When Bengaluru-based IT software major Wipro announced its December quarter earnings on January 18, the focus was not so much on the numbers but what the management had to say about its future strategy post its recent leadership change. It was another thing that the numbers weren’t anything to write home about. Dollar revenue grew by a mere 0.3%, sequentially impacted by the Chennai floods. However in constant currency terms, it grew by 1.4% meeting its guidance of 0.5-2%. The bright spot for the quarter was that the company managed to bag six new orders, largely driven by its global infrastructure services business. While the company indicated that the March 2016 quarter will be a better one with a revenue growth of 2-4%, analysts feel that a recovery is still some distance away for Wipro. Leading the recovery from the front will be its new CEO, Abidali Neemuchwala, who was elevated from his previous rank as the COO. Neemuchwala spent 23 years at Tata Consultancy Services (TCS) before joining Wipro in March last year and will take over in February 2016 from the incumbent head TK Kurien, whose five-year stint comes to a close. The appointment didn’t really come as a surprise to too many. “Abidali brings in some unique skills around core execution, which needs to be the focus of the company now,” says Kurien.
After handing over the baton to Neemuchwala, Kurien will continue as the company’s executive vice-chairman and be a part of Wipro’s board till March 2017, ensuring a smooth transition and developing a new technology roadmap for the company. Neemuchwala will be Wipro’s third CEO since the economic slowdown in 2008, which set the beginning of a new paradigm for the IT industry. While companies such as TCS and Cognizant were quick to adapt to changes in the marketplace, Wipro struggled due to internal organisational modifications. Its failure to read the market transition meant that India’s third-largest software company lost out on significant market share, thus leaving it to grow at sub-par industry growth rates (see: Lagging behind).
The news of Neemuchwala’s exit from TCS, which first popped up on the leadership WhatsApp group, came as a surprise to everyone. The 49-year-old, who was mentored by TCS top gun N Chandrasekaran, has held several key leadership roles at the IT firm. However, his most remarkable milestones remain scaling the company’s BPO business and spearheading the acquisition of e-Serve — Citigroup’s back-office division — for $505 million. It’s estimated that India’s largest software services player earns a revenue of $500 million from Citigroup every year. Apart from higher revenue, Abidali ensured costs were cut by moving out e-Serve’s expensive top management which in turn catapulted its margins to the best in class. “He ensured that the organisational structure of the BPO remained flexible and nimble for its size,” says a TCS employee. He moved people to new roles and created new positions as per new business demands to ensure that no one became complacent. He played a crucial role in automating a large part of the business and it’s during his tenure that the business contribution increased from 6.9% in 2008-09 to 12% in 2013-14. Abidali is also credited with implementing the Global Network Delivery model for TCS’ US clients and had even forged strong relationships with Fortune 500 companies in the US.
Strategic decisions gone wrong and slowdown in key verticals have left Wipro behind in the race to the top
A former TCS colleague of Neemuchwala reveals how the new Wipro CEO scored the General Electric account, “He is great with clients and building businesses. He was heading the GE account. The US conglomerate is a tough client to please and is an account that was the breeding ground for a lot of people in TCS.” Known to be a soft-spoken man who prefers to keep his relationships strictly professional, Neemuchwala is a shrewd businessman. The ex-team member adds, “TCS did not have a hire-and-fire culture. Neemuchwala had very little tolerance for mediocrity and if anyone was not delivering, he would be moved out of the account.”
As the TCS stalwart is all set to take over the reins at Wipro, he has his work cut out for him. Many believe he has what it takes but will need the support of chairman Azim Premji and the board to execute. Peter Bendor-Samuel, CEO, Everest Group, says, “Abidali is very strong in execution, he has successfully built one of the fastest growing businesses for TCS and is probably the best bet to lead Wipro out of its underperforming streak.” While he may come with a track record of strong execution skills, the real challenge for Neemuchwala will be to get the entire organisation aligned with his vision.
What went wrong
The genesis of Wipro’s performance woes was with the onset of the economic recession of 2008. Suresh Vaswani and Girish Paranjpe had just taken over as joint CEOs a couple of months earlier. As the financial crisis imploded, the CEOs’ priority was to focus on cost reduction and productivity improvement. So, Wipro’s bench was downsized, expenses — including sales and marketing spend — were cut back, campus hiring was halted. As a result, the company was able to protect its margins from the impact of the crisis, even though employee morale dipped. But what caught the company on the wrong foot was the timing of the recovery and the change in customer behaviour. The company expected the recession to last 18-24 months but things didn’t quite go according to the plan. Not only did they miss the revival in the market but also the transformation in the way customers worked.
