A decade is a significant milestone for any organization. For MindTree, the Bangalore-based information technology (IT) company that began operations in August 1999, a decade signifies even more. Started by 10 senior IT professionals from leading firms including Wipro, Lucent and Cambridge Technologies under the leadership of industry veteran Ashok Soota, MindTree carried the weight of great expectations.
Sudhir Sethi, founder, chairman and managing director of venture capital fund IDG Ventures India, was a MindTree board member in his earlier role as general partner with Walden International, a MindTree seed investor. “As investors, our internal thought process was that, in a 10-year cycle, each of the founders should have been handling US$100 million in business,” he recalls. “We were clear that MindTree had the potential to be a US$1 billion company in 10 years.”
MindTree is nowhere near that magic figure. For the year ended March 2009, the company had consolidated revenues of US$269 million. It has announced projected revenues of US$290 million to US$300 million for the current year. In 2006, the company had set an internal target of US$1 billion by 2012. In its new five-year vision statement articulated in April 2009, MindTree moved its US$1 billion revenue target to 2014.
“We did not expect the dot-com bust of 2001, 9/11 and the current economic downturn,” Sethi says about MindTree’s not reaching its initial ten-year goal. Still, he sees MindTree as a role model for any midsize Indian IT company. “In these 10 years, MindTree has achieved things that very few other start-ups have, like establishing global standards on corporate governance, knowledge management, people practices and innovation. And what’s more, all the cofounders are still together.”
S. Sadagopan, director of the International Institute of Information Technology, Bangalore, who has watched MindTree closely from its inception, is also bullish. “MindTree has outstanding talent, culture and customer intimacy,” he says. “It focuses on R&D services more than any other Indian company, and in areas like Bluetooth it has world-leading capabilities. It emphasizes knowledge transfer sharing and constant learning, and over time its employees will be better off than any other company’s. MindTree will emerge as one of the big players very fast.”
Not everyone subscribes to this view. Some see MindTree as not having delivered on its potential. Though MindTree has established itself as a credible player, they say, it remains one of many small and midsize IT companies from India. Sabyasachi Satyaprasad, founder of Mindplex Consulting and formerly senior director at offshore advisory firm NeoIT, notes: “Going by the quality of its early engagements, we expected much stronger growth and stronger differentiation from MindTree.” Satyaprasad sees MindTree as strong in product engineering, Internet solutions and consulting, but feels it hasn’t built competencies for comprehensive outsourcing deals. “In the current environment, this is a limitation for the company to grow to a large size.”
MindTree, meanwhile, sees itself as appropriately situated, given the two and a half years in its early stages that were lost to the 2001 meltdown. “There is no shortcut to creating a services company,” says Soota, the executive chairman. “You grow step by step, customer by customer, brick by brick.”
A US$1 Billion Timeline
The firm’s confidence is reflected in the vision it articulated in April. Over the next five years, it aims to achieve US$1 billion in annual sales; be among the world’s top 20 IT services businesses as measured by profit after tax; be among the 20 most admired companies globally in the IT services business, known for customer satisfaction, human resources, knowledge management and corporate governance; and improve the lives of the differently abled through leadership in assistive technologies.
With this vision statement, MindTree has not only created a formal timeline for hitting the US$1 billion mark, it has also raised the bar exponentially in terms of its profitability. In its earlier vision statement, the profitability aim was to be among the top 10% in the industry. With more than 10,000 global IT services companies, this required only that MindTree be among the top 1,000, a feat it has achieved. For fiscal 2009, MindTree’s EBITDA was a healthy 27%, 132% over fiscal year 2008. While profit after tax, at US$11.4 million, was down by 56% from the previous year, MindTree is not troubled. Chief financial officer Rostow Ravanan notes that this was due primarily to mark-to-market provisions on hedges that are expected to reverse themselves over contract lifetimes. MindTree’s fiscal 2010 projection for consolidated profit after tax is US$37.7 million to US$39 million.
Typically, few companies surpass the industry in both revenues and profitability growth. MindTree has reorganized itself to take on this double challenge. It has entered new market segments, and created new business units and new roles for senior management. Soota, chairman and managing director since the company’s inception, has handed operational duties to cofounder N. Krishnakumar, who is now CEO and managing director. Soota will focus on strategic initiatives and long-term development. Last year, Subroto Bagchi, MindTree’s high-profile cofounder and author of the books The High Performance Entrepreneur and Go Kiss the World, who was based in the United States as chief operating officer, moved back to India to take on a leadership-building role with the rather unusual title of “gardener.”
