In April, when Makarand (Mak) Teje became CEO of AppLabs, the world’s largest independent software testing and quality management firm, his priorities were clear: He wanted to strengthen client relationships in the U.S. and Europe. Teje also had to find ways to increase revenues to $100 million from $67 million. In a slowing global economy, what strategies will AppLabs adopt to reach its ambitious goals? Teje discussed that question and more in an interview with India Knowledge at Wharton.

Knowledge at Wharton: Our guest today is Makarand Teje, CEO of AppLabs. Thank you so much for joining us today.

Teje: I’m glad to be here, thank you.

Knowledge at Wharton: It’s been about two months since you took over as CEO of AppLabs. What were your priorities, for your first 100 days?

Teje: That’s a great question. My getting on board asthe chief operating officer had given me a good understanding as to how we are really doing as a global business. But after the 1st of April, when I took over as CEO, the clear priorities were to further strengthen our client engagements that we have in our US business, as well as our Europe business and to continue to look for opportunities in terms of our operations area; where we can really look for improvement in our margin. 

Knowledge at Wharton: What are your overall priorities for AppLabs?

Teje: Our journey has been really exciting over the last seven years and now we are the largest independent testing services company in the world. We started by serving the independent software vendors. What we are finding very interesting is that over the last two years the services that we are providing for these software vendors are now more than valuable to the enterprise customers.

To talk a little bit about enterprise customers: Insurance companies, airline companies, utility companies, manufacturing and logistics; and, the very reason for this is that software today is so much intertwined with every business process. It would be fair to say that it is more complex than it was five years ago and it is going to get increasingly more complex.

The real key issue from a CIO perspective is that when we look at the full life cycle and development of the software, are we really adequately budgeting time; are we really allocating money for the testing of the activity? This is because successful testing is what really determines the success of the product.

Knowledge at Wharton: How does AppLabs’ scale of operations compare with some of your Indian and American competitors?

Teje: AppLabs today has about 2,000 employees and we are in the US and Europe, as well as India. We serve about 80+ customers globally.The nature of these engagements are more year-on-year; so they are doing some projects, but more engagements are based on annual engagements, where we really do ongoing work with the clients. In terms of the capability that we have really built, it’s more than 360° of capability in the testing services areas alone.

To illustrate, we do certification, we do performance testing, and we do manual automation testing…. We have also launched a new … advisory practice around test process consulting. And, short of that, for a CIO, we are defining a blueprint in terms of: What should my test process clearly look [at] across an organization? Bring us in and we’ll be able to define this and not only define it but also help you to really implement it. 

Knowledge at Wharton: You referred to AppLabs, as “the largest independent testing company.” Is there a value to being independent, or is it better to be part of a larger IT company that does both testing and development?

Teje: You know, increasingly what we find is that the skill of testing is present in the development. But, the independent developer and tester will look at it objectively and is really looking at it in an unbiased way – and that is really helping organizations to bring us in. Irrespective of whether they have internal organizations doing development, or they have another service provider who is really doing development — and that value of looking at it in an unbiased way is where we have really added value.

The second one is that if you really look at a full service organization, the way that the hiring, the talent management and the entire supply chain works is that they are really geared to bring in all sorts of skills; whereas, AppLabs is fully focused on building a career for testers and bringing in career test professionals. And, I am allowed to say that this is the only place in the world where testers walk with pride.

Knowledge at Wharton: In 2007, AppLabs had $67 million in revenues and you had set a goal to reach $100 million. How far along are you towards reaching that target?

Teje:  In 2007-2008, we were right on track in terms of reaching our goal of $100 million. We are tracking well above the industry average — the general services industries that are growing out of India — of about 30%. And, as a niche provider, we are experiencing much higher growth. There are a couple of competencies that are really helping to drive this growth.

We are looking at clients that we have already acquired and re-presenting to them the entire service portfolio and asking them a business question. And that is: Testing is a technical skill, but how will it really solve a business issue? And, one of the service portfolios which we have is performance testing. This is a very good service that is helping businesses to really pose that question of performance, of whether it is web applications or enterprise applications — and how this has become more of a business issue today rather than a technical issue. So, that is really helping us.

