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July 29, 1999
Polaris began software services with a strong focus on financial and banking industries in 1995.
Showing remarkable courage, despite enormous peer pressure, it stayed away from seasonal opportunities like the date 2000 fix.
The decision has helped Polaris acquiring meatier expertise in the software services business.
Such daring strategies have come from the mind of Founder-ChairmanArun Jain who began with 25 employees three years ago.
Its compounded annual growth rate has been over 100 per cent for the last three years. With more expansion plans, the company is going public on August 4.
In an interview withShobha Warriar, Jain explains his unorthodox discipline from the reasons for his timing of the public offer, to the decision to shun the Y2K cash cow, to the reasons for not expecting much from government sops:
Between January 1 and April 28 this year, when the Sensex rose by a mere 8 per cent, the IT stocks shot up by 63 per cent. But from April 28 to July 14, when the Sensex went up by 44 per cent, there was only a mere 13 per cent jump in the IT stocks. Of all the times, just why have you decided to go public now?
It is not only market sentiments that affect the judgement of the people on new issues. They also look at how a company fares and how it shares its wealth. When your organisation is efficient and it has good customer relations, there is no need to get worried.
Yes, I agree, market sentiments do affect a company to some extent. But in our case, we do not think the recent mood will affect us. If we felt that way, we would have gone public much earlier and when the scene was much favourable. But we choose to enter the market now, when we are quite sure of ourselves.
Now I can confidently say that our company is on the right track. Two years back, we had Citicorp Finance (India) Limited as a private equity investor and now we are close to becoming a Rs 100 crore (Rs 1 billion) company.
If the company is in the right track, it can survive in any environment and we are confident of crossing the Rs 400 crore (Rs 4 billion) mark in another three years.
So, I feel the current market sentiments may not affect us significantly. You can never say it might turn to our advantage too.
When the market was down, only IT, pharmaceuticals and fast moving consumer goods fared very well but not now. Do you feel the IT bubble is going to burst soon?
I don't think so. The IT bubble in India is so small compared to what is happening in the international market. The truth is, in the international market, India is a small player even now. But we have every potential to be a major player. So, for the next 10 years, Indian companies and Indian products are definitely going to be there. There is no doubt about that.
But you see the players in the field changing every three years. We see new players entering the market and making their mark. So, the bubble can only grow bigger!
You said you plan to invest only 30 per cent of the funds that you are going to raise from the public issue on software, and the rest, you want to invest in infrastructure building, like setting up offices in Germany and Japan. Why did you take such a decision even though you are a service company?
Yes, we are a service company and that is precisely why we plan to set up offices all over the world. See, it is essential that our sales network reach out to people.
Secondly, we should have the ability to service our clients like any other local company does. As we are exporting our software to the US, UK and Germany we should be able to provide solutions to our clients' problems. Our clients should get the feeling that we are there to solve their problems. For that, we have to be a global player and not just an Indian company.
Thirdly, you should have a good infrastructure to show your client when he visits your factory.
That's why we are really on an infrastructure building exercise. We are building three more offices in India too; one in Madras, another in Delhi and we have not decided on the third place.
It will be in South India, that's for sure.
Many software firms that have bases in the US are setting up offices in India because India provides cheaper labour. For example, a company like Mastech. Will it not be a costly proposition for an Indian company to have offices all over the world?
All the American companies, which are there in the US or in Europe, are now setting up their development centres here in India. These centres are their production centres. In all businesses, there is something called a front-end. Toyota has its base in Japan but they have production factories in the US and here in India too.
Companies like Mastech or EDS have their markets there but they have set up offices here because it is cost-effective to have production centres here. But we are better off in the domestic market than these companies.
What happens now is, we are trying to play in their field and they are trying our field. If I want to be a player in the global market, I should know the global market well. For that, we have to be present there. But only 10-15 per cent of our people will be there and the rest of our employees will be working from our production centres in India.
We want these 15 per cent to give a clear idea to our clients that we are global players with a base in India and not just an Indian company.
Fifty-eight per cent of your revenue comes from the US market and 14 per cent from the domestic market. Is the Indian market that small? Doesn't that mean you depend a lot on the US economy?
The Indian market is small. If you look at our economy, India spends only less than 5 per cent of the GNP on IT while US spends 60 per cent on IT. So, every company that markets its IT products in the US will get 60 per cent of their earnings from the US market.
The whole of Indian market is only $50 billion, and I mean, all the IT companies put together. At the same time, Microsoft alone or GE alone has a market capitalisation of more than $300 billion. So, one US Company is three times the size of our whole Indian IT market.
When you sit here, you feel the Indian market is big but our fundamental market is very small. It cannot be otherwise too as you spend only 2 per cent or 1 per cent on IT.
Do you foresee any change in this in the near future?
Not in the near future. We are growing only at the rate of 7 per cent or 8 per cent. That is not sufficient to change the import-export balance. All the software companies whether it is Infosys or NIIT or Wipro, get 90 per cent of their revenue from the export market. Only 10 per cent comes from the domestic market. That is how the global market is distributed.
Other than the US market, where else do you see a big IT market?
I see a very big market in the G-7 countries where the cost differential is not so high. There is not much gap in the per capita income there and business can grow faster in such countries.
You are not involved in the Y2K problem or in the Euro conversion. Why?
These are short term, seasonal businesses. If we want to grow into a large business house, it is not advisable to go after seasonal businesses. As soon as the season is over, the work also will be over.
Now some of the companies have taken a cautious approach to the Y2K problem and they are not taking more than 50 per cent of their business on solving the Y2K problem. But the fact is that even those who have built 40 per cent of their business on Y2K problem are in trouble today.
But we want to be only in contemporary technology, and Y2K does not fit into our idea of business at all.