A look at the Wipro leaders who spearheaded the company over the years, deploying varying strategies
Clients were looking for vendors who could not just reduce costs but also increase revenue. They were moving from cost arbitrage to paying on outcomes and investing in technologies such as cloud, mobility and analytics. “Wipro was late to see the need to move to an industry- and domain-expertise model. Cognizant and TCS recognised early on that the market was moving from a low-cost delivery model to an industry and domain expertise-led model. So, they re-organised by industry and vertical and moved their leadership closer to the customer. Wipro was a slow mover, stuck in the classic factory delivery model that was centrally controlled and its execution problem limited its ability to grow fast,” explains Samuel.
While its competitors invested a lot more in their sales and marketing efforts in a bid to help customers make the transition in their business models, Wipro cut back on these spends in an attempt to manage margins better. “Sales and marketing spend was seen as part of overhead costs and companies such as Wipro and Infosys continued to under-invest in the area to manage profitability. But in the IT services business, sales and marketing spend is more like an investment. Wipro’s ability to mine its client accounts was impacted,” says Sudin Apte, CEO, Offshore Insights. The market for traditional services was moving out of a hyper growth environment to a more mature one, where it was getting harder and harder to get new clients and the opportunities were about growing in existing customer accounts. While Wipro spent 11-12% of its revenue on sales and marketing, Cognizant and TCS spent around 18-20% of their revenue. It was no surprise, then, that both these companies took the lion’s share of the incremental revenue over the past five years, while Wipro landed at the bottom of the heap. For instance, TCS and Cognizant snapped up 34.6% and 31.5 % share of the incremental revenue (of top five Indian companies) over the past five years, while Wipro managed to garner only an 8.7% share. Infosys, with similar problems of leadership changes and high attrition rates, managed to cope better, with a 13.4% market share of the incremental revenue. It has been a double whammy of sorts for Wipro. Neither has it been able to win the revenue growth game, nor boast of the best industry margins. For instance, in FY12, Wipro ended the year with revenue of $5.9 billion, while Cognizant had just pipped the company, clocking $6.12 billion (Cognizant follows a January-December financial year). Cut to FY16, and Cognizant is likely to finish the year at $12.41 billion, whereas Wipro is likely to clock revenue of around $7.6 billion. On the margin front, while Infosys and TCS enjoyed operating margins of 27.9% and 26.1%, respectively, in FY15, Wipro recorded operating margins of 23.1%.
While both companies have managed to marginally improve in FY16, operating margins for Wipro are likely to end lower at 21.2%. The company hopes to improve its margins by using automation. It has set itself an ambitious target of reducing people deployment by 35% for some tasks, instead opting for automation tools, artificial intelligence engines and algorithm banks. For starters, in the December 2015 quarter, the company managed to reduce its people requirement by 4,300 using automation.
To add to Wipro’s troubles, its organisational structure — where its vertical heads were responsible for revenue generation and service-line heads managed costs — didn’t help either. While the vertical-led sales team determined the pricing, the service-line heads were responsible for delivery and keeping costs under control. Unlike TCS, where every industrial unit (of the 25) is responsible for revenue and profit and is free to decide the pricing, too, Wipro’s vertical-led sales and service teams didn’t work well. And that led to customer satisfaction issues. In fact, in 2011, some of its top customers threatened to shift part of their business to TCS, Cognizant and Infosys. Client mining also became a major concern for Wipro. While it has been scoring new accounts, it has not been able to go deeper into the account relationships. In the December quarter, revenue from its top 10 clients declined to 19.3% compared with 21% a year ago.
In 2011, Premji and the board decided to do away with the dual-CEO structure and appointed TK Kurien, who was then heading the eco-energy business. In his 15-year stint at Wipro, Kurien led the consulting and BPO businesses and the newly-incubated healthcare and life sciences business. But he is best known for his turnaround of the BPO business. “He could build strong relationships at the CEO level in client organisations and also get into the nitty-gritties of operational dashboards. There aren’t too many leaders who can see the big picture and yet have a good understanding of what’s happening on the ground,” says Mythily Ramesh, CEO, NextWealth. Ramesh, who had worked with Kurien closely for three years during the turnaround of the BPO business, recalls, “The BPO business was considered as untouchable within Wipro since the margins were so low. We would try and align with the verticals but they wouldn’t want anything to do with us since we would be a drag on their overall margins. But within three years, Kurien turned around the business, bringing the margins on par with the technology business,” she says. He managed to do so by reducing the contribution of the call centre business from 95% to 65% and increasing the back-office operations to 35%, in addition to going after billion-dollar deals and building vertical practices.
