Showing posts with label CAGR. Show all posts
Showing posts with label CAGR. Show all posts

Thursday, August 30, 2012

“We often work without competition”

In an exclusive with virat bahri, Aricent CEO Sudip Nandy talks about how focus has been one of Aricent’s key strengths and how they will leverage it to enhance value proposition and growth prospects for the future
 It’s been over 4 years since Aricent was set up as a conglomeration of different entities post the acquisition of a majority stake by PE giants KKR and Sequoia Capital. The company has seen an impressive success rate, with revenues at $484 million in FY 2009-10 (from $238 million in FY 2005-06, a CAGR of 19.4%). The company’s business model has several unique hues to it; starting from the exclusive focus on telecom to the multiple client engagement model to the intense focus on design as well as R&D. In this exclusive with B&E, Aricent CEO Sudip Nandy discusses the company’s plans to grow in the telecom space and how the sector is expected to evolve further.

B&E: Tell us about how Aricent evolved as a pure play IT company in the telecom vertical. Do you feel it remains a compelling strategy?
Sudip Nandy (SN): Different parts of Aricent have got different ages, some of the parts are very old. For instance, the larger part of the building where we are sitting was one of the entities called Hughes Software Systems. These were independent companies in the 1980s and 90s. Hughes was listed on the BSE. In 2004, Flextronics acquired Hughes Software Systems in India and made it a part of Flextronics Software Systems in India. They continued buying a few more companies in India. In 2006, Flextronics became a part owner, and a significant investment was brought in by PE KKR and Seqouia Capital. At that point, we became Aricent. It just so happened that the larger entity called Hughes Software Systems and so many of the other entities that got acquired under it, were focussed in some way or the other on the communication eco system. There was a synergy in what was there together. The decision was taken that we should focus on the telecom and communications area since the feeling was that this is going to be a very very high growth area. Three years on, we find that was highly prescient in terms of where we are today. It is not only high growing; it is going to find its way into all parts of life and industries. It’s almost like internet in the mid-1990s. Communication in the next ten years is going to be embedded into everything. We think that with the focus we have, we are able to a) better predict what the future could bring b) invest ahead of the curve and c) when required beat out competition but often work without competition on our own work with clients. Over the last four to five years, we have been growing well and have been able to ride the crest and the trough.

B&E: You have had a long experience at Wipro. What motivated you to make the shift to Aricent?
SN: I have had a more broad experience in technology from 1989 onwards, with a little under 26 years in Wipro. And this is the first change; about an year and a half back I joined Aricent. And at Wipro, Aricent was our competition number 1! And when we talk about Aricent in comparison with other IT companies in India there are some unique aspects; besides the fact that we are sharply focussed. Companies are struggling and are at different levels of readiness in terms of the kind of consulting they have created. For us, around 20% of the revenue comes from situations which is really consulting; where the revenue per employee would be in the $300,000 per employee range; where in normal outsourcing and services business, it would be in the $50,000 per employee range. Second interesting thing is that the model that we have is what we call rightshoring. Around 82% of our people in US and Europe are actually local people. For other companies, the figure is around 20% and the rest are expatriates from India. We are more strategic for customers here whereas in my previous job, I would say we were probably more tactical for the customers. More positive was the sense of what is possible in Aricent. We had an innovation piece that was chugging along and doing very well; and then there was this engineering piece, and there was also a piece which was products and licences. All three had a significant communication component but it was not woven together. If you put the missing piece of strategy, it becomes a very compelling and complete story. Secondly I understood the business very well as we were competing with Aricent. The possibility of creating a new class of company was a motivating factor.

B&E: With respect to your co-creation strategy with clients, what are the different models of revenue you employ and how is it working out?
SN: We do co-creation because the work we are doing is very strategic. Often when services companies work with customers, it’s more of a play on the cost side, whereas our work is more to do with creating new and enhanced revenue streams. Most people go and talk to a CIO and get business, but with a CMO it is a very different discussion and value proposition. Even if it is not licensing of something we have created, we have different models – fixed price model, fixed price + sharing of rewards, capped royalties, et al. We haven’t made it a huge part of our business yet but it could over time become a huge part of our revenue. In situations like cost saving, clients want to share the risk and to keep you happy, they give a bit of a reward. With co-creation, they want to share the reward. We don’t own the IP in these cases; the customer owns it. We have not just people doing delivery work but also project management for the customer and defining their product road map. They have their eyes and ears on the ground to understand what competition is doing and how we can be a step ahead. Our people also work for customers on the strategy front. This is very different from a purely product engagement.


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Wednesday, July 18, 2012

Does R&D Really Pay?

