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, Mr. Ghaisas talks about the global banking software services space, the unique business model of i-flex and his vision for the company for the future.
EQTM: What is the current status of banking software services market in terms of demand and consolidation?
Mr. Ghaisas: Even when the economies, globally, are going haywire, banking is a must for any country, and in my view, either in a falling or a rising economy, the banking sector is the first to respond. This is because it makes for a big part of the entire financial infrastructure per se. Now, consolidation or actual polarization of banks is taking place, as more and more banks merge with each other. And in that case, instead of having 15 banks in an area, probably 5 will remain. But the need for technology will continue to exist. This is because people would spend, rather spend smart now on technology to ensure that their operational costs remain low, or go down further. And what technology they will adopt is the new technology that opens up new avenues to offer services to customers.
Also, banks would get into more channels of operation, be it Internet banking, or kiosks, or ATMs. That is certainly going to reduce the operational costs substantially. And for that, they would definitely require technology. This would reduce their costs. That is recurring savings that they would have. And we are seeing that change coming in. And if, and when, the economy improves, there will be more and more banks vying for better technology to cater to their customers better.
EQTM: What is the size of global spending on banking and finance services?
Mr. Ghaisas: What we see today, in the IT spending of banks (around US$ 300 – US$ 400 bn), around 85% of this is spent on internal IT development. And only the remaining 15% is the spending on package solutions. And at the same time, we are seeing that people with long-term plans definitely are not going to develop internal solutions, and would rather go for package solutions. And we are seeing that happening at present. And that is the way things will move going forward. However, we are currently looking only at the sell side of the transaction. There is also a buy side. There are over 10,000 corporations that would like to have treasury modules, cash management modules, etc for their treasure operations. And that is a huge market.
EQTM: Is the market consolidated with few players offering products and services in this space? Or is there a fragmented market?
Mr. Ghaisas: Today, as we are the largest selling product, or that we were the second largest for the past few years, any bank that is looking out for a banking solution cannot ignore that. So whether we reach there or not, customers will try to reach for us.
EQTM: Would that be right to say that, since the market is very huge, there is a place for everyone?
Mr. Ghaisas: Yes, it is there but, at the same time, there are a lot of entry barriers. It is not like an IT service space where any company can start today and recruit 5 people tomorrow and send them to the US. Product business is not like that. You have to invest a lot in R&D, you have to come out with a quality product, and the kind of complexity that we are talking about in a core banking system, which is mission-critical for a bank, without which a bank would not open tomorrow. Then entry barriers are much stronger. And that is why there are few players in this space. In India, if you see, people who were there in this market for three decades, there are still not many products available from India. The first reason for this is that it is not easy money. In our case, we have done that right from day one, as a mission. And we stand at an advantage because of the kind of experience that we got in the last few years.
Even from the overall management style of a service company and a product company, in case of India, if I take four priorities of a service company – HR is the first priority always, then comes software development, then is sales and marketing, and finally comes strategizing. In a product company, the first priority is strategizing. Second is sales and marketing. Third is software development. And fourth is HR. and if your mindset is entirely on the service side, then your priorities need to be upside down. That is where the entry barriers are created.
EQTM: Is your small size detrimental?
Mr. Ghaisas: I think that the momentum that we have gathered and the thin spread that we have got in ninety countries carries a lot of weight. So, size does not really matter. At the same time, our strong balance sheet also supports the confidence of a lot of customers. Take for example, Temenos, that is based in Switzerland, it is almost of the same size. What matters now is how your product works, and whether you are going to meet that business purpose. Things are looking positive, and that is taking us from strength to strength.
EQTM: How would you position yourself on the software services front? What are the lessons that you have learnt from the last three years of global economic slowdown that has affected technology spending?
Mr. Ghaisas: As I said, this slowdown has not affected us much as it has affected software services companies. And the major reasons for that are – we are in a product business, we have a de-risked geographical concentration of revenues and are not US-centric, and that around 35% of our business comes from services. These things make our company much stronger. And for the last three years, we have seen the momentum going the same way.
EQTM: Is there any specific positioning on the services front? What are the options you have in the software services segment?
Mr. Ghaisas: Let us see the services side as more of an incubator, and look at it as a window for new technology and new opportunity, and a good tool for employee retention. Because in a product you cannot change the technology fast, but in services you can easily switch to new technologies. For example, Internet banking was earlier COM/DCOM based, and then it moved to Java, then now to the .net platform.
EQTM: Is the low cost advantage losing relevance going forward?
