Genpact Acquires Headstrong

Genpact acquired Headstrong for $550 million in cash.

Headstrong revenues for 2010 were $217 million. Genpact’s were $1.26 B. So unlike iGate’s acquisition of Patni, this isn’t remarkable in the minnow-swallowing-whale fashion.

Nevertheless, the acquisition is a sensible one. It is largely complementary in that Headstrong is mostly about IT Services to Capital Markets. Very little overlap with Genpact. Again, unlike iGate-Patni, this was about complementarity, not about achieving scale.

Genpact had to bulk up its IT Services business. IT Services offers both higher margin and higher growth. Both of which Genpact has not been able to deliver, at least to the satisfaction of investors whose expectations are benchmarked to the early days of the IT Services industry.

Genpact’s sophistication in BPO means that most of their growth comes from solutions where IT applications must be implemented or reengineered. Headstrong will bring them a lot more credibility, especially with custom applications.

And finally, even if the IT and BPO work are not joined at the hip in the same solution, having both offers cross-sell opportunities.

A few months back I had written about Cognizant’s rumored interest in Genpact. Eventually, nothing came of it. But I thought that that would have been a very good combination. Sort of a dream team – the fastest growing services company and the best BPO company.

Obviously, I don’t know whether the rumors were true or not, or what transpired if indeed there were serious discussions. But if I were to go out on a limb, I would say that they did have discussions. Maybe they didn’t agree on the price, maybe there were disagreements about the future of the combined company. Whatever the reason, the deal did not go down.

Which left Genpact in the position of being the leader in BPO, an industry that was very promising in the future, but an underachiever in the present. They had to do something to fix that. And so they acquired Headstrong.

This is a good time for bankers in the Offshore services industry. More transactions are to be expected. Watch this space.

How Not to Do a Newsletter

I get most of my reading done via twitter. I follow a bunch of smart people who essentially filter all that’s out there to what is truly worthy of reading. My feed reader is getting less and less airtime nowadays. But there are some bloggers who don’t tweet their posts so one has to go visit Google Reader once in a while.

In spite of these new age consumption methods for news and opinion, I still get the odd email newsletter. One of them is from the Wall Street Journal Online. But I don’t click on the stories much. In fact on most days, I delete the emails unseen.

The WSJ email newsletter is put together for the sole purpose of inserting ads and generating revenue. The ad, as you can see in the image below, occupies pride of place. Most people I know don’t allow automatic download of images in emails. So basically you have a big blog of nothing right at the top of the email.

To the left of that big blob of nothing is, wait for it, another big blob of nothing. Whoever designed the email, decided that the first topic could be next to the ad, but the second topic must begin way below.

The email signup takes up most of the rest of the space above the fold. Its kind of funny that users are signing up for email newsletters in which the first and almost only thing they see in the email is an invitation to sign up for email.

I could go on you know. The use of all caps. The general ugliness of the email. But you get the drift. It sucks.

On the other hand, here’s an email newsletter from GigaOm. This is how its done.

At the top of the email is a list of the top headlines, that is well designed and pleasing to the eye.

If you click on a headline, it doesn’t take you directly to the website. Instead, it takes you to a short blurb about the post that you clicked on, within the email. You read the blurb and if you want to read more click and go to the website.

Isn’t that a little counterintuitive? If the user has clicked on the title, just take him to the website, no? Each click is X ad impressions. Each ad impression is worth $Y…

Actually, no. I like the fact that I get a little bit of a blurb within the email. This saves me from the costly (in time) visit to the website, if I was curious about the title but wasn’t sure what it was about. And this makes me click more.

The fundamental difference in the approach is that GigaOm wants the newsletter to be useful for readers before they start making money on it. WSJ sees it just as a source of revenue. In fact they probably handed it over to the ad sales department to design. It certainly looks like that.

The Role of Management Consulting

The hearings on the Galleon insider trading case have begun. Two of the accused Anil Kumar (turned witness) and Rajat Gupta are former McKinsey consultants. So naturally, there is light being shone on McKinsey and management consulting.

John Gapper in the FT

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

The value in hiring management consultants lies in broadly three (overlapping) areas:

  1. Superior analytics skills – Firms like McKinsey do hire some of the best business brains.
  2. Expertise – industry or functional expertise.
  3. Best practices

The third – best practices – does overlap with expertise, but differs in a crucial way. Expertise could be acquired either because you were a part of industry or because you have been a consultant to that industry (or function like Marketing or HR) for many years. But best practice is just about knowing what the best companies are doing.

Hiring consultants to get industry best practices analytical skills is quite common. There was a time when smart MBAs were concentrated in management consultancies and were hired by companies just looking for smart analytical types to fix problems that their own managers were not able to.

But hiring MBAs became commoner in the industry as business schools kept churning them out. This redressed the IQ balance somewhat. Which forced management consulting firms to shift more towards hiring people from the industry (acquiring expertise) and to offering best practices.

