Genpact - on top of the BPO world?

Rakesh: Analysts say that Genpact has had a good year, they’ve had wins with UCB, with Unitech Wireless and with Walgreen to name a few. What do you think the next 12 months hold for Genpact?

Tiger Tyagarajan: The next 12 months should be better than 2009, as it should be for the whole world. Our pipeline is very strong and it only built up towards the second half of 2009 - clearly customers and lots of big corporations here [in the US] were really worried about where their revenue was headed. A lot of their leadership teams where undergoing change and restructuring. Decision making really slowed down for the first half of 2009. That obviously had an impact on a bunch of providers including us, in terms of our ability to enter into new relationships and actually even our ability to grow existing relationships because they were also freezing decisions.

All of that started unfreezing in the fourth quarter which is why we have a slue of new wins. A lot of these new wins are going to ramp up this year and our pipeline is strong. We have doubled our growth from last year to this year - our growth was 8 percent last year, but this year it’s 14-17 percent - which is still lower then the 25 percent growth we were getting before the economic crisis. We see 2010 as a momentum building year and then hopefully it will lead to even more accelerated growth as we get into 2011 and beyond.

Rakesh: Has the recession in 2009 led you to look at other markets like domestic BPO in India?

TT: We actually looked at the domestic India and the domestic China market before the recession hit. We looked at markets where the GDP was growing at 10 percent and then we looked at other companies which grew at 30 percent for many years… When that happens we all know that back offices never keep pace. When we started talking to a number of clients two years ago, or potential clients, we knew all of them in India, because the relationships are very strong at very senior levels and in those dialogues it was becoming clear to us that big companies were saying "I want to change my back office, it is legacy and it is broken and I’m growing at 30 percent - I cannot survive with a broken back office. But I don’t want any instrumental change, I want someone who will take me to the best in the class right away. I want someone to take me to whatever is the best in the world."

This is similar to the wireless industry or rather the telephone industry in India. It was considered to be the worst in the world and today it’s considered to be one of the best in the world. We believe that a lot of companies have started leapfrogging on back offices and that provides a huge opportunity when you walk in, you actually help the company to go from really old stuff to cutting-edge thinking. The value you drive is not labor arbitrage in fact there is zero labor arbitrage. It’s all about redesigning the process, completely changing the way it gets delivered and hopefully impacting on the outcomes of those processes.

Rakesh: That’s very interesting, another trend that has developed over the last twelve months includes acquisition activity within the outsourcing space, such as Xerox buying ACS, and Genpact has not only been linked to a lot of this including the UBS back office, but also given that they are 'venture-capitalist owned', they have also been linked with being acquired.  In the next 12 months do you see Genpact more as an acquiree or as an acquirer?

TT: Genpact gets linked to anything that moves in the market, that’s one of the problems with the Indian press, be that as it may you shouldn’t believe everything you read in the Indian press. I think we’ve done a series of acquisitions in our history of being an independent company since 2005. Our objective was to build clear capability and domain expertise around retail, CPG and Pharma - which is what they brought in. We will continue to look for acquisitions that build capability, build new domain and bring in new geography.

The way we think about our M&A strategy is to continuously talk to our customers, figure out what they are looking for from us, figure out if we already have it, or if we have to build it or buy it and then figure out whether there are people we can hire so that we can bring that capability into our company. It’s a capability-driven acquisition and that’s what we will continue to do. Our Smart Enterprise Process that we’ve launched over the next couple of years will actually help us identify gaps that we can fill - using acquisitions.

To answer your question about Genpact becoming an acquired company I think the best people to ask are our shareholders. The reality is that now we are 45 percent publicly owned - and pretty widely distributed - we just finished our secondary offering. Our shareholders are very happy with the journey they have had with us over the last five years. Thus if I were to guess, I would say we would continue to acquire the right acquisitions. I’m not so sure whether our shareholders would allow us to become an acquired company.

Rakesh: We’ve noted this week from the buyer community that it is sometimes difficult for buyers to differentiate between different players in the market, what do you think differentiates Genpact from a) the other Indian providers and b) the bluechip providers?

