About a year ago, a global telecom and media conglomerate from Down Under was looking to outsource its critical business applications. The rationale was simple—it wanted to focus on the core business and farm out the IT-related support function to a third party who could do the job better and cheaper. The deal, valued at several hundred million dollars in a year bereft of big deals, saw IT services firms queuing up eagerly. But, with the client insisting it wanted to work only with large, reliable vendors, proposal requests were extended only to the big boys—such as large Indian pure-plays Infosys, Wipro and TCS and global bigwigs IBM and Accenture. Mid-sized firms were not invited to participate.

Given this, it came as a total shocker when Mphasis, with one-third the headcount of a tier-1 Indian IT services firm, was able to participate and walk away with a big chunk of the contract. Reason: it was backed by the might of its parent—HP, the world’s largest technology firm.

This would have been unthinkable a few years ago. As a mid-sized firm, Mphasis used to live off the crumbs left by its larger brethren in the IT services space. While the company had some pockets of expertise, it lacked a comprehensive portfolio, which hindered it from bidding for large outsourcing deals.

The takeover last year by HP (it acquired EDS, which owned Mphasis) changed all that—the Australian deal being a case in point. In fact, the HP-Mphasis relationship has been formalised in the form of a new brand identity. The Indian firm has been rechristened Mphasis, an HP company (HP owns a 61% stake in Mphasis).

Mphasis has finally got its pedigree right…under its third owner. The company was floated in 1998 by ex-Citibanker Jerry Rao, who merged it with BFL Sofware in 2000. Under Rao, who continued to head the merged entity, Mphasis carved a niche for itself serving companies in the financial services space. But it had no real exposure to other sectors. Still, Rao took Mphasis to Rs 940 crore in revenues (March 2006) and Rs 2,447.67 crore in market cap, before selling it to EDS in June 2006.

EDS took Mphasis to the next level. Revenues rose to Rs 2,423.1 core and market cap doubled, before EDS got acquired by HP globally. But it is under HP, that Mphasis has hit a purple patch. Revenues have grown (See chart), but, more importantly, operating profit margins have jumped from 11.5% to 21.6%. That’s triggered a re-rating of the stock—its market cap has almost trebled to Rs 14,323.16 crore, less than 18 months after HP took charge.

Clearly, this partnership, which draws on HP’s technological prowess and its long-standing relationships with global businesses, is opening doors for the Indian firm. Of the 30 new clients Mphasis added in the first nine months of fiscal 2009 (the company’s financial year closes October), as many as 26 came through the joint pitching strategy. Several of these were big wins (revenues in excess of $20 million).

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Powering Up

Mphasis continues to outperform its peers...

Q-o-Q Growth In Dollar Revenues
Company	3 months ended Jun’09	3 months ended Mar’09	3 months ended Dec’08
TCS	0.5%	-1.5%	4.7%
Infosys	0.1%	-4.3%	-3.7%
Wipro Tech	-1.3%	-4.9%	0.9%
Cognizant	4.1%	-0.9%	2.5%
Mphasis	5.4%*	7.2%^	9.3%**

… And its profit margins are also inching up.

     

* Figure for quarter ended July ’09; ^ Figure for quarter ended April ’09;
** Figure for quarter ended January ’09

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Mphasis CEO Ganesh Ayyar says the deal won Down Under was the result of a carefully planned operation (from chasing the lead to the sales pitch) carried out by executives from both companies. “If we were on our own, we wouldn’t have been anywhere in the picture. But jointly, we were able to offer something very unique—the strength and capabilities of the world’s largest technology company along with the nimbleness and speed of an Indian pure play,” he says.

The collaboration doesn’t end with bagging the deal. Delivery, too, is a joint effort -- with HP’s India captive unit doing some of the work and Mphasis doing the rest. And contrary to what analysts anticipated at the time of the acquisition, it’s not been one versus the other. It helps that HP’s captive unit in India and Mphasis do not have many overlapping skills. “We don’t have competencies to do everything. By partnering with someone who has what we lack, we can offer a more holistic solution and win deals,” argues Ayyar.

A Good Marriage…

After acquiring Mphasis in 2006, EDS merged it with its India captive centre. This not only gave the Indian firm an entry into the fast-growing infrastructure technology outsourcing (ITO space), but also helped it de-risk its applications business. Mphasis’ traditional focus on developing apps using new technologies meant that it could only tap the discretionary IT spend of a client— the first casualty in a downturn.

The EDS connection gave it the ability to also tap the non-discretionary spend or ‘keeping the lights on’ kind of business. However, the flip side of the EDS association was the impact on employee morale. The lack of clarity on what EDS planned to do with Mphasis made people nervous. It didn’t help that there were quite a few exits at the senior level. So, when HP acquired EDS, and with it, Mphasis, there were similar concerns. However, HP quickly dispelled those doubts.

Horse Power: Mphasis added 30 new clients in the first nine months of the fiscal.

The technology giant treated Mphasis as a partner and evolved a joint go-to-market strategy with the company. With five successive quarters of robust growth, industry analysts are beginning to believe in the partnership. In a recent report, brokerage firm Kotak Securities says it sees HP’s support as a differentiator for Mphasis in today’s challenging times.

