Mid-sized IT/ITES Cos May Merge To Challenge Top Tier Firms: Raman Roy

Raman Roy, the chairman and managing director of Quattro BPO Solutions, has the distinction of setting of the Indian BPO revolution. He was in charge of the BPO efforts of American Express, and later headed GECIS (GE Capital International Services) in India. His first startup Spectramind was sold to Wipro in 2002, leaving a neat sum for himself and also the venture capital backer Chryscapital. Roy, who raised $100 million from Olympus Capital for his venture Quattro, is now involved in BPO/KPO, gaming outsourcing, and legal process outsourcing. Roy is also one of the founders of Indian Angel Network.

The man has views on what is in store for the IT/ITES industry, the consolidation, entrepreneurship and impact of Satyam on the Indian IT dream. He believes the mid-sized IT players will come together and pose a challenge to tier-II and then tier-I IT companies in the longer run signalling a consolidation in the business. He also believes outsourcing is a long term story and the developed countries need India's talent to get their house in order.

VCCircle's Madhav A Chanchani talks to Roy on the state of startups, IT/ITES industry and Quattro's acquisition strategy. Excerpts:

Q. Do you think current economic meltdown has had any impact on the entrepreneurial space in India?

If you look at history, the entrepreneurial juices end up being more effective during a slowdown. Some of the best companies were formed during a slowdown. If you look at colleges and universities, even premier institutes, the robustness of the jobs that the people are getting are limited. So you find much more people saying that they are seriously looking at setting up something of their own.

A slowdown becomes a contributory factor to the creative juices as it brings out a different kind of focus and that is what we are seeing in the Indian marketplace.

Q. You are a part of Indian Angel Network (IAN). What kind of dealflow has IAN been getting?

We are a little overwhelmed with the success that we have had. What we had planned that we will meet once a month to spend a couple of hours on the proposals that we get. But now between Delhi, Mumbai and Bangalore there is a meeting happening every week.

The success rate is less than one out of 10 in angel investing but our success rate is better than the global average in terms of how we are progressing. Hopefully we are adding value to the entrepreneurs because its not only about funding but also feedback and advice to whether they are doing right and what they need to do differently.  

Q. What kind of advice are you giving to your portfolio companies in dealing with the slowdown?

Some of them are in very different areas and there is no direct relation. If you look at Robottah, No Cross we are having a very good time. These companies have a minuscule market share. For them adding one or two customer can have significant impact. Basically our advice is more to do with how to run a company, how to get customers, how to create a scalable operation. That is an ongoing thing.

Q. So do you see a slowdown in investments by IAN?

No we don’t see that. Actually it is pleasing to see involvement of people. If you look at it from my lenses, the slowdown is not perpetual. The bottom will be reached, unfortunately we don’t know where it's, and from there recovery will start.

But given the slowdown it will take time to build a business. But there is a certain impatience that has come into being. I met kids who waited for the ink to dry and said that their company was more valuable. Business valuation do not improve with age. They improve with more revenues, profitability, productivity and by adding on things. People had forgotten the basics.

Q. Do you see some sense coming to people now as they face market reality?

Oh I absolutely agree.

Q. Now we are seeing several tech and internet startups shutting down. What will be your advice to those entrepreneurs?

If you have a good product proposition, what is important is to keep your head above water. But there is also a reality that there is a timelag before you become profitable. I have done enough startups in my life to know that you cannot be cash flow positive on day one. You need to have pain before you have gain. It is the quantum and length of pain that becomes important.

You cannot keep pumping money on hope. There needs to be a strategy, a gameplan. When the objective is to make money, then you need to have a gameplan to make money.

Q. Coming to the BPO industry. What kind of trends do you see for the industry this year?

Right now in the BPO industry the growth will be a little muted because the largest component of work came from BFSI. And BFSI is under a little bit of stress right now. My thinking is that one day the bottom will be hit and people will come back to work thinking what they will do for their company. Right now people are thinking will I have a job, how to manage the government, how to manage TARP (The Troubled Asset Relief Program of the US government) but not how to manage their customers and company.

When things will come back to what I call NTP, which is physics term of normal temperature pressure, which will happen when  bottom is hit and they start focusing on business. (Then) outsourcing and offshoring will become a critical component and we will be a part of the solution.

Take the example of Countrywide getting acquired by Bank of America. Countrywide and BoA have a few thousand branches. Now they are part of one company. But Countrywide is running its system and BoA is running its. One day they have to figure that systems, processes need to be the same. All their databases need to be integrated. How will they do it without India? There are not enough people in the developed economies to be able figure out a solution in a cost effective manner.

