Migrating to the next level
Date: Wednesday , December 28, 2005
In 2000, after a bitter and protracted legal battle, Japan based Fujitsu Corp. and India’s RPG Group settled for an out of court settlement and merged their operations to create Zensar Technologies, a Pune based tier two IT services company.
One among those lofty ambitions was to reduce the number of engineers employed to develop software and enable computers to do the coding. Five years later, Zensar is one of the top 20 IT services companies in India and the developer of the Solution Blue Print, a new innovation that reduces manpower involved in developing software by up to 60 percent.
“What sets us apart from other companies is our uniqueness in innovation and technology. Our focus is to remain specific to innovation,” says Ganesh Natarajan, CEO Zensar. So much has innovation been part of the company that the company is expecting its proprietary product SBP, also called as the migration services, to provide significant revenues over the next three years.
With a market cap of $102.95 million and $21.57 million in consolidated revenues for the quarter ended June 2005, Zensar (BSE: ZENSAR) is still a small company when compared to the top tier Indian IT companies. And it hasn’t set out to take the top tier companies head on. Instead its strategy is to remain niche in the area of migration services. “Over the next three years, revenues from migration services will certainly grow by over 100 percent, from $15 million next year to $30 million in the following year,” Natarajan says. Their revenues from the U.S. operations comprise just 12.94 percent at $37.04 million than compared to U.K. which was way ahead with 46.08 percent and rest of the world contributing as much as 50.52 percent to their revenues. To further make its case, the company acquired a U.S. based SAP services provider OBT Global Inc and its offshore affiliate OBT Global Pvt Ltd.
“Zensar is doing quite fine. In terms of performance it can do better than what it is doing today. However I expect them to do better over the next four-six quarters,” says Apurva Shah, analyst with ASK Raymond James in Mumbai. While he thinks the company has more potential to grow and reap rich dividends, he also says the “management is not consistent in saying in which year they would consolidate their accounts as their quarterly performances have not been very good. They were below average.”
He is right. Quarterly performances have been hit by poor profits. At a time when other reputed Indian IT services companies are making profits up to 30 percent of the revenues, Zensar has turned in dismal profits, at about 10 percent. Natarajan says the company does not intend to chase revenues. Its only intention is to convert the Fortune 1000 clients like AIG, AXA, Cisco, into permanent customers. However Shah says the company’s profits have been hit due to the lower average billing rates when compared to the other IT companies due to competition and also because they do not have the scale to widen their customers or revenue base.
While most top tier and mid sized IT companies are vertically focused with domain experts heading each department, Zensar, with its horizontal focus has taken a radical approach. “For a company of their size, this is a different approach they have taken. While many mid size companies also claim to be highly vertically focused, Zensar’s strategy has been quite different,” Shah says. This also means Zensar Technologies is not a vertical specialist. “They don’t claim any vertical specialization, they only claim to have specialization. They are not domain experts. They are essentially technology experts and that’s the domain they have. Anyway companies of their size will hardly have any domain experts. As they grow larger, they will need domain experts, but at this stage, they don’t need any,” says Shah.
Despite the horizontal strategic business units and migration system, plenty could go wrong. Cost arbitrage and competition from other IT companies with money and brain muscle, could prove to be a dampener for the company. “The competitors we run into are the big five – IBM, Accenture, TCS, Infosys and Wipro and for niche areas – Bearing Point and Satyam,” says Natarajan.
The man who wants the migration system to contribute substantially to the company’s revenues sees wide-open territory ahead. “By the end of the decade, I want to see the company reaching the $227 million mark, Natarajan says.
Only time will tell whether or not Zensar migrates to the next level.