But was it not a risky decision to stay away from the Y2K business as many companies were cashing in on that?
Yes, it was a tough decision to take, as there was a lot of pressure from the organisation too. They wanted to know why I took such a decision when all the others were eager to cash in on the Y2K problem. Many in our company felt that our company was too small to take such a risky decision. But we stuck to the decision.
You talked about four of your new products, INSPIRE, Nterprise, Super Store XS and Parsley. Are you going to sell these branded products?
We have set up separate a retail division, Polaris Retail and Communications Limited to provide strategic focus to the retail business machine. Our efforts are to sell branded software soon but I do not know how successful we will be. We definitely want to sell our product Super Store XS as a branded one.
You said somewhere that banking and finance is going to be the area where you are going to concentrate. Why banking and finance alone?
I want to correct the statement. It is not on banking and finance alone that we are going to concentrate. Yes, Polaris has focussed primarily on the industries of finance and banking and a significant part of our revenue for 1999 was from banking and finance. But we are spreading our domains to Insurance, retailing and transportation. We want to be more of a business solutions oriented company and not just a technology oriented company.
We want to use technology as a tool to deliver the solutions rather than have technology as a base to sell solutions. For that, you need to know the business domain very well. I shouldn't believe that I could do everything and be good in everything. We would like to be in the designer stage of the company and not in the coding stage.
Whatever the projects we do, we want to take the complete responsibility of designing, developing and also implementation.
How does the Indian banking sector react to new technologies?
Private banks are taking good initiative in implementing the best technology in their banks. Yes, the other banks have an inertia problem.
Is it because they are public sector organisations?
It is not because they are public sector organisations but it is because of the attitude of the leadership. If the leaders believe that automation can improve their business, they will go for newer technologies.
I believe that the CEO of a firm is fully responsible for whatever happens inside the company. For example, look at the way the Indian Railways switched over to new technology. You did not expect Indian Railways to do that, much ahead of banks. But the truth is, the railways could achieve what the banks could not. That is why I said it all depends on the top-level leaders.
You have talked about the need to change the mindset of Indian software companies as they spend 80 per cent of their revenues on product development and 20 per cent on marketing the products unlike the Western companies. Why do you say it should change?
We, the Indian software companies feel that product development is an intellectual exercise and it needs 80 per cent of our efforts! And then we follow the marketing model of the manufacturing companies by spending 20 per cent on marketing products.
But in software, once you build a product, once you create software, it is going to be there with you. What is important is marketing the product. So, we should think of using 80 per cent of our efforts to market a product.
You take the case of Microsoft or any other major software company in the US, 60 per cent of their balance sheet is taken up by marketing. We are not used to spending 60 per cent of the expenses on marketing. Our mindset is not tuned to that. That is one of the reasons why no Indian software product is making waves in the international market. We cannot even dream of spending 80 per cent on marketing a product.
What is the strategy of Polaris? Can you think of spending 60 per cent on marketing your products?
I must admit that we also do not do that. In fact, we have failed miserably a couple of times earlier. Now we have set up a separate company for marketing our products. I have read that when Lotus 1,2,3 was being launched, they kept $3 million for capital funding. As they were so eager to sell the product, they spent almost $ 2 million on a single show. Can you imagine anyone spending $2 million from a $3 million fund on one show?
How many people in India have the guts to at least spend 60 per cent of their funds on one show? I am sure nobody will do that. I too won't.
We do not take risks as far as our businesses are concerned. We consider a business set up as our own, to be passed on from one generation to another. But in the US, business sentiments and personal involvement are kept apart. We take so much pride in setting up a company and we look at it as our own and we cannot even think of selling it to others.
But in the US, people sell their successful software businesses, if they get the right value for it and then start all over again.
Let me ask you something about IT hardware. The Philippines exported IT hardware worth $150 million in 1997. But in 1998, in a single month, they exported $5 billion. On the other hand, India's IT hardware export is just 0.1 per cent in the global market which is also said to be dwindling. Why is it that when small countries like the Philippines or Taiwan can be major players in the hardware market, India is lagging behind?
We had great opportunities in the past but somehow we failed to capitalise on them. I feel the myopic view of the industry is also responsible for this. In the software industry, we had TCS, Wipro, NIIT, Infosys, etc as major players and they paved the way for many small players entering the field.
The success of the earlier players worked as an impetus to others while in the hardware sector, we did not have any benchmark. This also could be a reason.
Is capital one of the reasons, as you need more capital to set up a hardware industry?
No, I don't think so. See constraints are there everywhere; it can be people constraint, it can be knowledge constraint, it can be anything. But if you are really keen on doing something, capital will not be a constraint at all. It is just an excuse.
There are three kinds of resources an organisation will have; purpose, challenge and economic resource. If you start with a purpose, you will take the purpose as a challenge and economic resource will follow then. But we somehow feel that capital should come first.
We define the purpose and the challenge only if we have capital. This is wrong because you are creating a purpose here. Unless you have a vision and passion for something, nothing will materialise.
Take your magazine Rediff itself. Somebody had the vision to create something on the Net, which was not done in India before and that became the driving force. They did not wait for Intel or somebody else to come forward with capital. It came into existence because somebody had a passion for that.
Now the government is planning to offer some sops to the IT hardware industry through the new policy of Soft Bonded IT unit. Do you feel such sops will help the hardware industry?
Sops never help. I don't believe that the government can solve all our problems. Somehow we Indians believe that the government is like god who can make things happen and do things for us. But as entrepreneurs, it is our responsibility to do things.
If the product is good, you will be able to sell it in the international market irrespective of sops from the government. I feel we should learn to behave like adult entrepreneurs instead of blaming the government for every mistake that we make.
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