Like other IT companies, NIIT Technologies felt the impact of the recession in the West, its major market. The company’s approach was not to cut rates, but to enhance service levels. NIIT Technologies is a sister company of global talent development corporation NIIT Ltd. Future growth for the firm — which offers software development, technology management and business process outsourcing services to companies in areas including finance, manufacturing, retail, and travel and logistics — is expected to come from Asia, says CEO Arvind Thakur, in this interview with India Knowledge@Wharton.
An edited transcript of the interview follows.
India Knowledge@Wharton: I wonder if we could start by talking about the fact that, about a year ago, you told The Economic Times that NIIT was facing a challenging business environment. Profits were down by about 50%. Revenues were down by 11%. How has the past year been for NIIT? Has the business turned around?
Arvind Thakur: I don’t think we’ve had an issue on profit. The issue was really [related to] revenues because of the recessionary trend the whole world experienced. Last year, we saw our profits increase [but] we didn’t see a top-line increase. The real reason for that was the aftermath of the economic slowdown and the value proposition that we [presented] to our clients. [They] wanted to do more with less. And we could configure that proposition because of the off-shore capability (work executed in overseas locations) that we have in the organization. The same work, instead of it happening in client locations on site, has moved off shore. [That] reduces your top line because bill rates on site are much higher than bill rates off shore. But it improves profitability because profitability off shore is much better than on site. That is what we experienced last year.
India Knowledge@Wharton: Could you give me some examples of the steps you took in different business verticals to respond to the challenges you were just describing?
Thakur: The basic theme was more for less…. Rather than getting into a dialogue on reducing rates, the conversation [with existing customers centered] around how we give you the same value, or better value, at lower cost. We moved the discussion away from bill rates and contract values to reorganizing the work such that more of it happened off-shore (in India and other overseas locations) and the customer continued to get the same levels of service as before. That was one key element of the approach that we took. The other was focus on new service lines that were essentially nonlinear. If you look at a traditional business, which is really service business, growth in revenues implies proportional growth in head count. And since it was important to improve the cost structure, we started focusing on business lines where growth in revenue did not imply proportional growth in head count. So we introduced new service lines like managed services, intellectual property-based solutions, platform-based services and, more recently, cloud-based services. That is another approach that we took because in the services business, a key element of your cost structure is head count. Of course, that contributes to higher salaries, but it also contributes to more cost in space [and a higher] cost of travel.
India Knowledge@Wharton: As the global economy emerges from the recession there have been a lot of mixed signals. How is business different today than it was before the downturn, both in terms of client expectations and the client mix? In short, what is your new normal?
Thakur: We’ve seen strong growth in business. A couple of things we’ve seen: No. 1 is prudence and curbs on spending over the past 18 months. There is pent-up demand and people are now keen to get on with some of the programs that were held back during the recession. We’ve seen all-round growth in each and every industry segment that we’ve been focusing on…. However, globally we are seeing different parts of the world responding in different ways. The emerging markets — particularly Asia — are where we see the strongest growth at this point in time. We are seeing stability in the U.S. supported by growth in volumes. Europe is a space where they have fresh issues to deal with, particularly in the aftermath of the sovereign debt issue that some of the Southern European countries are experiencing. While we have not seen that impact volumes in terms of business activity, what it’s definitely done is weakened European currencies. The net realizations have reduced because the currencies have become weaker.
India Knowledge@Wharton: Based on what you just described how do you foresee the geographic mix of your revenues changing, say, over the next 5-10 years? Are you going to be pursuing more growth in Asia?
Thakur: We have already seen a shift in the revenue mix in our business. If we look at previous years, the maximum revenues used to come out of Europe for us. A little over 40% used to be from Europe; around 33% from the U.S.; and the balance from Asia. If you look at our first quarter results, you can see a shift in that mix. Now the U.S. contributes 36%, Europe 35%, and the balance is from Asia. We’re already beginning to see a shift in the revenue mix. Going forward, we will definitely see a larger proportion of business volumes coming from the emerging markets.
India Knowledge@Wharton: How does China figure in NIIT’s growth plans?
Thakur: China is an important market. We have a presence in China in our education business but not in our technology business. We have set up a large number of our educational institutions that are teaching information technology in partnership with universities and other organizations. If you look at the emerging markets, the big markets are India, China, Brazil, and Russia for IT services and technology services. We have [increased] our focus on the domestic Indian market … [it] is large and has not been completely exploited. The way one has to do business in these [emerging] markets is very different from the way we have been traditionally doing business. In these markets you have to actually operate as a local company and build your business. Currently, the focus is on India. I’ve been reevaluating how to address the market in China. At some point, we need to get our act together and address that market as well.
India Knowledge@Wharton: Since we were speaking of India and also about the education aspect of your activities, what does the talent scenario look like for India? Is India well positioned to meet the talent gaps in our markets? What do you see as the challenges and how can they be addressed?
Thakur: The big advantage that India has is raw material [i.e. the available workforce]. The challenge is to make those numbers employable, which means providing the right framework for education — starting right from primary education, so that the raw material … can be converted into employable products. That’s the big challenge and it requires concerted activity right from primary education.
India Knowledge@Wharton: Speaking of education, I think about three years ago, [NIIT chairman] Rajendra Pawar had come to Wharton and I interviewed him. He told me about a very interesting example of NIIT’s involvement in rural India. He told us a fascinating story about how computers had to be carried on the backs of elephants to reach village schools. Can you give us an update of where your rural education initiatives stand, and how have you gone about doing what you have done?
