"Just like ‘Intel inside’, every bank should have a ‘FLEXCUBE inside’. " - Views on News from Equitymaster

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  • May 25, 2002 - "Just like ‘Intel inside’, every bank should have a ‘FLEXCUBE inside’. "

"Just like ‘Intel inside’, every bank should have a ‘FLEXCUBE inside’. "

May 25, 2002

Starting his career in Finance, Mr. Ghaisas moved to the software industry in 1987. He joined i-flex (then Citicorp Information Technology Industries Limited) in 1993 as controller and company secretary. He went on to be chief financial officer and company secretary for the global operations of i-flex solutions. In 1997, he became one of the three-member top management team in the new organizational structure of i-flex. In an interview with Equitymaster.com Mr. Ghaisas talks about the Indian IT industry, the unique business model of i-flex and his vision for the company going forward.

EQTM: How do you see the software sector taking shape globally?

Mr. Ghaisas: As far as the spending on IT is concerned I think it will continue to grow, inspite of the economies doing well or not. This is because whenever you talk of cutting cost, technology does help. Most organisations need to have efficient operations by reducing costs. So ‘smarter’ spending will be more than general spending. I don’t see any major fall in as far as IT spending is concerned. Therefore, the market for IT companies would continue to grow. Probably, not at the pace that was envisaged before.

This is not because people will not spend more, but there will be mergers by mortality where some companies will vanish, who otherwise would have spent. Only to that extent the markets will be smaller. However, merger by mortality also means that, automatically, market share will get folded to the companies that have survived. This happens specifically in the case of banks. Suppose a country has 30 banks and 10 die out over a period of time due to the economic situation and feasibility. The same number of people are still going to do banking. So the remaining 20 banks get the market share of the 10 banks that have perished.

If you want to keep costs in control and service the newly added customers you need to use right kind of technology. Therefore, those banks will spend more on technology to keep a balance between the number of customer and the quality of service. Going forward the worst-case scenario is that things will be stable. The better case scenario is that if the economic situation improves things will be far better.

EQTM: What makes you feel so optimistic? What factors will drive the industry and what kind of technologies do you see developing in the future?

Mr. Ghaisas: In my opinion, when economies are not doing well at a macro level, it is not the new technologies that help, but it is better domain knowledge that helps better applications. When I am trying to balance my increasing customer base with efficiency of service, it does not matter whether I am working on Unix or NT. It is how my application software is built and how efficiently or quickly I can understand my customer that makes all the difference. At times like these customer management is critical.

Let us take an example, all the previously developed banking software were GL (General Ledger) centric. The sole objective was to tally the trial balance. But today things have changed. Take FLEXCUBE (I-flex’s banking product) for example. It is more customer-centric with a strong focus on relationship management. The changes coming in are not necessarily technology based but a lot of domain knowledge is being ingrained into the software.

If we take a look at history, every time an economy is down, what has triggered it to go up is a new invention. And I am not talking about information technology alone, I mean technology in general. Inventions like the TV, the Car and the telephone have their contribution to economic cycles in the last century. Probably we will have to wait for a new invention. Dot-com was expected to be a trigger but it only proved to be a bubble.

EQTM: Any specific comments on the IT industry in India? Do you feel that the USP (Unique Selling Proposition) continues to be low cost or has there been a change?

Mr. Ghaisas: The IT industry, in the last three decades of its growth, has been constantly arbitraging labour costs. That needs to change now. If you take the development cycle of a solution, coding only forms 20% to 30%. This too is shrinking as newer technologies and tools are coming in. Previously in COBOL we used to write a thousand lines, now you can execute the same program using ten statements. Therefore we need to shift our base from arbitraging labour costs to providing specialized services or domain expertise. If you want to do that, in my opinion, concentrating on a particular vertical is very important. Chose one vertical and understand how the business in that vertical takes place worldwide.

When I-flex started in 1993, terms like value chain were not there, but we went ahead with this vision. We had to face mind blocks like ‘you don’t understand our business’, ‘you can’t manage projects’, ‘you do not have project management skills’ and ‘you are only good coders’. But we wanted to change that attitude.

Today if you see the reports that are coming in from market research and consultancy firms for a prescription to the Indian IT industry, people are talking about similar things, move up the value chain and focus on a industry vertical.

