstrapped till we went public and for 20 years ran the company with that.
When did you leave the company and why?
I wanted to be mentally free to pursue what I wanted to. When Internet came up and HCL was going through a reorganization, it was clear that they wanted to wait and watch which way it was going and then go behind it. From a company point of view this was good, but from a fund point of view it was no fun. It was like you are not to fool around with technology as it is evolving.
I talked to them and said that I was becoming a slave to my own creation and was not being able to do what I truly wanted to. After arguing for more than a year, I managed to get an amicable out.
HCL Technologies, called Consulting had also become big and started in US though had not gone public. I started working from home and moved out when my wife said that she had married me for good or bad, but certainly not for lunch. At that time I was consulting with Goldman Sachs. The next step was to start Techspan, a systems integration and consulting firm with funding from Goldman Sachs and Walden International.
Did the dotcom bust of 2001 have any effect on Techspan?
The impact was there but the timing was wrong. My father was unwell (passed away later that year) and I feel I delayed taking action. But thanks to my HCL experience, where for years we ran a bootstrap operation, running tight cash flows was not difficult. When the dotcom crash happened, we told our people they could return to India, for we could not pay them for sitting idle in the US. 49 returned. During a senior management meeting in the US we decided rather than lay off, we would take a 20% salary cut.
We followed this up with another 10% and ended up running the company with a 28% salary cut for 3 years. There was a minimum salary of $50,000 and those below that were not touched. People think in the US there is no loyalty, but we managed to stay together. I still remember, we had one extra person who was supported by the entire staff who decided to forego two days’ leave every month, till things got better.
We let our people be innovative in their solutions. Technically the company stayed together with everyone assuming that the business would come back one day. We worked on strategies and kept the company cash positive, even if marginally so, through the entire slowdown. Never was there any threat that we may have to shut down though our turnover came down from $67 million to $30 million.
Then in 2003 you merged with Headstrong…..We thought we would start an offshore centre for them and they said they needed to take a small investment in us. The problem is whether you invest 5% or 100% you have to do full duties in terms of value, so as we got to know them and it seemed like a better idea to merge.
Were they willing?
They were going through a rough period. There was a private equity group that had injected $200 million into them, in the last quarter of 2000. This was just before the bubble burst and strangely, they were running the company assuming that the bubble had not burst. How they blew $140 million in two years is beyond me. So when we merged, they had only $60 million left of the original $200 million. The private equity group was frantic and though they did not understand the business, they had made certain assumptions. In hindsight, had we known that, we would have negotiated harder.
We now had to regroup and reorganize. In 2003, we tried setting up a company that did consulting to outsourcing and was integrated and seamless to customers. When the opportunity to merge with James Martin came along, we took it up and that’s how Headstrong got formed. Most of us from Techspan managed the new merged company, getting it to stabilize and focus on capital markets where we have about two-thirds of our revenue. We established our differentiated position as compared to Accenture, IBM type of companies and Infosys, Wipro, HCL, TCS type of companies.
Also, instead of talking to Chief Information Officers, we decided we were going to talk only to business managers. We would discuss a business problem and use technology to provide a business solution, instead of working with the CIO and saying this is a spec, support this code.
Post Headstrong, how have the last 3-4 years been?
We started on 23 October, 2003. The first 15 months were somewhat rough. What we found out later was that Headstrong was rated twice our size in revenue but was not as profitable. Although we were the profitable company, internally they had told their people they were going to acquire us. It was a big shock to them when Techspan started to manage them. There was resistance to change.
Everyone thought that his or her unit or office was profitable. When we showed them actual numbers, they started justifying. Clearly, cash flows had to be managed better, business had to be profitable and depreciation factored in. Once people understood this and got the real data, they were initially shocked at getting correct data in the first place and then they were upset for they had been kept in the dark. What they perceived and what the data showed were two different things. Most intelligent people don’t like to be given the wrong impression.
Now the problem was ours and it was important for me to give them data they would argue with every week. We had to set our structure right internally and provide them accurate data, down to the decimal cent. Once we got them to reconcile to that data, we started sending a file to everyone so they could see each other’s performance and evaluate their own in turn.
This put healthy pressure and we succeeded in building a certain culture and business plan. We also began to look profitable by end 2004 and by 2005 we were more into what to focus on and how to build expertise.