India will be a part of the solution. This will be only when we come back to NTP. And in that solution, as a report says, BFSI offshoring will increase by 5 to 6 times of today. And exactly for this reason we will be part of the solution and I resonate that. Therefore in the medium to long term the outlook is very very positive. But getting to the medium term is a challenge as decision making is in a flux.

The non-discretionary work will keep happening which will keep the industry’s nose above water. It is the discretionary spending that has gone down and will revive once the bottom is hit.

Q. Do you see any consolidation in the BPO industry?

Has to happen. There are two phases of consolidation. One is with the market share. The big are getting bigger and there is consolidation because some of the accounts and bigger pieces of business are moving. That is where you see the growth within the IT sector of big three to bigger three (TCS, Wipro and Infosys). Then the second level of consolidation is one by acquisitions. Spectramind got acquired by Wipro and Daksh by IBM. More of both will happen.

What has not happened in India right now are mergers. Some acquisitions have happened that have been positioned as mergers because of tax or other reasons. I am talking about merger of equals.

What I think will happen over the next few years is that a lot of these mid-sized players will come together and pose a challenge first to tier-II and then tier-I. Take the news of Satyam. The net result is that if the company gets merged with HCL Technologies or Tech Mahindra, it will create a big four. That is also a form of consolidation.

Q. What kind of impact has Satyam scandal had on the Indian IT/ITES sector?

You know post Enron we didn’t have a major impact on the American economy. It does have an impact. Andersen as auditors disappeared. The big five became big four. That was a very major impact.

Corporate governance has come under pressure. Customers will be wary and they will ask additional questions. Our customers at Quattro have asked questions like who are your auditors and what do you follow for corporate governance. It is not necessarily all good. Because its not about IT but the Indian corporate industry I think is upto the challenge of showing that this was one off.

Q. So you think this wont have any collateral damage?

I don’t see a permanent damage. I don’t know if you call it damage or what, but in short term you have to show yourselves to be whiter than white.

Q. How is Quattro doing?

There is the good and the bad. At this moment for us the good of the slowdown is more than bad so we are delighted. For example, we are the largest mortgage foreclosures firm in the country today. That wouldn’t have happened if the world had not melted down. On the other hand, the new account closures have slowed down and that is the bad.

In balance, we are pretty happy. We are pretty well positioned to continue with more of the good.

Q. How is the LPO business doing?

As I said we process foreclosures there. We have over 400 people there. Technically we would be the largest LPO in the country.

Q. Do you have any capex plans in coming year?

We are looking at 40-50% growth next year. It will need capex and we will not hesitate to make investments.

Q. How do you plan to fund the capex?

At the moment we have money in the bank and more important is that market offers some very attractive opportunities today. We also understand that the valuations are challenging. We think despite those challenges we will be happy to raise some incremental capital and utilise those funds to make acquisitions that will be in the long run more beneficial to our stakeholders.

Q. Do you plan to team up with private equity funds to make acquisitions?

Yes we do. I wish I had the money without teaming up with them but I don’t.

Q. Are you evaluating any opportunities right now?

We are in some deals where we have already tied up with funds. These are deals we are looking at right now. We are very delighted the confidence the private equity funds have showed in Quattro.

Q. Are you looking at overseas or domestic acquisitions only?

Both. But largely overseas. If I look at my pipeline there are more deals overseas than in India.

Q. How many deals are in you pipeline right now?

Pipeline can have any number of deals. This is a strange business. You have to kiss a lot of frogs before one turns into a prince. We are learning to kiss the frogs. Our biggest fear is that we look at something for 2-3 hours and decide that its not worth pursuing and we may have missed out a point. The flow of the pipeline is so large that we are unable to give thorough attention to every deal.

Q. In what areas are you looking to do deals?

Multiple. I don’t want to straitjacket that. There are newer areas that we are not into today. There are expansion opportunities for areas that we are in today like mortgages, risk management, for LPO. There is a lot of action.

Q. What are the new areas in outsourcing that you are looking at?

Right now India caters to less than 5% of what is the outsourcing market. 95% is a huge headspace. At NASSCOM summit we came out with report that by 2020 this industry has an opportunity to grow dramatically. Yes I agree. But the way we leverage that opportunity will be very different from what we are doing today. That is where we have to see whether we as a country, industry and from my perspective as a company are ready for that challenge.

(Photo credit: India Today Group)

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