Thakur: I don’t have specifics of that because I don’t run the education business. But I can give you a sense because education is very close to [Rajendra] Pawar and he is personally involved in many of these initiatives. There are two or three, which are very significant. One of course is what you just talked about: essentially NIIT is providing [computer] education at the school level in the remotest parts of the country. This is basically setting up the infrastructure in village schools and imparting that education. That has been done in many states. I don’t have the exact number, but I think the number of people already trained on computers through this program has reached one million.
The other is even more interesting. It [is based on] … the Hole-in-the-Wall experiment, [in which a scientist] set up a computer [on an outside] wall of one of our software factories, which was adjacent to a slum. He observed the behavior of the slum children when they saw this computer sticking out from the wall. To his amusement, he found that, within a month, without any formal education, these slum children were actually surfing the Internet. He came to the conclusion that there is a much better method of imparting education and he coined the term Minimally Invasive Education. In traditional education, people are put into classrooms. This experiment found that if you provide children with the tools they are able to learn by themselves. This was a very interesting concept, which was deployed in rural education. We set up these kiosks on school playgrounds and [they included] nothing but computers. That was another strong initiative.
The third thing we have embarked on right now is the NIIT University. It’s a full-fledged university that has been set up in the state of Rajasthan, halfway between [New] Delhi and Jaipur. Now NIIT is imparting a formal degree programs in computer sciences, biotechnology and various other subjects.
India Knowledge@Wharton: That’s great. Now, among the other markets that you are pursuing actively today, what are the opportunities and risks you see in the travel business?
Thakur: The travel business is very information intensive and the interesting thing about the travel industry is [it was] experiencing difficulties even before the economic slowdown. It started with oil prices shooting up to $140 to a barrel. [After] that issue was resolved, [we had] the subprime [housing finance] crisis and the recession. Thereafter, there were other challenges which were [focused] around [fear about the] H1N1 [pandemic in 2009]. More recently was the volcanic ash [crisis, in which European air travel was grounded for days in the spring of 2010 following the eruption of a volcano in Iceland]. The travel industry has been experiencing more difficulties than any other industry. The interesting thing is that the industry has been using technology to help them through all these difficulties. One of the reasons they have adopted technology is there is a lot of cooperation between different constituents of the industry, which is facilitated by the industry association, the International Air Transport Association. The travel industry is using technology to improve the efficiency of the entire supply chain.
One example [of that] is the whole program of going completely paperless and everybody adopting e-ticketing. That is something where everybody has to comply. When you are [paperless], you can have settlements that are faster. You can reduce the float for the entire industry and therefore your own organization and generate a much more efficient operation. On the freight side, there is a similar movement where they want to make all freight activities completely paperless.
India Knowledge@Wharton: Could you give me a couple of examples of projects that you are involved with in the travel industry that exemplify what you were just describing?
Thakur: About five years ago, we were working with large airline and the three top elements of cost were distribution, fuel and wages & salaries. This airline went into a program where they decided that they would get their customers to book tickets, book their seats [and] check their bookings in a self-service mode…
India Knowledge@Wharton: In March, you announced a partnership with Singapore Airport Terminals Services [SATS]. Could you explain that?
Thakur: Our whole move to make our business nonlinear meant that instead of just providing services, we needed to provide complete solutions, where a good part of the solution knowledge was built into the intellectual property. With SATS, we actually built the cargo ground handling solution, which has been very successfully deployed in Singapore’s Changi Airport. For the past 10 years, we have been supporting, enhancing and building in all the features that I just talked to you about. We have a deep understanding of that application. We then entered into a partnership with SATS [saying] ‘Here is something that’s working extremely well for you. Can we take this intellectual property and build services around it and implement it in other airports? Obviously, it’s your intellectual property so you will commercially also benefit from this partnership’…. We took that IP and we implemented it in Taiwan, Beijing, Hong Kong, and Bangalore and, more recently, in Indonesia and Vietnam.
India Knowledge@Wharton: Do you see Google’s acquisition of ITA [Software] having a major impact on online travel, and will companies like NIIT be affected by that? (Google bought ITA Software, a flight information software firm in Cambridge, Mass. for $700 million in July 2010.]
Thakur: I really can’t comment on that, but yes, definitely. The big thing in travel is mobile technologies and location-based services. This creates new paradigms and interesting new services that can be built to support that kind of clientele. It also provides an opportunity for service companies like us to see how we can leverage some of the technologies [that] Google and ITA will be putting together for this.
India Knowledge@Wharton: What kind of opportunities do you see in government services? Is that also a growth market for NIIT?
Thakur: Absolutely, but our business in the government [sector] is limited to services in Asia. We don’t have a global practice for government services because doing business with the government is different in different parts of the world. In Asia, we have strong brand equity and presence in the government. In the emerging markets, particularly in India, the government is using technology to put in place the infrastructure that can provide inclusive growth for the whole economy. They are very large programs and one would not want to miss out on an opportunity to participate in those large programs.
India Knowledge@Wharton: Since you have been the CEO of NIIT Technologies, what is the biggest leadership challenge that you have faced, how did you overcome it, and what did you learn from it?
Thakur: The real role of a leader is to provide a superior vision and get everybody in the organization aligned to that vision. That’s been our constant endeavor in the organization. I see this as a constant endeavor and exercise, which basically acquires an enormous amount of communication. Providing this continuous communication is, I think, a big challenge, which I constantly keep experiencing as a leader of the organization.
India Knowledge@Wharton: How do you define success?
Thakur: There is an aspiration that you create in the minds of people and there are milestones that you define as small steps that help you meet those aspirations. Success for me is the satisfaction that you derive out of meeting those milestones. You can never have complete fulfillment because those aspirations continue to evolve. But success means meeting those milestones that we have set for ourselves on our journey to achieve those aspirations.