We are now technically ready to go for an IPO – the numbers are right and revenues are about $200 million. The market has suddenly changed and opportunities are available. Major competitors were out of the scene with I-Flex bought by Oracle and Canbay by Cap Gemini, leaving us with an opportunity to be a leader in that space.
Though at $200 million, I still would not want to go public, telling people that I am an absolute leader. We have now put a plan in place where by 2010 we will become a $500-million company and then at half a billion I will be able to say that I am a leader.
What have been the show stoppers as you look back on your career?
I can’t think of any. I started the company when I was 26, running national field operations for DCM at 23. My philosophy has been to recruit people smarter than me. In those days no one wanted a job in IT. You had to persuade people to join but I was convinced that if I could design the best piece of infrastructure, which promised to turn world class, there was no reason why the best talent would not come and work for you.
Will Headstrong have an India presence?
We have not addressed the market till now but are flooded with requests. Capital markets here do not have the depth of instruments or sophistication of instruments, the way you have in Wall Street. Also, it does not train my people in any way, to see that they become any better. But that is starting to change slowly. Mortgage is coming in, people are talking credit derivatives and private wealth management is taking place.
I had a person come to me and say he wants to set up a wealth management platform for someone with Rs 1 lakh capital. Now you have companies like Kotak who will do it for Rs 10 lakh for they are looking at 1 lakh people, but this person was wanting to have a client base of tens of millions. With such large numbers, you want to be sure you can service them and be low on touch and high on net worth.
We hadn’t really planned this but sometime in 2008 we may just address the domestic market business by coming in as consultants. Much of our work is for Wall Street Investment Banks and with many of them coming here, we may start work on their offshore centres.
You are more in the KPO business…
If I were to define it in a basic and crude way, I would say, what a KPO is to a BPO, we are in the KPO of IT.
Do you think India in the years to come will hold on to its outsourcing edge since many of its players are from across the world?
If it is commodities, then you are in trouble though the situation is different for value-adds. In case of textiles, what migrated were commodity textiles not designs and fashion textiles which exist because the buyer, skill and knowledge required to do it are all different.
In IT, the moment you do a value add, it becomes difficult for others to replicate. So we can stay in the value-add business and it may even be more difficult to touch us. Competition will come from Australia etc though they do not have the bandwidth or size but since we have knowledge, business is unlikely to go to Russia or any of those countries.
What made you move to Japan?
Japan has an old James Martin office where Headstrong based itself to do pure consulting. They didn’t write code. What we have now started to do, especially in capital markets, is adding some domain expertise and offshore work. In Japan we wanted to be a Japanese company, in that if we had 100 people there, 80 were Japanese.
With 2,500 people and a $200-million turnover, we are completely different from a company like HCL, which has say 50,000 people and $1-billion turnover. Also our business is completely different. We do consulting and outsourcing while they do only outsourcing.
Are you looking at acquiring a company in India or abroad?
We always look for people who have expertise, and preferably smallish companies that fit, maybe a $5-20-million company. What I am looking for is expertise. There is nothing specific at the moment on the cards.
The recent Gartner report on outsourcing talks of you as being in a niche player’s quadrangle. What does that mean for you?
There is another Gartner report of financial services where we are the third fastest growing vendor in the financial services space. This covers only US revenues, not worldwide revenues, implying that in the outsourcing business, according to Gartner we are niche. Technically I don’t need this recognition but if I was in say Fortune 500, it would be different. All my clients know me and I don’t need too many more clients. I just need to expand my business with them
Who are some of your big clients and any plans of diversification?
Most banks on Wall Street are our clients. Nothing at the moment. We want to be world leaders in the few things that we are doing for this makes clients, employees and me happy.
What are your plans for the future?
When I have the time, I would like to get into the education segment and focus on high school and the two years following that. But that is only if I have enough supply. Education today is a bigger business than IT and in the coming years, finishing schools will thrive if run and managed well. .
When we started NIIT the idea was to fill a need for good data entry operators with hands on training with quality education. NIIT is doing well today but they have not moved into regular education. Maybe public-private partnership here might be the answer.
If I have 50 defunct universities, I would attempt revitalizing them. This should be a priority, for there are a million people in Delhi alone who can be employed and if they are good, employers will not go to China and other countries to get the right people.