The second area that we are strengthening would be investments in client management. We have a client management team that is focused in the U.S. and in Europe which brings a very good cultural proximity to the customer, in terms of how they are engaged and what they would like to really see. We have built-in that initial comfort when we start engagements; so that they have the advantage of somebody they are comfortable interacting with, as well as the advantage of a global delivery that we bring along side. And, that will really help fuel our growth.

In terms of organic base, we are also very much targeted towards going after certain industries to acquire new customers; insurance, manufacturing, retail and energy are some of the ones at the top of our list.

Knowledge at Wharton: In terms of your revenue goals for the next two or three years, what strategy are you using to get there?

Teje:  We expect is that thecurrent traction we have in terms of percentage growth — above 45% — will continue. In the past four years, we had about a 72% combined annual growth rate. Going forward, we expect to grow at least 40%-plus year-on-year.

Organically, acquisitions of new clients and servicing our existing clients and the service portfolio work we have is going to be major. But, there is a good possibility of even adding some inorganic piece as well.

Knowledge at Wharton: A number of Indian companies have been growing through acquisitions. Are there any gaps in your strategic portfolio which you think will be filled by acquisitions? If so, what do you think you might do in that respect?

Teje: We have done very well with acquisitions. We acquired a company called KeyLabs in Lindon, Utah, which really helped us to bring a lab on site and helped us build the certification business. About a year and a half ago, we also completed another acquisition of a company called IS Integration which is based in the UK. This company brought us skills in the consulting area and more importantly in the system integration testing area. 

So, our outlook in terms of going forward is that anything that will help us to further enhance our value proposition as the best testing service provider; this is something that would be attractive.

Knowledge at Wharton: Speaking of consulting, one of the biggest challenges that Indian companies have faced is building relationships with Fortune 500 companies, especially at the C-Suite level. In fact, even large Indian IT companies face this challenge. How are you addressing it?

Teje: We recognize this challenge and we are taking a selective approach, that is with the clients we already have a relationship with, we are really putting in additional investments. This is because they know us and we have been working with them for five years, six years. So, it is relatively easier for us to go to the C-Level Executives and explain what we are really doing.

As far as the team that we are building for acquiring new clients, we are really looking at senior level experienced professionals who bring the understanding of the global culture — and that understanding becomes important. It is the cultural context as well as the [experience of dealing] with multiple time zones before – and to translate those benefits in terms of clients and what that will mean for them — and with all of this, keeping testing in mind.

Knowledge at Wharton: As you go about trying to get these clients, whom do you come up against as competitors and how do you position yourself?

Teje: Competition is coming from multiple areas and we do compete with the large global SI’s like Accenture and IBM. We also compete with the tier-one Indian providers like Infosys and Wipro. Our positioning is that the independence of the testing and the focus that we bring to testing is what allows us to first, get invited to large deals and second, really communicate that this is really something special. This is because, if you look at it from a CIO perspective, if they are looking for a partnership in the generalized services areas, they get to hear, more or less, a similar message.

But, when we tell them “if it is testing, we will do it for you; if it is something else, we would rather pass”  that [kind of] gives them further assurance that here’s a company that is entirely focused on testing and wants to stay focused on testing. And, that is one of the ways to win confidence early on with them in the larger engagements where we will come across the broader competition. That’s with the global SI’s as well as the Indian majors. 

Knowledge at Wharton: Even if you do succeed in winning confidence, the US economic situation is so uncertain, there’s no telling when the recovery will begin. How is this affecting the decisions that big companies are willing to make about large IT projects?

Teje: AppLabs revenue base between the US and Europe is about 50/50. What we are finding is that our sector preference within the industries that we are targeting — which are insurance, utilities and manufacturing — is really helping us go after the new client acquisition. What we are certainly seeing is that decisions are taking longer and probably a longer due diligence.