At its start a decade ago, MindTree had two lines of business: IT services focused on Internet technologies, and telecommunications and networking R&D services. Unlike typical Indian firms employing low-cost models, MindTree from its very inception took a consulting-led approach. It also invested in creating intellectual property (IP). The dot-com bust and telecom meltdown in the early 2000s forced the company to increase its service portfolio. It added data warehousing, business intelligence and enterprise resource planning and, in the R&D services space, addressed new areas including storage and consumer appliances. It continued, however, with its consulting-led approach and IP focus.
A few years ago it added service lines including independent testing, and infrastructure management and technical support (IMTS). Last year, MindTree acquired Aztecsoft, a leading player in outsourced product development services and independent testing with 2,100 employees.
Branching Out into Testing, IMTS
For the year ended March 2009, IT services accounted for 76% of MindTree’s revenues, not including Aztecsoft. R&D services provided the rest. Now, it has created new business units to drive growth. MindTree has combined the testing capabilities within its IT services and R&D services with those of Aztecsoft to create a separate testing team. It has also carved out IMTS (which had straddled IT services and R&D services) as a separate business. “By separating them as different business units we can give them the required focus to drive faster growth,” Krishnakumar says. “Going [forward], we want to dramatically scale these two businesses.”
MindTree’s move toward testing and IMTS appears sound. While application development and maintenance is a large market of the offshore segment, Indian players already have a large piece of the pie, so growth in the segment will be limited. Also, MindTree was a relatively late entrant in the space. Testing and IMTS, on the other hand, are not only growing fast, they are also relatively new and under-penetrated segments. Though big players dwell in these areas (Wipro, Infosys and Cognizant in testing and Wipro and HCL in infrastructure management), opportunities remain. “There is also a huge opportunity to create thought leadership, because people are still grappling with concepts and buzzwords,” says cofounder N.S. Parthasarathy, president and CEO of IMTS and independent testing.
MindTree has also added a completely new business to its portfolio: knowledge services. The company has always maintained that it would not enter the low-end and commodity business process outsourcing space, but it sees potential in high-value knowledge services. It is looking to leverage existing strengths in business intelligence and has started with analytics. Within analytics, the firm is focusing on customers and marketing, operations and risk management. It may eventually look at other knowledge-services areas including market research, content and editing, and legal process outsourcing.
“To be successful in this space, the team needs to be cross-pollinated and cross-functional,” says Scott Staples, president and CEO of knowledge services. “It needs to be a combination of statisticians, domain experts, technology experts and functional experts. We believe that we can bring all these four key skill sets to the table under one umbrella for our clients.” The hosted analytics model is expected to be a main driver in this space, Staples says, and MindTree is working toward developing this.
Meanwhile, with the Aztecsoft acquisition, MindTree has expanded significantly in product engineering services. Where the company’s focus had been limited to silicon and systems companies, Aztecsoft’s capabilities in outsourced product development enables MindTree to offer end-to-end services. This is critical because value addition and innovation are increasingly taking place on the software side. Says S. Janakiraman, president and group CEO, product engineering services: “We now have the complete range of product engineering services capabilities going all the way from the chip to the cloud. Many innovations start at the chip level, ripple into the system, and finally explode at the application level. Our systems and semiconductor knowledge enable us to get an early sign of the new technologies and the new products.”
MindTree is also making a shift in the IP space. It has been investing in building IP at the technology and component level; now it wants to focus more on building IP at the product level. The strategy is to build 90% of the product and customize the rest. The company is focusing on emerging areas such as telemedicine, video surveillance and cloud computing platforms. The first products are expected to be ready by the middle of next year.
The current challenge for MindTree is to make the right bets and bring in new competencies. The company has engineering capabilities for product building, but needs to build market-facing capabilities for product management and understanding customer needs. Amitava Roy, president of Symphony Services, a leading provider of product engineering outsourcing services, adds a note of caution: MindTree’s “chip-to-cloud” positioning requires deep and broad capabilities, and that’s easier said than done.