Working with this vision right from inception is what makes us uniquely different from the IT services companies in India. We are a software company. 60% of our revenues come from a product that is mission critical. If a CRM software stops functioning, chances are that the company using it won’t. However, if FLEXCUBE stops functioning then the bank will stop functioning. Your tellers’ won’t work and your ATMs will stop functioning. That is where your value addition comes. But at the same time there is the added responsibility that your service levels are right to give the confidence to people that ‘Made in India’ could be as good or even better than international products.

EQTM: What lessons has the software industry learned from the recent slowdown in business?

Mr. Ghaisas: I think people are still struggling with the cost leadership strategy and are cutting down each other for rates. Many have put up a huge infrastructure and have employed in large numbers. Consequently, they start working on a marginal cost basis. This normally happens in any industry. However, the IT industry is slowly realizing the importance of moving up the value chain.

In the last McKinsey report for Nasscom, I-flex was cited as a role model because of its different kind of business model. It’s a product-focused business. We don’t have an Oracle from India, we don’t have a Microsoft from India, we don’t have an ERP from India and we don’t have a CRM from India. However, you have a banking product that is the second largest selling product in the world. So today if any bank looks at solutions, they have to look at FLEXCUBE as one option. We are very proud that it comes from India.

Cost leadership was a correct strategy at one point of time. However, every industry must mature and change. Every advantage that you have will sooner or later cease to be one according to laws of economics. Today we think of China, Russia and Philippines as potential competition. The threat perception is due to the possibility of these countries offering services at even lower costs. In the last Nasscom report, some people claimed that this was a myth. If arbitrage on labour cost was the key criteria you were running with for the last 20-30 years, I think you need to change.

EQTM: What is the biggest threat for the software sector?

Mr. Ghaisas: Biggest threat is losing the cost leadership. This will intensify the rate war. As a result, the margins and growth will suffer. The results and revenue guidance from software companies in the past two quarters show initial signs of strain. We have seen margins and topline growth sinking. If you understand your customer’s business well and manage your projects better, then your USP changes from being a low cost service provider to that of a solutions provider. Take the example of Israel. Its IT industry is known for their security products. And Ireland is known for its database management experts. What is India known about? Cheap labour. We need to change that. Not as one company but as an industry.

EQTM: Otherwise you see the business being commoditised?

Mr. Ghaisas: Yes and your USP is not changing. Also your USP will no longer remain a USP. Countries like Russia, China or Philippines can give better USP than that. Then business will fly away. There are two things, either you expand the USP or do some mission critical job where the customer can’t just throw you out. But if you are just maintaining the legacy system and are not doing a development or production or R&D for the customer then he can replace you quickly.

EQTM: What was i-flex’s vision when it started? How has it evolved over the years?

Mr. Ghaisas: When we started clearly the vision was we don’t want to be one more IT services companies in the country. We wanted to be different. Today we want to be up on the value chain.

We must be in products business. This is because it is the business that offers exponential growth. It has the potential to grow without adding number of people unlike in services business. For example, suppose a bank already has a license for our software, acquires another bank and the number of braches goes beyond the number for which the license has been purchased, the additional license fees we get is added directly to the bottom line as there is no additional expenditure. But this will depend on our customer expanding. Thus, the flip side is that the visibility is low. However, higher margins are the strength of the model.

The services business offers a linear growth. You add number of people and then your revenue grows. Or if you want your revenues to grow you need to add people. With 60% of our revenues coming from products and 40% coming from services, we have a good combination between exponential growth and linear growth models. The services business complements our product business because it is also in the financial sector.

We use the services business as a window to a new technology. For example, when Java came we did some projects in Java and then absorbed the technology in our product. It also serves as a domain window. The process of banking keeps on changing. You get newer ideas and concepts, which can be blended into the product. It also helps as a people retention tool. Those who work on a product continue working on a particular technology. While every intelligent engineer feels that he or she should be working on the latest technology. Five years back Developer 2000 was the technology and over the years many such technologies have come. If you want to keep your employees excited, you need to rotate them. This opportunity is provided by services.

EQTM: Where do you see i-flex five years down the line?

Mr. Ghaisas: The whole dream is that how more and more financial transactions in the country would be processed by FLEXCUBE. If you take any financial transaction, one leg always sits in the bank. And if that transaction is processed by FLEXCUBE, we would love that.

In one of the talks we had, I told my people just like every computer has an ‘Intel inside’, every branch or bank should have a ‘FLEXCUBE inside’.

EQTM: 40% of i-flex’s revenues come from services. Are these services related to your product or are independent of the product?

Mr. Ghaisas: We approach the services business more on the concept of centre of excellence. Since we are vertically focused and all our people are working in the financial sector, we have gained the domain expertise. This gives us a lot of value addition.