Knowledge at Wharton: Are some verticals being affected more than others?

Teje: Clearly it is retail banking. I would say mortgage and retail banking. Fortunately, we do not have much exposure in terms of our current client base, but there is sort of a ripple effect with what you see in the other industries as well.  With our association with the banking financial services customer we also have built a very strong capability now in the exchanges.

And, what we find is that if you take financial exchanges as the first level platform and all of the other exchanges which are commodities, derivatives and metals and so on and so forth; the type of distinct skill that is required is a combination of a strong business understanding of how exchanges work and what kind of tools that you really need to bring, to make sure that [what] they are bringing in [is] defect free. But, more important … is [that] to continue to manage defect free, they need a very strong program in terms of independent testing.

So, we recently acquired in the last four quarters, a couple of exchanges and we are their sole partner in terms of testing. One good example is Turquoise, which is a platform that is set up in the UK by about 11 investment banks and they are going to create an alternative platform for the large exchanges. We are their chosen partner for testing right now.

Knowledge at Wharton: AppLabs has a significant operation in Hyderabad, India. To what degree is the appreciation of the rupee still a problem for AppLabs?

Teje: You know, I would say in general, about six quarters back; it looked like an important thing to really look at for all of our IT services industry. And, when we looked at AppLabs, that is something we recognized early in some of the initiatives that we took in terms of our continued focus on gaining client confidence and if the model is right. Second, looking at the operations, looking at our utilization and carefully looking at our bench; more importantly using that time to create capability for people who are on bench in terms of industries that I mentioned which is exchanges and insurance.

And also, investment in building soft skills has really helped us. And now, operationally we have a model by which we can say that irrespectively of what will happen, to the dollar and to the rupee, operationally we are able to take that and manage the expectations of our customer as well as deliver the robust business growth that is expected. So, it is that time, [over six quarters] that has really helped us to deal with any variation that will happen with the dollar and the rupee.

Knowledge at Wharton: The other refrain that I constantly keep hearing, especially from Indian companies is how hard it is to keep good people. The rate of attrition is terrible. How is AppLabs dealing with this problem?

Teje: You know if you look at a young worker today who is 20-something, the ideas and the type of involvement that they need to perform and “tick” is entirely different from the time when we grew up. And, the interesting part is that our whole human resource approach is based on first, taking testing as an attraction and creating it as a career base for the professionals who really want to get into it; and then creating this sort of a social network, within a company, which includes the quarterly meeting, the time that they get with their supervisors, the program that they sign up for in terms of their personal as well as professional environment – all of that is helping us to build sort of a solid community.

We have been able to effectively do that across the three buildings that we have and that is because of deploying these similar human resource processes … related to the training and mentoring as well as the strong technical training that we provide in terms of testing. So, broadly, we expect a much lower attrition compared to what we are seeing in the broader industries. And, to give you an idea, Hyderabad, if I were to talk in general, about 20-22% attrition we have observed and reported. We are running at about 18% attrition right now.

Knowledge at Wharton: What keeps you up at night?

Teje: Well, the excitement that… first of all, we are the largest independent testing company and, from the early successes that we have, serving the enterprise customers. There is a lot that we can do, whether you look at the U.S. market or the Europe market. So, we are just seeing the tip of the iceberg right now.

Knowledge at Wharton: Where would you like AppLabs to be in the next four to five years?

Teje: …The value proposition of AppLabs will get much stronger in terms of acquiring capability in the business-critical applications in which this thing will become so much mainstream; so that whenever you look at the outcome of a business system, you could relate it directly to what went right and what did not go right in a particular testing. So, some of the investments that we’re making in building the industry capability will help us get there in a five-year timeframe.

But, the model is here to stay. It’s going to get stronger and probably much wider in terms of acceptance. For somebody to say that we would rather look at testing areas done by independent players and specialized players who  build their entire model right from training recruitment as well as servicing customers based on focus.

Knowledge at Wharton: Thank you so much for joining us today.

Teje: Thank you.