A clear delineation of responsibilities between Mphasis and HP’s India captive centre —insiders say this demarcation happens even before a sales pitch is made—ensures the effort is seamless. Ayyar cites the case of a client who told him it didn’t feel as if HP and Mphasis were two separate entities—because everyone involved in the sales effort spoke the same language.

This isn’t a surprise given that experienced HP hands have taken over the reins at Mphasis. Ayyar, who joined the company in January 2009, is an HP veteran, having spent two decades with the company. Insiders say his earlier experience in key positions is helping Mphasis align itself with HP’s processes seamlessly.

Mphasis’ 10-member executive council has two more HP people in Ganesh Murthy, the CFO, and Gopinathan Padmanabhan, who heads the applications business. The rest of the executive team is a fair mix of old Mphasis hands like BPO business head Raj Patil and HR head Elango R, as well as new faces like PA Krishnan, head of the technology infrastructure outsourcing business.

...Will It Last, Though?

But with HP owning 61% of Mphasis, the question everyone’s asking is how long will the latter be able to retain its independence? Mphasis is the only HP subsidiary to have a separate identity. One may recall that when HP acquired Compaq in 2003, it got the latter’s Indian subsidiary, Digital Globalsoft, de-listed.

Analysts, however, feel that merging HP India, which is primarily into IT hardware, with a services firm like Mphasis doesn’t make sense. Besides, 29% of Mphasis’ revenue comes from non-HP clients—this may be at risk if the company is turned into a captive unit. The technology practice head of a global consulting company, who didn’t want to be named, says HP is busy with the EDS integration and delisting Mphasis isn’t a priority. “When the two entities seem to be working well together why would HP want to upset the apple-cart?” he adds. Mphasis’ soaring market cap (the company is currently valued at Rs 14,003 crore) could be yet another reason. However, no one’s willing to rule out the possibility of an eventual delisting.

Mphasis currently earns 71% of its revenue from its partnership with HP. Of this, about 14% comprises captive work while 18% comes from HP’s customers (i.e. work migrated from a costly onsite location to Mphasis). The balance is made up by new business accruing as a result of the joint go-to-market strategy with HP, as happened with the Australian company.

HP is aggressively trying to build its services business, which currently accounts for a third of its total revenue. While the EDS acquisition in 2008 made it the world’s second largest IT services player, it’s still some distance behind rivals IBM and Accenture as far as offshoring is concerned. IBM has over 100,000 employees in India, while Accenture’s India headcount is expected to cross 60,000 this year. HP India is believed to have about 35,000 people, but a large chunk of this is in the hardware business— personal computers, servers, printers, etc. To catch up, HP needs to aggressively add to its offshore capabilities.

Mphasis is the only HP subsidiary with a separate identity. But the question everyone’s asking is how long will it retain its independence?

This is where Mphasis makes a perfect fit. According to Motilal Oswal Securities, HP currently earns $34 billion from IT services. This includes $22 billion from the EDS/Mphasis acquisition. Mphasis’ wider expertise should help it garner much more work through its partnership with HP, and increase the parent’s IT services earnings. “Only the EDS portion has been tapped for business by Mphasis. There is a significant untapped portion that offers an opportunity as HP tries to catch up with Accenture and IBM,” says an Oswal report.

Over the last two to three years Mphasis’ expertise has widened considerably from its traditional focus on the financial industry (a throwback to former CEO and Founder Jerry Rao’s background). Today, it has expanded into sectors like manufacturing, communications & media, healthcare & life sciences, transportation & logistics and government. “This allows us to play on a wider canvas and takes us to a whole new level in terms of client engagement,” says Gopinathan Padmanabhan, who heads Mphasis’ applications business. With the applications outsourcing market expected to improve with the economic revival, the future looks bright for the Mphasis-HP combine to corner big deals.

The ITO business stands to gain the most from the partnership. It currently accounts for 18% of Mphasis’ revenue and is growing fast as companies look to extract the maximum from their IT infrastructure by weeding out inefficiencies. It’s a space where HP (along with acquired company EDS) has a solid positioning. PA Krishnan, who heads Mphasis’ ITO business, says even though Mphasis has moved up the value chain from technical helpdesk-related services to remote infrastructure management, it still lacks end-to-end capability. “But with our partnership with HP we can aim for even such contracts,” he adds.

With its top line growing at a robust pace and profit margins stabilising, the company is now looking to invest for the future. Going forward, the key focus, according to senior executives, is increasing its share in a customer’s wallet by cross-selling services. The first step in this direction is restructuring the organisation along geographies rather than service lines. So, Padmanabhan now dons a new hat—developing Mphasis’ business in Europe. BPO head Raj Patil is doing the same in the Americas while ITO head Krishnan is in charge of the Asia-Pacific region.

“Customers today want IT vendors to solve business problems, which can involve application work, ITO work or even BPO work. Without an integrated approach, winning large deals will remain a pipe dream,” says Dinesh Venugopal, Chief Corporate Development Officer. With HP’s backing, Mphasis can today offer integrated solutions and dare to dream big.