When Kurien took over as the CEO, there were tough decisions to take and changes to be made. He beefed up the client-facing team with lateral hires, fired non-performing managers and increased spend on sales and marketing. In a bid to streamline the organisational structure, he put younger client-facing vertical heads and gave them more autonomy to take decisions, instead of the existing structure, which had vertical, service line and geography heads selling to the same client. Salaries of the leaders were linked to performance, customer satisfaction and attrition levels in their teams.
But the entire process took longer than anticipated. “I think Premji was right in bringing TK in when the dual-CEO structure wasn’t working. But muscle regeneration takes time, especially when there is some damage. Muscle building can be accelerated with steroids but regeneration cannot be accelerated,” says Krishnakumar Natarajan, CEO, Mindtree. But Kurien didn’t have the luxury of time, since there was already a sense of urgency for results to be delivered. “TK took over a paternalistic organisation. He made a lot of drastic changes and had to move a lot of talent, which affected morale , and the pace he had to move at added to the confusion,” says Everest’s Samuel.
Notwithstanding the changes at the top, there have been multiple reshuffles in the company’s leadership team. Sangita Singh and Ayan Mukerji, who spent more than two decades at the IT services firm and were heading the fairly large healthcare, telecom and media verticals, quit in December 2015. Following Anand Sankaran’s exit in October 2013, there were multiple portfolio shifts. Sankaran, who was heading Wipro Infotech and the global infrastructure business, which brought in nearly one-third of the company’s revenue, left after a more than 20-year stint. GK Prasanna, who was heading product engineering solutions, was brought in to lead the global infrastructure business. Shaji Farooq was roped in from Infosys to head advanced technologies. He now heads the BFSI business at Wipro.
Soumitro Ghosh, who headed financial solutions, took charge of Wipro Infotech. As per the recent management rejig, Prasanna will head the newly created Marketing, Innovations & Technology while BM Bhanumurthy, who was heading the business application business, gets bumped up to COO. Sudip Banerjee, who was the former head of Wipro’s enterprise business, feels that the frequent changes at the top have done more damage than good. “You can’t keep losing people, especially those who have been with the company for more than two decades. Every time someone leaves, you have to carve out the business and give it to someone else, and that creates complete chaos down the line. You must have a stable organisation. If you keep tinkering with the DNA of an organisation, then you only end up losing more than you gain,” he says.
Losing the first mover advantage
Wipro was the first to identify the growth opportunities in infrastructure management services, the fastest growing segment in the IT industry, but lost the edge to TCS and HCL
But Ashok Soota, one of Wipro’s earliest CEOs and now the chairman of Happiest Minds, feels that these changes are inevitable, especially when the company is going through a challenging time. “Change is inevitable because you don’t want to be growing at slower than the industry growth rate. I don’t think leadership change is the problem. The issue is making the right bets on new growth areas and creating differentiated offerings. It needs to focus on a growth-oriented strategy rather than a cost-reduction strategy,” avers Soota.
In the past, Wipro has been known to pick some market opportunities ahead of competition, but it failed to capitalise on its first mover-advantage. Take, for instance, the infrastructure management services (IMS): Wipro acquired Infocrossing (revenue of $238 million) in 2007 for $600 million to add to its offerings the end-to-end capabilities of IMS. By 2010, the IMS business was nearly a billion-dollar practice for Wipro, even as peers such as TCS and HCL were clocking half the revenue of Wipro (see: Losing the first-mover advantage). IMS has been one of the fastest growing segments for the industry, and while rivals TCS and HCL leveraged on the opportunity and grew the IMS business nearly four times its size in the past five years, Wipro has only managed to double its business during the same time. Its infrastructure business has been grappling with growth issues as customers continue to move quickly to the cloud. Cloud computing technology is transforming the nature of business in the infrastructure space and everything is now being defined by software. Wipro is confident that the investments it has made in this space will help it leverage the shift in the market. In fact, in the December quarter, the company managed to bag some large deals, which should bring some growth momentum back in this business.
Similarly, Wipro was among the the first to offer R&D services as an outsourced service but it failed to scale up the business. “Technology was Wipro’s strength and it failed to leverage that strength. One of the reasons for Wipro’s earlier success was because it attracted good people and gave them the freedom to operate. Somewhere, the systems overtook the people. It is important to have processes in place as you grow larger but the processes must ensure you stay nimble and agile,” points out Dr Sridhar Mitta, managing director, NextWealth Entrepreneurs.
In the past decade, the business has remained stagnant, whereas HCL and TCS have managed to grow by 17% on average during the same period. “In infrastructure services, it was not able to maintain the lead it had and allowed competition to catch up. As far as engineering and R&D services are concerned, it has ignored the practice because they believed the business didn’t have enough scale but HCL, TCS and Persistent Systems have invested in the business and managed to grow it rapidly,” says Apte.