TT: When we compete in the market we typically compete with IBM, Accenture and Capgemini and in some cases we compete with Indian IT players, who are desperately trying to move into the processing industry. The reality is BPO and processes will grow much faster than IT overtime as it is currently underpenetrated.  Every industry you do a lot of work with, will in time become much bigger than IT. Everyone knows that so everyone is trying to move over to the process side of the business. When we compete, one of the biggest reasons we win either versus IBM and Accenture or versus the other IT players, is because the customers say "you guys think process, you guys have grown up with process, and you are the only people in this whole community who think this way." If you think about our heritage, it’s all about process, if you think about your competitors’ heritage it’s either about consulting or it’s about technology.

Thus we are very different when it comes to process. Our customers say: "you guys have distinguished yourself and you are different." The other thing that differentiates us from the rest is: everyone uses lean Six Sigma. If the user wants that tool then everyone produces a slide saying they have it. But if the question is show me what you’ve done with, or show me how many people use it today, then there is no comparison. We have 300 black belts and master black belts - 30 percent of our leaders have black belts. I myself, have a master black belt. We have 10 000 green belts and we have about 12 000 odd projects we’ve done in our history. Thus, there is a whole slue of learning and insights that we’ve built over many years that has now spread across the globe.

The last point I would like to make is and this is the biggest differentiator between us and anyone else: we have a different culture and we believe clients are often looking for our kind of culture. Our culture is seeped in process, it’s seeped in Lean Six Sigma and it cuts across the entire organization - it goes from top to bottom. Therefore, I don’t know if anyone else can ever get to a point where they have thought about this process to the extent that we have thought about it. We will continue to do things that will position us as thought leaders in the process industry.

Rakesh: So then, why does Genpact sometimes lose? 

TT: We lose because not all customers are looking for what I have just spoken about. For example if a customer is looking for technology to be bundled with process now and I don’t give that much importance to process or if they have a very deep relationship with a technology partner and that technology partner convinces them that they can also do the process, then in those cases we don’t even get invited to tender for the project. Or if the customer says that there is a specific industrial knowledge that they want, for example travel - clearly we won’t get that contract but one of our competitors, with strong travel expertise will.

The CIO could be the decision maker and the CIO could have some very deep relationships with specific companies. Thus there is a bunch of different things which could contribute to us losing. But our win rate is at an all time high. In the second half of 2009 we had some of our highest win rates ever. Again that’s a reflection of more and more companies moving in that direction saying "hey that is different." This process it’s not technology.  I think they are beginning to realize that now.

Rakesh: Who do you see as your biggest competitors at the moment? 

TT: Accenture, IBM, Capgemini - probably in that order.

Rakesh: And is that consistent across different regions?

TT: Accenture and IBM are everywhere, but not so much in India and China. We see Capgemini more often in the US then before, earlier they were very Eurocentric. But we don’t see some competitors these days as often as before. We don’t see HP and we don’t see ACS as often as we used to. I suppose their focus is different given the transformation they are undergoing, either due to the EDS acquisition or by being acquired by Xerox.

Rakesh: Whilst we are comparing Genpact with other providers, we hear terms used like value and innovation.  What do these terms mean to you and what do they mean to Genpact?

TT: We are very careful about using these terms because I agree with you these terms have been used too often. The word transformation has been in use for 10 years now, therefore we are very careful not to use the word transformation. The path we’ve taken is the path which says there is a whole area of processes and building signs around processes that is completely vacant. Thus no-one has done it and no-one is even close to doing it. If you talk to company CEOs, CFOs or CIOs and ask them if they really know how well their processes run, they will probably say "I actually don’t know. It’s okay it’s good it’s not so good." They will never be able to say I run 34% lower in my process than a lot of my competitors.

Listening to those dialogues you realize that they don’t know what is going on. This is where we step in; we bring in value called Smart Enterprises Process and say we will improve your process’ ultimate outcome. If you have a 100 people who manage source- to-pay and procurement for an organization to a cost of around $5000 and I can do it for $3000, that is a $2000 saving. But that is nothing. On the other hand what do these people do? They buy for the company - they buy up to 2 billion for the company every year. If I can find a way to reduce that amount by 10 percent they will save 200 million dollars.  The magnitude of this difference is so much that our focus of driving improvements and value is mainly based on the outcomes.