Yet Roy and other industry veterans see MindTree as having strong capabilities. “The acquisition of Aztecsoft has certainly strengthened MindTree in the product engineering services space,” Roy says. A.L. Rao, former chief operating officer at Wipro Technologies and once its global R&D chief executive, adds: “The team under Janakiraman is very competent and capable of providing innovative solutions across industries.” Rao is currently an advisor at Wipro.
MindTree is trying to minimize its dependence on any single region. Over the last four to five years, it has grown its business in Europe to around 23% of revenues. The United States accounts for about 60%. India, which contributes 7%, is a focus area. MindTree would like to increase India revenues to 10% to 12% over the next five years. This has its own challenges. Unlike the global markets, India is more systems-integrator-led, and to successfully compete against the likes of IBM and Wipro, MindTree must develop market-specific skills and partnerships. Moving in this direction, MindTree a few months ago attracted P.K. Gopalakrishnan, a former Wipro executive, to head its India business. At Wipro, Gopalakrishnan was responsible for the Indian government and defense vertical. Under his leadership, this vertical contributed US$75 million to Wipro in 2007-08.
As MindTree grows, industry experts say, it needs to equip itself further to meet customers’ increasing expectations. The economic crisis requires customers to fundamentally reengineer themselves, and they are demanding more from their IT vendors. According to Anjan Lahiri, president and CEO of IT Services: “It is no longer enough to ‘understand’ a customer’s business. We need to be ahead in identifying their problems and be able to create frameworks in which we can solve the problems. This means that we need to build deep domain expertise and technology expertise and blend the two.”
This stirs up the longstanding “specialize or perish” debate for midsize companies. Commenting on MindTree recently in the business weekly Businessworld, Sudin Apte, head of Forrester Research in India, noted that the company “needs to pick its spaces and not deviate.” MindTree, however, would like to see itself as offering both scale and specialization. Says Soota: “Ever since we have been [at] US$25 million to US$30 million, we have been told that we must specialize or we will be wiped out. But the nature of the business is such that if you don’t offer a given skill, then you are giving someone else an opportunity to enter your account.” Adds Krishnakumar: “We want to be seen as a ‘summation of specialists’ rather than a loose confederation of different skills.”
‘A Transformative Journey’
MindTree’s other big challenge is on the people front. The combined MindTree and Aztecsoft employ 8,000 workers. As MindTree moves toward the US$1 billion mark, the workforce is expected to grow to around 10,000. Scaling leadership capabilities to cope with the complexities of a growing organization is critical. Since April 2008, Bagchi, in his new role as “gardener,” has worked one-on-one with MindTree’s senior executives on personal and professional matters to develop the organization’s next level of leadership. Over three years, Bagchi will have interacted with the top 100 people at MindTree. Explaining his role, Bagchi says, “There is nothing like a transformative journey of a company. There is only a transformative journey of its top 100 leaders. And this cannot be achieved through workshops and classroom training.”
Bagchi’s role rests outside the formal organizational structure. He does not report to anyone, and no one reports to him. He calls it “hetero-archy.” If this proof of concept succeeds, MindTree will create more such hetero-archical roles, Bagchi says. “The world around us is changing in fascinating ways, and organizations which are very structure-driven will be found wanting,” he says.
Bagchi’s role change, however, has raised questions within the industry. Skeptics wonder whether Bagchi’s moving out of an operations role indicates differences over the company’s direction. Some see his three-year “gardener” role as the beginning of a parting of ways. Others suggest that MindTree’s quest for the US$1 billion target may bring personnel issues that necessitate the role. Soota dismisses such talk: “Both Subroto and I, in my role as executive chairman, are engaged in building the future.” Incidentally, by 2020, MindTree would like to have a non-founder as chairman. “This is [would symbolize] that anyone can aspire to reach the highest position in the company,” Soota says. “It is an aspirational approach for all our leaders.”
Ravi Bapna, associate professor of information systems at the University of Minnesota’s Carlson School of Management and executive director of the Centre for Information Technology and the Networked Economy at the Indian School of Business, considers MindTree’s leadership to be its biggest strength. “I’m bullish on the company because for me corporate success begins and ends with leadership,” Bapna says. “Visionary and ethical leadership is a scarce commodity globally, and MindTree is certainly fortunate in having Soota and Bagchi at the helm.” Sethi, of IDG Ventures, remains a firm believer in MindTree and its top team. He believes that the company will reach greater heights in the coming years. “There is magic there,” he says.