Apart from some bad decisions, Wipro also paid the price for having a sub-optimal portfolio mix. Unfortunately, two of the largest verticals that the company has the highest exposure to — oil and gas and telecom — have seen a huge slump, leading to shrinking demand for IT services. In the case of oil and gas, which contributes 16% to revenue, the decline in crude oil price from $100 per barrel to a 12-year low of $30 has seen spending by oil and gas companies reduce by more than half, leading to a decline in revenue. Similarly, in telecom, not only Wipro but almost every company — including Tech Mahindra, which until now managed to buck the trend and grow — complained of demand being impacted by delayed decision-making. No new projects are being awarded. Even in the BFSI space, where demand bounced back strongly, insurance and capital markets, where Wipro was focused, are reaching saturation. Also, Cognizant and TCS have built far stronger positions in BFSI and healthcare, the two verticals that still witness a fair bit of demand momentum.
“Unfortunately, it was a combination of bad luck and bad decisions for Wipro,” says Apte. About four of its top 10 clients were from the oil and gas sector. And as the company lost out to competition on some existing business, despite having had some strong deal wins of $3 billion in FY15, (almost double that of the previous year), growth rates for Wipro in FY16 were muted. Even Infosys, the country’s second-largest IT services firm, which had similar woes of underperformance, is expected to post stronger numbers in FY16 compared with Wipro. Infosys raised its annual revenue guidance for FY16 from 10-12% to 12.8-13.2% on a constant currency basis (which eliminates currency fluctuations).
As the market for traditional services matures, the gains will come from market consolidation. Cognizant is already playing this game by acquiring companies that not only add to its capabilities but also growth. Over the last decade, the US-based IT behemoth generated $7.4 billion of cash and spent $3.3 billion on acquisitions (45%). Wipro, on the other hand, apart from its $600-million Infocrossing acquisition in 2007, made a string of smaller acquisitions, spending 22.9% of its cash, which is still higher than the rest of the Indian firms. Rather than going for a big-bang acquisition, Wipro adopts ‘a string of pearls’ acquisition strategy. The company acquired US-based securities processing and administration services provider Viteos for $130 million. The acquisition gives the firm access to hedge funds (the buy side of the securities markets). Wipro already caters to the sell side (broking firms of the securities market). In early 2015, Wipro acquired Denmark-based design firm Designit for $95 million to strengthen its position in the digital space. It also acquired German IT consulting firm Cellent AG for €73.5 million to expand its presence in continental Europe. Wipro has indicated that it will continue to scout for buys in the engineering space, for healthcare plays in the US and more firms in the Nordic region to expand its presence there. Apte feels that this is the right strategy to pursue at this point. “Wipro needs to get things in order internally before it begins to look for large buys. A large acquisition requires a lot of management attention and right now, the company’s focus must be on improving customer satisfaction and mining existing accounts better.”
According to Everest’s Samuel, the market is at yet another inflection point, where it is moving to an IP-led services model. V Balakrishnan, former CFO of Infosys, believes that most Indian IT companies must look at acquisitions to add capabilities in new growth areas like cloud, mobility, big data and the Internet of things (IoT). “The traditional business is getting commoditised, so you are not getting the price points you used to get and that is impacting the margins. While the incremental growth is coming from cloud, mobility and big data, you can’t be an expert in everything. That talent has to be acquired from start-ups,” he says. Digital transformation remains a big theme, with companies such as Accenture and Cognizant, who have built up large digital practices, benefitting from the surge for digital transformation services. While TCS gets about 13% of its revenue from digital, for most Indian companies, including Wipro, it forms less than 10%. “As the market moves to a new inflection point of IP-led services, the question is not whether Wipro can, but can any Indian company successfully make the pivot? They know how to invest in people-based models but they don’t understand IP-focused models,” Samuel points out. Neemuchwala has indicated that the company will continue to invest in digital and IP-led solutions and look at mergers and acquisitions to augment its offerings, helping its customers make the digital transformation faster.
According to Mindtree’s Natarajan, the change in the industry presents a great opportunity for anyone to disrupt the existing players, as the customer connect with existing vendors is not that high and they would want to work with vendors who are experts. He believes that for Wipro to make the big changes it needs to make, an outsider like Neemuchwala is the right choice. “In challenging times, when tough calls need to be made, I would bet on an outsider because an insider may try and do the same thing more efficiently and that may not work.” He believes that just as Vishal Sikka brought a sense of purpose back to Infosys, Neemuchwala could have the same effect on Wipro. The challenge will be around execution. He draws up a cricket analogy as to what Wipro must do. “The pitch is green and the ball is seaming everywhere. You need to put your head down, look for the singles and wait for a bad ball to score a four or a six.” According to him, there is nothing like small, consistent wins to bring the confidence back.