These aren’t the best of times for India’s most successful technology entrepreneur, Azim Premji, and his giant software outsourcing venture, Wipro.
On April 10 the company’s arch-rival, Infosys Technologies, shocked the market by slicing its 2003 profit forecast by more than half. Worried about the entire sector, investors quickly took the price of Wipro stock down 18 percent. Seven days later Bangalore-based Wipro shared its own bad news: Net income had fallen 3 percent to $170 million for the fiscal year ending March 31, and the June quarter was expected to see only a 4 percent gain in revenues -- a far cry from the 60 percent annual gains Wipro registered as recently as three years ago. Stockholders soon shaved an additional 8 percent off the value of the company’s shares, bringing them to 884 rupees ($19.22), from Rs1,657 at the start of 2003.
The Indian software industry’s salad days are over. A slow global economy and stagnant IT services spending have reduced the typical outsourcing company’s margins from more than 30 percent to roughly 20 percent in the past year and cut sales growth nearly in half, to about 20 to 25 percent annually.
There are other pressures. Western rivals like Accenture, EDS and IBM Corp. have opened offices in India and are starting to reap the benefits of the country’s vast pool of software talent. And Chinese competitors threaten to further undercut Indian companies’ business and margins. Another headache: Concern for lost jobs at home has prompted U.S. and European lawmakers to call for limits on outsourcing to lower-wage countries like India.
Both Wipro and its biggest stockholder, Premji, who owns 85 percent of the shares, have paid a heavy price: This year’s 49 percent share price decline through June 10 has cut the company’s market capitalization to $4.46 billion and helped trim Premji’s net worth from more than $6.4 billion a year ago to about $3.8 billion today.
Of course, neither Wipro nor Premji has too much cause to complain. The company still boasts the local market’s biggest technology market cap, and Premji is the second-richest person in India (dropping one notch in the past year). Besides, there’s a hidden benefit: People no longer ask him about his money. “It used to make me very angry,” he says.
Premji, 56, started in business 35 years ago when he inherited Western India Vegetable Products, then a $2 million vegetable oil maker, after his father died of a heart attack. He had to leave Stanford University just a few months shy of graduation to take over the business. (He later got his degree by correspondence.)
Premji soon diversified beyond vegetable oil. Hiring low-paid but highly skilled, English-speaking IT professionals, Wipro branched out by providing first-rate software maintenance and programming services at a fraction -- usually a third -- of what its European and U.S. competitors charged. By last year the company had more than $900 million in sales, most of it from North America, Europe and Japan.
Premji plans to address Wipro’s recent challenges by breaking out of the company’s bread-and-butter software services business and into more complex -- and higher-margin -- project consulting work. In this revised role Wipro will market business solutions to CEOs instead of selling plain-vanilla technical fixes to chief technology officers.
To gain client expertise, Premji has acquired two small U.S. firms. In April, Wipro bought financial technology consultant NerveWire for $18.5 million. That followed its November 2002 purchase of American Management Systems’ global utilities practice for $26 million.
Premji recently discussed Wipro’s plans with Institutional Investor Senior Writer Deepak Gopinath.
Institutional Investor: Is the outsourcing business model still viable?
Premji: I think part of the investor public was expecting too much from the software industry. They underestimated the margin pressures which were coming and the business normalizing to more reasonable operating margins. A stagnating global economy has not helped. But the business model is very viable. Growth rates this year will be very good. Last year [ending March 31] the industry clocked 25 percent growth, including IT-enabled services. Part of the battering Indian IT stocks have been taking is investors asking a fundamental question: How much is the business model changing, and where will it settle?
Is the boom over?
If you consider the boom 50 percent growth rates in sales and 30 percent operating margins, yes, it is over. If you consider the boom 25 percent-plus growth rates and more reasonable operating margins, somewhere between 20 and 25 percent, no. It is a frame of reference.
What are your expectations for revenue growth for Wipro for this year?
We’ve only given a forecast for Q1 -- it is essentially about 4 percent. We will have a good year on the top line, some margin pressure, more acquisitions, because we are finding that it is an important strategy for going up the chain, for building quickly to mainstream. The reason we are keeping our acquisitions reasonably small is the risk factors.
Do you see corporations eventually taking their business from India to lower-cost countries like China?
That is going to happen. Work will get done wherever it is most cost-effective and quality is assured. We see China as our single most important competitor.
How soon before China catches up?
China is behind because it is still not English-speaking, a disadvantage in the global scene. They don’t have project management capabilities yet; they have to learn, like we learned, the hard way. They don’t have the same sophistication in technology; they don’t have the same sophistication in quality processing. I reckon they are four years behind India; now, because of SARS, they’ll be five years behind India.
How will you deal with Chinese competition?
Two years from now we will have a [software] development center there. We will hire local Chinese speakers. We are setting one up in the Asia-Pacific, which we will announce shortly. It has also become necessary from the perspective of a geographic risk spread for the customer.
How concerned are you by U.S. politicians’ attempts to limit outsourcing by U.S. companies to protect jobs?
It is the politicians’ job to talk. It will probably happen, because IT-enabled services are displacing people who are not even college graduates; they are probably 45 and over. Therefore they are less employable by definition. It is a social issue. I think people must realize that from economic necessity it is better to save some jobs than to lose all jobs.
Is a business model based on cheap labor sustainable?
I don’t see business as exploiting cheap labor. I am not going to China for cheaper labor. I am saying that the world is going to a global delivery model in services. When we have people in the U.S., we pay them U.S. rates. What the model is saying is exactly what happened in manufacturing. Operations which are not cost-effectively performed with proximity to high-cost economies are getting transferred to lower-cost economies with the benefit going significantly to the customer.
Why is Wipro focusing more on consulting work?
It is a one-two-three strategy. First, it gets you into the mind of the CEO in addition to the CIO, and that is becoming increasingly important. I think line management is playing a much more dominant role in IT decisions than it did three years ago. And that trend will accelerate. Consultancy builds equity with the CEO much more than execution. Second, it generates downstream business. Whether it generates $2 for every dollar of consultancy business, or $10, is a function of the kind of work that you do. But it certainly is leverage for growth for execution business. Third, to understand customer requirements, we need to have local people with local understanding and local expert knowledge.
Why do you still hold 85 percent of the company?
I never thought it was worth selling my shares. Even when they reached Rs9,500 [in February 2000 versus 850 recently]. One has to have confidence in oneself.