When I talk to customers I talk about outcomes and not about efficiency. For us that’s value and innovation. That’s where we are putting our money and our resources. We have 70 people only doing Smart Enterprise Development. We’ve actually just set up a process innovation lab – where processes are being deconstructed. There is a laboratory environment where the processes are being tested and controlled. I don’t think anyone has ever done that, on technology yes but on processes no. We believe we can offer something unique.

Rakesh: This year we have seen the models of "make", the models of "automate", we have seen "collocate" and we have seen "buy" decisions being made by clients. What advice would you give organisations to consider before making these decisions? What criteria should be important?

TT: There is not one criterion or one answer that is suitable for everyone. I think it goes back to the company’s core and culture. If companies only focus on outsourcing they will fail. These are companies which have a history of being worried about protecting intellectual property and certain areas of their business. Usually it’s very difficult to change their culture and convince them to trust you. In which case finding a way of combining partners who do provider services as well as shared services and captives is the best option. More and more our view is that irrespective of whether you have a captive or shared services yourself, you are either using partners or you are using collocate. How you stitch those together and make them work together is often the bigger challenge. If you find partners who actually help you stitch them together then you can have a real win-win situation. We have some customers and while we are busy doing some provider services for them we are actually also helping them manage and build their captive. In fact in some cases while we are actually setting up their captive inside our organization, we are also doing other things for them.  But that’s when you have a very close strategic relationship.

Rakesh: How important do you think the political readiness of the client, the culture and the maturity of the buy-side community are? I guess in my experience the most important aspect of whether to "make" or "buy" is the political readiness of that client to outsource and embark on that partnering journey – which is sometimes a venture that the key stakeholders have limited experience in. How important do you think that is?

TT: It’s very important, but I do think that culture will ultimately determine whether you can change the politics. Let me give you an example, if you think about companies known for aggressively driving change continuously and if in that company you have a political environment where let’s assume an idea like outsourcing is not welcome, as long as you have a few leaders who want to do it they’ll drive the change and force it.

To me it becomes extremely important because in some cultures the political environment actually doesn’t matter, but in some cultures the political environment matters because you can’t change it. In those situations you have to understand the politics and you have to figure out, how and when you are going to change it.

At the start of the journey, you make the early steps big wins, you make it clear where it’s headed and you hopefully rally people over time. In the end it can only be driven only if some leaders have bought into it and want to drive it. If the political structure is such that people don’t want to do it and no leaders are driving it visibly, then don’t even go there. As a provider we would not partner with such companies because it will be very difficult to work with them.

Rakesh: I’m going to ask you to take out your crystal ball and predict what you think the F&A BPO market will look like in 5 years’ time? Where you think Genpact’s position will be in that market?

TT: I would say the F&A BPO market 5 years from now should be double or even triple the size it is today. I think that you’ll find lots of new, large, global companies which haven’t even thought of globalizing F&A who will start looking into creating shared services and using a provider to prove those services. Today there are industries where there is nothing happening right now like retail for example. But in 5 years time a lot could be happening in the retail industry.

The other thing that I think is going to happen is there is going to be a lot of mid-market companies who are actually going to want to tap into these services. There will be a realization that there is a bunch of things that I as a company need to focus my energies on in order to be really good in the market and compete.  That realization is beginning to grow now. As people in our client organizations move from company to company -  they will infiltrate those cultures with that thought process and the more that happens, the more I think the market will keep growing. Finally I think the market dynamics in terms of what customers expect from providers and what providers actually deliver is going to undergo some dramatic shifts - where SLAs and labor arbitrage are not that important.

The question is what real improvements and outcomes directly measurable on the balance sheet, will get the CFO interested. Because today if it’s a million dollar improvement for a global company the CFO doesn’t care. A 200 million improvement in working capital or increasing retention rates for your customer by 40 percent will get the CFO’s attention.

Rakesh: Thank you very much for joining us

TT: Rakesh, those were some of the best questions I have ever been asked. Thank you.