Patni banks on intellectual property to build scale

Firm setting up subsidiary in the US by September to bring in revenues from products that don’t exist today.

Jeya Kumar sleeps a lot these days, but only when he is flying. The first non-promoter CEO of the $700 million (roughly Rs 3,400-crore) Patni Computer says he has been spending “more time on air than on the ground”, as he has been travelling across Americas, Europe and Asia-Pacific to meet Patni’s clients and employees ever since he took charge four months ago.

That’s time well spent, as Patni’s key employees and clients need his assurance at a time when the company has been making headlines more for the fight on ownership issues within the Patni family than its financial achievements.

Analysts said Patni needed a professional management, as the company, which was a pioneer of sorts (Narendra Patni, now a non-executive chairman, set up the company 37 years ago) in the software industry, had lost the plot mid-way because of the ownership tension between Narendra and his two brothers and a conservative approach.

“It’s an irony that Patni today is more known as the company where Narayana Murthy and Nandan Nilekani had worked before they set up Infosys,” an analyst said. The comparison is stark: While Patni has 15,000 employees, Infosys, which was set up a few years after Patni, has over 100,000; while Patni’s market capitalisation is around Rs 3,000 crore, that of Infosys is over Rs 100,000 crore; and while Patni’s annual sales are Rs 3,400 crore, that of Infosys is over Rs 21,000 crore.

But history isn’t something the new CEO is particularly fond of. For example, he is least impressed by the fact that Patni has over $300 million cash in its books. “That, to some extent, shows the company’s conservative approach in the past. We have to take calculated risks and have an aggressive growth strategy,” Kumar says. His target: Patni must more than double its turnover to $1.5 billion in the next three years and reclaim its position among the top five in the Indian information technology industry.

Inorganic growth is only a small part of Kumar’s strategy to achieve that. He also isn’t interested in suggestions that Patni needs to hugely scale up its employee base to execute big contracts, and gives the example of Sun Microsystems. When he left Sun in 2007 as the head of its $5.2-billion global delivery services business, the net profit margin was 50 per cent. The headcount — just 10,000 employees and 20,000 partners, who did the outsourcing work. The difference between Sun and Indian IT companies is that while the former is intellectual property (IP) -led, the latter are employee headcount-led.

To begin this shift to an IP-led growth, Patni is setting up a subsidiary in the US, called Patni Labs, which will drive its future revenue growth. Kumar is targeting 10 per cent of Patni’s revenues to come from this subsidiary by 2011. Patni Labs, to be set up by September, will be headed by a technology-led person who will report to him directly.

Kumar says innovation-led growth is the only solution for Indian IT companies. “The model of shipping somebody from India to reduce costs is maturing fast. I can’t think of any other industry anywhere in the world which has relied on the same business model for over 30 years now. It’s time to change,” he says.

At the centre of the change process is the belief that a substantial part of future revenue has to come from products that don’t exist today. That Kumar is serious is evident from the fact that last month Patni got its first US patent for a solution, nearly 37 years after it came into existence. “That process has to be fast-tracked,” he says. The company is thus planning to file for more patents, each of which costs over $50,000 each.

Patni Labs, Kumar hopes, will create the technology, the hype and the culture that the rest of the company might have to infuse in future. The employees here will not have the conventional designations of VP, AVP etc. They will be called Patni Fellows or Patni Distinguished Engineers. The company has also tied up with a couple of universities in the US which will mentor these employees.

To make sure that the “innovation culture” doesn’t remain just a fancy management concept, Kumar says his brief to the team at Patni Labs is clear — they will be responsible end-to-end; every product/solution invented must go from the concept stage to the market on a massive scale in terms of revenue as well as profitability. “IP must bring in systems and tools that will help productivity go up 300 times, if not more. That’s the quantum of transformation I want in our delivery model,” he says, adding “cloud service” is an area where he sees scope for massive innovations that will deliver scale.

While Patni Labs will be future-looking, the company is also talking to IITs to set up innovation labs in India, whose brief will be to drive down the cycle time in the existing delivery models. For example, If Patni charges, say, Rs 10 for a three-month project, anybody can come in and charge Rs 8. The new Patni wants to continue to charge Rs 10 but squeezes the project time to one month through innovative systems and tools. “That’s the model — something others will find difficult to replicate,” Kumar says.

In keeping with customers’ demand for more onshore centres, Patni has already set up two such centres — in Illinois in the US, and in Mexico — and has set up its new EMEA headquarters in London. It is also planning to grow through joint ventures in other countries — in Japan, for example, it has tied up with Nihon. In another two weeks, Patni will partner with a hosting company on cloud services.

It is also in the process of scaling up the number of its overseas employees from 3,000 at present. But there is a limit to which the company can do that because of the cost factor. That’s where its new model of IP-led growth comes in.

Much of Kumar’s optimism is based on the fact that Patni has been growing despite hiccups. Proof: It got its first $100 million turnover after 30 years, but the next $600 million came in just seven years. Besides, the company has done phenomenal product engineering work — for example, embedded engineering in pacemakers where the room for mistakes is zero. The process just has to be speeded up.

But what are the concern areas? Kumar, an Australian citizen, says he wanted to be a priest when he was just 21 because he had a lot of self-doubts. But he got over that phase after his mother told him not to believe in his doubts. “The advice helped. Now, if I set my mind on something, I am blinded to what else may happen,” Kumar says. Patni’s clients and employees would take comfort from that.