Mr. Ghaisas: Last Thursday, we had a debate in Bangalore. The issue was ‘Have we commoditised our software skills?’ My answer is ‘Yes’. Let us take the example of the Indian garments industry. For the last three decades, we are exporting garments, but there is no single Indian brand available in the market. You sell it for US$ 2 in New York and there, for example, Nike puts its brand and sells it for US$ 12. We do not have an Oracle or a Microsoft from the country. We just have Flexcube, which has brand equity. But if you see across industries, I do not recollect any brand other than Titan, which sells outside India.
Low cost advantage, therefore, is going to lose relevance because what has happened is when companies in the US spent US$ 100, you gave them the advantage by pushing cost at US$ 60. Now the CTO there has to show in the next 2-3 years what he can reduce further. So, we go down to US$ 40. Now, still he wants a reduction because he wants to show better performance. And this is done by further forcing cost reduction. That is why the billing pressure comes. And then, there are many Indian companies that are standing with a US$ 10 quote. That is the way you are commoditising it. Commoditising is ultimately making available the same service at a cheaper price. You are not differentiating. What you are still telling to the customer is that you come to India and we will reduce the cost. What is the value proposition there? Why cannot we enhance the value proposition to the customer? I do not think we are doing it.
I do not know how long will it sustain because what is happening is that your cost base also is increasing. IT services people are getting the highest salaries than those paid in any other industry, and their needs are going up. So your cost is getting pushed and your rates are going down. So, somewhere, you are going to hit the crunch in profits so bad that beyond which you cannot reduce the cost. But the customer is used to telling you to reduce the cost.
EQTM: i-flex has reached a point where the client list is among the best in the world. What is required to keep the momentum in the long-term?
Mr. Ghaisas: ‘Made in India’ is still not a popular brand. We want to make it popular, and get more and more high profile banks as our clients. What we have to still achieve is too huge. So, marketing and sales would have to be strong as we have to penetrate into markets, we have to spend money on brand building, we have to spend money on R&D. These kinds of products that are enterprise- backed solutions in banks cannot be said to be complete. There needs to be a constant enhancement as far as technology, scalability and functionality is concerned.
EQTM: How do you see the relationship with Citigroup panning out in the long-term?
Mr. Ghaisas: Well, they hold what we design and they are our major client, and whatever you say today, any Indian IT company who is in the financial sector, wants to do business with the Citigroup, as they are one of the largest spenders on IT as they are the largest financial company globally. And if you were enjoying a good relationship with them, you would continue to do so. However, on the service side, we have reduced our dependence on them.
EQTM: When a bank buys a core-banking product, going forward, the recurring spending, will it be mainly on maintenance or some other part of spend that you do not get as revenues otherwise.
Mr. Ghaisas: It depends firstly on how much part of core banking it buys. Assume that it is the startup point and, for example, it buys for 50 branches first. That is license fee, implementation fee and customization fee. Then the bank expands beyond 50 branches, and then they have to buy additional licenses. So as the license fee goes up, the maintenance fee also grows. Maintenance fee is always a function of the license fee. And probably, then they acquire a bank. So, the number of branches again goes up. Again they would require additional license fee. Then they acquire some more modules. So whenever we say that we have added 10 customers, rest assured, it will be a relationship that will span many years.
EQTM: How has been the company’s initiative towards R&D in the last few years? What is your focus area?
Mr. Ghaisas: R&D that we do is a three-pronged investment. One is regarding the functionality of the product – the way in which treasury operates, the way in which forex operates, the way in which trade finance operates, the way in which channels like those in the retail side operate, Reveleus like product that is on the analytical side, and so on. Then there are brokerage and capital market services and derivatives.
However, insurance is one service that we have not entered. Insurance industry is not same as banking. It does not work on products so much. It is not a transaction oriented. It is more of a database work. So what remains is non-life insurance. And even if we see in India today, people who are coming in are coming with foreign collaboration and they are bringing their technology from there. So, ultimately what remains is only the delivery part of it. So it in not really product driven, and that is why we are not present in that space.
That is about the functionality aspect. Then there is technology related stuff, because whatever UNIX or Microsoft or Oracle will come out with, we would like our product to be compatible with those new technologies.
And the third is scalability, what we call the TPS – transactions per second. The product when we started performed 100 TPS. Now we have reached almost 1,000 TPS. So, you keep on enhancing that scalability, so that bigger and bigger banks can use that product and more and more accounts and transactions can be processed at the same time.
EQTM: How has i-flex’s vision evolved as it grew, and what is the management’s vision for i-flex for the long-term?
Mr. Ghaisas: I always tell people that just like every computer has ‘Intel inside’, every branch or bank should have a ‘FLEXCUBE inside’. 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 were processed by FLEXCUBE, we would love that.