Outsourcing: Ravi Pandit, Chairman And Group CEO, KPIT Cummins (Part 5)

Sramana Mitra: So, it is your IP, the innovation that you are doing is your IP?

Ravi Pandit: Significantly our IP. In some other cases it could be a joint IP. What that means is that we are able to take it to any customer that we want, but the other person, the automotive OEM will be able to use it in an unlimited manner in his own production.

SM: Okay. How do you negotiate these kinds of contracts? Are they the R&D contracts for places where you have a one line spec and you are doing the whole thing? How do you structure these contracts?

RP: The first thing is who comes up with a need? You see, typically if the client has defined everything that he wants, like if the client has defined the need, he has defined the architecture of the solution.Iif he is coming to you to say that will you deliver it to me, there is no way in which you can own the IP.

SM: Right, absolutely.

RP: But on the other hand, if you are the one who has gone to an end customer, if you are the one who has part of a problem solution, has come out with an answer for that and you are working with someone to deliver that, then it is your IP. So, the important thing is that at what point in time you enter the game. You have to enter the game as early as you can because that is what gives you thought leadership. And progressively, we are now working in a domain where we go to the customer and we tell him, you have this and this vehicles in this and this markets, but your customers want this. We know, because we have been talking to your customers. We will be able to  put this feature with you. We know how to do this feature, or we have done already this feature. I want to give this feature. I want to give that feature because you are going to gain your market share by virtue of that. Now, that’s a very different conversation from a normal outsourcing conversation that one does.

SM: And tell me a bit more about your customer facing front office organization. I understand the back office, the research organization, but what about the customer facing organization? What kind of people do you recruit who are capable of having these conversations?

RP: There are two types of people. There are people whom we could say are SMEs, the subject matter experts, the people who can engage in deep conversations on technology and any customer needs. And then there are others who are essentially the business people who could either be miners those who mine the account, or they are the people who could be hunters who will go out and open new accounts.

SM: So, when you are inside a customer, you already have a customer you send in the SMEs to do the mining of new opportunities where you already have some credibility, some relation?

RP: No. Typically, the SMEs are the guys who will go along with the hunters to bring out the expertise that we have to the end customers.

SM: I see.

RP: Once somebody is a customer, the miner will actually spread inside the customer. He is the one who will dig deeper.

SM: I see. Okay, fair enough. And how easy or difficult is it to find these kinds of people?

RP: Good people are always difficult to find, but you can make your people good enough by appropriate training. I think the strategy of focus helps a lot because your people eat, breath, think, sleep this domain.

SM: Right, and you don’t lose these people that easily either, right?

RP: That’s right.

SM: And what is the attrition in your Pune operation?

RP: Attrition depends on the level at which you are talking about. Attrition is typically high in the sub three-year area. When there are freshers and they like to change jobs. But beyond the maybe three to five year periods, the attrition is in the early teens. Again, the attrition in the markets is very low, which is the sales front end focusing people. But if you were to look at aggregate attrition, it can look like 20%. Also, that’s what the industry picture is currently. But it is heavily skewed towards the freshers who have joined in less than two years.

SM: Who haven’t really developed any specialization yet?

RP: That’s right. And they are at a stage where they want to try out different things rather than grow into a specific thing.

SM: Yes. Now how are the other markets, the emerging markets, evolving? How are you working with them? What’s happening as far as your industry is concerned, the specialized automotive industry outsourcing. What is going on?

RP: There is major growth happening in China and India. There, we are present. There is growth happening in the markets like Germany and in the US because the automakers now want to make better cars rather than just more cars. The competition for automotive sales is really heating up, therefore you have to have a better car to sell. On almost like 25% to 30%, 35% of the value of a car now comes from electronics. Most of the differentiation in cars comes from electronics, so actually there is demand all over.

SM: What about Africa? What about Latin America?

RP: No. We just started doing some work in Brazil because Brazil is a great place to be. We don’t do anything in Africa. Outside of Brazil, we don’t do anything in Latin America.

SM: I see. Any other area of your business that I should have explored?

RP: I think we are in  the age of outsourcing to 2.0 or maybe 3.0, which is where innovation is the key that one is looking at. We have done some work in that area. We have been fighting quite a few battles. We recently came out with a hybrid system called Revolo (see https://revolo.kpitcummins.com/, which is our IP, which a manufacturer can use to bring out hybrid cars or can be retrofitted in the after market to make a car far more energy efficient at a reasonable cost. These are the kinds of innovations that we are focusing on. I believe that the future growth of outsourcing will depend on innovations that we can bring to the table, because at some point in time, I believe thatIT’s value as a horizontal will diminish in terms of its value proposition to the customer. And there I think we will have to switch to come out with innovations by the use of information technology. How can the product be better? How can the customer experience be better? I believe that the next stage of outsourcing will happen on the innovation front.

SM: Now, your business model then must be changing quite substantially, right? It’s moving away from a labor arbitrage based model to more of a product sales or IP sales based model, yes?

RP: Yes. What we are really saying is that we have to move from the cost side of the equation to the value side of the equation. That is very important.

SM: Yes. I think the growth rate is going to change significantly if you have a substantial portion of your business coming out of these IP sales as opposed to projects, right?

RP: Right.

SM: What time frame do you anticipate that shift to start to kick in, in a sizeable way from your initial point of view?

RP: For us, it has been kicking in for a year, year and a half. I think for the next three, four years it can be substantial.

SM: So, you can anticipate becoming a billion dollar company over the next three, four years?

RP: Yes, we are looking at the next four years.

SM: Four years. Okay, very good. I enjoyed your story; very interesting.

RP: Thank you very much, Sramana.

This segment is part 5 in the series : Outsourcing: Ravi Pandit, Chairman And Group CEO, KPIT Cummins
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