When Apple came up with Mac, IBM was investing 100 times more in R&D than Apple... when Xerox was spending billions at its PARC research centre, others were becoming market leaders in laser printers and mouse, which Xerox invented... and now, when western CEOs are shying away from billion dollar R&D investments, Indian CEOs have began to pour in more and more... and that’s for a reason for sure!

Research & Die! That’s exactly what we said in 2006 (see 4Ps B&M issue dated September 14, 2006) when we argued that those prodigious commentaries on R&D’s capacious contributions to top & bottomlines, and those golden treatises on the voluminous powers of R&D were equivalent to one huge and most impressive looking word: Balderdash!

It all started at the start of this century when Dr. Scott J. Wallsten of Stanford wrote a paper titled ‘The R&D Boondoggle’, where he very strongly commented that internationally, leading firms have started investing lesser and lesser in R&D. And the reason, he deliberated, was that in general R&D spenders had received considerably lesser benefits than all others around them... Since then, time and again, researches have kept proving how even in the industries where R&D was supposed to provide the biggest benefits, it has gone on and accumulated losses that are statistically significant and not ignorable. What can be better examples than Sun Microsystems and Xerox, two prolific R&D investors? After investing over $2 billion in R&D every year for a decade and wiping out a large share of investors’ money, while the former finally got sold to Oracle, Xerox, which kept investing in R&D through its PARC research centre, failed to make money on its patents; even the laser printer and mouse, two of Xerox inventions, are now cash cows in the hands of competitors.

Unarguably, the devastation that the spectacularly researched Resilience Report (2005) of Booz Allen Hamilton, which surveyed the top 1,000 R&D spenders across the world (who constitute around 90% of the global corporate R&D spending) over six years, caused on the world of R&D remains unequalled till date. The report undertook the most massive correlation analysis between R&D and performance. We note here two statements from the report that have attained significance at least in contemporary history. The report statistically proved that “lavish R&D budgets don’t guarantee performance.” In fact, statistically again, the report turned the R&D world around with the statement that there existed “no correlation” between R&D spend and any performance factor (sales, profitability, shareholder return...). “No Correlation!”

To reconfirm if the trend sighted by the research still prevails, when we at B&E, with the statistical and research support of the IIPM Think Tank, carried out a similar correlation test on the top 20 R&D spenders in 2010 among the Fortune 500 companies (US) including the likes of Microsoft, Intel, Apple and IBM, the results came out to be even more shocking. The results indicate that over the past 5 years CAGR growth in R&D expenditure as a percentage of revenue has resulted in a decrease in revenue as well as profit and market capitalisation of these companies as they bear a negative correlation of 0.50, 0.64 and 0.36 respectively (see table below). Justifying the fact in a more intriguing manner Steve Ballmer, CEO, Microsoft, once said, “The lifeblood of our business is that R&D spend. There’s nothing that flows through a pipe or down a wire or anything else. We have to continuously create new innovation that lets people do something they didn’t think they could do the day before.” Microsoft under Ballmer has seen its m-cap destroyed from $580 billion at the start of this century to $230 billion right now (as on January 20, 2011). Despite his public statements, a fire-fighting Ballmer has reduced the company’s R&D billings as a percentage of revenue by 0.92% from 14.87% in 2006 to 13.95% in 2010. On similar lines, HP too brought down its R&D spend as a percentage of revenue by 1.57% between 2006 and 2010. Microsoft and HP managed to uplift their turnover by 41% to $62.4 billion and 37.5% to $126 billion respectively during the period R&D spend was reduced.

On the other hand, despite doubling up its R&D expenses from 4.11% of revenue to 9.53%, revenue per R&D dollar spent by Boeing has fallen dramatically to $10.50 in 2010 from $24.30 in 2006. The situation is no different for companies like Merck and Cheveron, which opted the R&D root to add to their top-lines over the past 5 years. In fact Merck, after investing more than $5 billion annually in R&D, with approximately 10,000 people, and with thousands of patents filed every year, has been able to introduce less than half a dozen new products in as many years. And their heart stopping story of Vioxx is a fable!

These results leave no doubt as to which way CEOs need to go when it’s about spending on R&D and the rate of acceptance of the fact is certainly improving at a smart rate. Be it MIT’s ‘Corporate R&D Scorecard’ – which proved how the top 150 corporate R&D spenders were investing significantly lesser and lesser in R&D – or the recently published (Winter 2010) Booz and Company report titled “The Global Innovation 1000” for 2010 – which indicated how the top 1000 R&D spenders of the world have cut down on their allocations on the front by 3.5%, to $503 billion in 2009 – they all stand tall vowing for the changing mindset. For that matter, over 55% of the global CEOs, who participated in 2010 NYSE Euronext CEO Report gave a huge thumbs down to any increase in R&D spending.


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