Centre of excellence approach is based on the fact that our people are experts in particular areas. Let me take an example. We implement CRM packages for Oracle and Siebel. What gives us the edge is the fact that we have knowledge on how banks run. When people spend a million dollars on a package like Siebel they expect a lot. Implementing technologically is just one part of the solution, but making is usable for the end user requires a lot of domain expertise. That is where we add value because we understand banking. This makes a large difference.

We don’t compete with the service companies in India, as we are not in that segment. We avoid businesses that are non-value adding. We did not do a single Y2K project and did not earn a single dollar from the huge opportunity. We avoided doing that because we thought that it was not a value added business.

We might be competing with the Big 5 or specialized firms in this sector. We tell our clients you tell us what the problem is and we will give you a solution. We will not generally take the specs from somebody, code it and give it back. That is called development in India today but that is actually coding. Many others are into maintaining old legacy systems. We are not into it either.

EQTM: With almost 60% of the revenues coming from a single product, there are bound to be concerns regarding the concentration. What is i-flex doing to de-risk this concern?

Mr. Ghaisas: Firstly, our geographical spread de-risks the business to a great extent. We have a customer base in over 88 countries. Only 33% of our business comes from US, 25% comes from Europe, 22% comes Far East and the balance comes from Africa, Middle East and India. Therefore, if somebody sneezes in US, it may not affect so much as it would affect those who derive about 70% of their revenues from the US.

Second factor that de-risks our business is the combination between products and services. You will see many competitors are pure product companies. That is a bit riskier proposition.

Thirdly, we have a large customer base. Today we are servicing almost 300 plus customers. And that makes a significant difference. When you have such a significant customer base with a mission critical product like FLEXCUBE, you are least likely to be affected when times are bad.

EQTM: How has i-flex managed to create such a successful product? Not many Indian companies have achieved this feat. What makes i-flex so different?

Mr. Ghaisas: To have a very successful product business an important factor is passion. Many people miss that point. Unless people are very passionate about what they do it is very difficult to create a successful product.

In other companies a person works for a project on a manufacturing industry, then on a project for the retailing industry and then a project in financial services industry. Three to four years down the line the person continues to be a programmer. He does not achieve domain knowledge. In i-flex if a person is in loans module he will not only learn the technology part of loans module but also the domain part of loans module. And if FLEXCUBE is working in 44 countries then you get a wider knowledge of how loans operate in 44 countries or how treasury operates in other countries. Thus, the banking people get technology knowledge and the technology people get banking knowledge. Five years down the line the person will become retail expert or treasury expert or trade finance expert or brokerage expert, giving the person a sense of ownership. We have people who have spent all their working life in this company. They have not seen any other office.

Another thing is that when you are doing projects, you don’t know what happened to the code that you wrote, as it became part of big scheme. Here is a product you have created and you see a bank running on that product. The pride that you take is far different and superior than writing the code giving it and forgetting about it. This too generates a lot of passion.

However, to keep the passion alive you need to have an open culture, flat structure in the organisation, don’t build too much of bureaucracy and hierarchy. Today anyone can walk into any one of our rooms and give suggestions. We have completely automated online suggestion system called Q-Base (Quality base). We have to follow certain processes being a SEI CMM Level 5 company. If somebody has a new or a different process, there is access to a system where in you can create a different process, get it vetted and make it a process for the company. There are baselines on productivity and the whole objective is to improve on the baseline every year. This gives more challenge to the people. In the software industry you keep challenging your people. That keeps them excited all the time.

EQTM: Companies with very mature products outsource implementation? Infosys has also managed to do this with its product? Do you plan to adopt a similar methodology?

Mr. Ghaisas: Yes. Infact, we have started doing that. As we grow we cannot implement all by ourselves. We have currently 33 partners around the world. Most of them are distributors but a part of them have started implementing and recently Accenture has done an implementation in Africa. IBM has also signed up as an implementer.

However, ours is a mission critical product. Therefore, the comfort level of the client also has to be accounted for. Therefore, we have to keep a balance between the confidence level and delegation of work.

EQTM: How many banks in India use your products? What is the competition like?

Mr. Ghaisas: Of the last five decisions taken in India four went in our favour. We started in India late in 1995, when HDFC came in. We worked with HDFC Bank from day one. The first branch bank went live on MicroBanker. Today they are the most successful banks in the private sector and have no hesitation in giving a good amount of credit to the technology partner. We don’t call ourselves as the vendors for HDFC Bank instead we are the partners. They use all our products. Then we have Saras Co-operative Bank that is 75 years old. Co-operative banks run differently. They need to maintain even five-rupee accounts with them. Then we have IDBI, Bank of Baroda, and Syndicate Bank. We chose one private sector bank, one co-operative, one nationalized bank and a smaller bank so that we understand the entire banking business.

Going forward we are offering ASP (Application Service Provider) services with HDFC. Many banks in the future may chose to utilize the ASP model. There are many banks in India that can afford a product like FLEXCUBE but are not interested in huge IT departments or operations. They don’t have to worry about upgrades in Oracle or hardware. By spending just 10% to 20% of what they would have otherwise spent, they can come up to the technology level of other banks.

Coming to competition, there is one set for the corporate banking segment. The list includes Temenos. On retail side you have others like Sanchez and Systematix. On treasury side, you have Sunguard and Reuters.

We have implemented a solution for Bank of Baroda with Reuters as the front end and our back end. Instead of trying to produce everything we can choose and integrate the right things. Our expertise is to create the technology for the back office core that is mission critical. You create the product in such a way that interfaces with other products available. Once that is there your product becomes versatile. All our products can interface with other products. So banks choose what suits them best.

EQTM: Is Finacle, Infosys’s banking product, a direct competition?

Mr. Ghaisas: In every country you get local competition, like there is product called Silverlake in Malaysia. In India, we do face local competition.

EQTM: Does every country having its own banking systems make it difficult to take on local competition?

Mr. Ghaisas: Yes, because it is made for the country. The international products might not have particular country specific features. But many banks are also realizing that their current processes need not be the same going forward. What international packages like FLEXCUBE bring in are best practices. The best practices would improve their efficiency and productivity. For this however, you need a little advanced mindset.

These packages are no longer transaction processes as seen in the past. But these packages should be the business enablers, which need to be with international practices. As economies grow and the world increasingly gets borderless, you have to compete with everybody and no longer locally. People are realizing more and more packages won’t give you the differentiation. How you use those packages makes the difference. Ten banks might be using a product but still there will be a difference. This is not because of what technology they are using, but how are they using the technology.

EQTM: How does the technology change affect your products?

Mr. Ghaisas: We saw a lot of quick technology changes from Java to COM/DCOM to .NET. When any new technology comes there is a boom, then there is a fall and finally the demand settles at a realistic level. Especially in a product business you can’t keep on riding on those waves. You will get hurt. You have to choose a stable technology to put into your product.

FLEXCUBE for example has a UNIX base, it has got NT application server and these are standard technologies that will run. When we extended into Internet banking, we started with Microsoft technologies and we also ported the product on Java.

EQTM: Where is I-flex’s R&D effort directed?

Mr. Ghaisas: I would say in three directions. One is constant improvement in functionalities. And when I say improvement it does not only mean fine-tuning but also absorbing new functionalities. Second part is meeting the changing technology. Databases and operating systems keep on changing. We need to adapt to that. The third thing is the scalability. How you improve your transactions per second. So that is the third level of R&D. We constantly have the product running in the labs of various hardware vendors.

EQTM: Three people who have influenced you the most?

Mr. Ghaisas: Firstly my parents. I used to be at Tata Unysis and J. R. D. Tata influenced me a lot. I have seen the Tata’s working and the kind of value systems they have carried. When I used to say that I worked for the Tata’s, the people showed respect, since you were supposed to be carrying the similar kind of value system. An attempt is always there to bring that kind of a value system in our organisation. So that when our people say that we work for I-flex they should feel proud about it and get respect. Third is Bill Comfort, the chairman of Citigroup Venture Capital. He has taught me the American way of looking at business. What to worry about and what not to worry about. It does change your way of thinking and helps you tackle the right problems at right times.

EQTM: Three books that have influenced you the most?

Mr. Ghaisas: One of the great writers I know of in Marathi is Mr. P. L. Despande. I cherish every reading of his. They give me a lot values and also I feel relaxed. It takes me to a different world. I read some books on Indian philosophy. Those are wonderful treasures. Probably India can export more of its philosophy than software. There is a book by George Soros on capitalism. So three different kinds of reading: one is thought provoking, the other that enlightens you more and third which is relaxing.

EQTM: What takes your time outside work?

Mr. Ghaisas: Mostly work. Saturdays I spend normally half a day teaching for the last twelve years. I teach at management institutes. I also enjoy Indian classical music and used to play the tabla. I was also interested in weight lifting but now all I manage is to go to the gym.


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