In many cases, hiring a management consultant for best practices is perfectly alright. In functional areas like HR for instance. Although, hiring somebody with the expertise as an employee might be better.

But if you hire a McKinsey for core business strategy you have to be pretty convinced that your executive row has the wrong people. Even then, if you were the CEO, wouldn’t you make changes to your exec team rather than seek outside help?

Outside of management consulting I see no dilemma. In IT consulting for instance, there is a certain complementarity in the expertise that the IT consultant brings. Assuming that IT is not core to the company (i.e. you are not amazon.com) there is every reason for the company to tap the technology expertise with a consultant.

Management consulting is the only kind of consulting where most of what they do is not complementary to what the client’s leadership is doing. It makes up for their deficiencies.

The companies who therefore use them for core stuff have admitted to themselves that a) their exec team cannot rise to challenge and b) in the inflow-outflow that Chris McKenna speaks of above, they will definitely gain from the inflow more than they can lose from the outflow of information.

You know who’s never used consultants? Warren Buffett.

Why BankSimple Will Get My Business

Hibernian BankI bank with a well-known national bank. We’ll call it CurrentBank. I’ve banked with CurrentBank, for more than a decade. I like to keep things simple, so I don’t have any other accounts. But as soon as BankSimple is up and running, I will open an account with them. Read on to find out why.

I recently booked airline tickets on Cathay Pacific for my in-laws who live in India, to come spend a few weeks in the holidays here with us in the Bay Area. I made the booking on Cathay’s website using my CurrentBank debit card. A few days later I was shocked to learn that CurrentBank had hit me with a fee of $234.92 for “international transaction fees”. I scrambled and called CurrentBank, who basically said, sorry, but read your contract.

I of course knew about those international transaction fees. I see them all the time when I use my card outside the US. But how am I supposed to know that sitting in the Bay Area I can be hit by these fees while buying tickets on an international airline. I had never paid any transaction fees on Cathay before this and this was not the first time I was buying tickets online on Cathay, though the trip always originated in the US.

Wouldn’t it be really simple for Visa and/or CurrentBank to pop a message while the transaction is being processed that said “Please note that CurrentBank will charge you an additional fee of $234.92”. Something that is always done at ATMs around the country. But why would they. You see, the card holder might have second thoughts.

The objective, you see, is not to serve your customer’s interests. It is to lure him in by “free checking” and other tall claims and then trap him with well-laid traps.

You might say, “Hey, you should have read the contract.” I offer an analogy to whoever might pose that question. Suppose you went to an e-commerce website. You clicked on the “I agree” button. The agreement that you just agreed to included a line that said “A service charge of 3% will be charged to your credit card for every purchase.” You then did your holiday shopping and then discovered in January that the e-commerce company hit you with an additional charge. You’d be pissed, wouldn’t you? So am I.

Earlier this week I got hit by a fee of $15. My account is not supposed to have any fees, but there must be a good reason why they hit me with a fee. I’ll never know. Their online statement gives no explanation. And it is not worth my time to call and find out what the fee is about. They probably concluded long ago that saying too much in transaction statements just raised unpleasant questions. And who wants to deal with those pesky customers.

I know CurrentBank needs to make a profit. I know that they’ve been hit big time by the cap on debit card fees (which the retailer pays). But I’d be much happier if they charged me whatever they needed in an upfront and transparent way. Don’t lay traps.

That’s why I am rooting for BankSimple. I have no problem paying a fee for checking. I know it costs money to provide a good service. But I want the services and fees to be simple, upfront and transparent.

You might say, why BankSimple, maybe this is just a CurrentBank problem. Try another bank. I don’t have to. I know all of them suffer from the same problem. They are all busy “leveraging their customer base.” After gazillion acquisitions, the way they compete has come down to reducing costs and getting more out of the existing customers. Unfortunately, the latter often means ambushing them in dark alleys with hidden fees.

Bottom of the Pyramid of Digital Media

PyramidIf you read this blog regularly you should be used to my constant carping about the lack of imagination in the music industry due to which the price per song is stuck at about $1.

While the music industry in the West and in Bollywood is doing its best ostrich imitation, in another product category we are seeing some amazing new developments – books.

From Novelr

Amanda Hocking is 26* years old. She has 9 self-published books to her name, and sells 100,000+ copies of those ebooks per month. She has never been traditionally published. This is her blog. And it’s no stretch to say – at $3 per book1/70% per sale for the Kindle store – that she makes a lot of money from her monthly book sales. (Perhaps more importantly: a publisher on the private Reading2.0 mailing list has said, to effect: there is no traditional publisher in the world right now that can offer Amanda Hocking terms that are better than what she’s currently getting, right now on the Kindle store, all on her own.)

If Hocking had gone to a publisher to do a paperback that retailed for $10, she would have made $1 per book. For the Kindle version, she would have made $3. But by self-publishing on the Kindle she gets to keep 70% or $2.10 per book and keep the low, low price of $3.

Yes, she has to figure out how to market the book. But as any good VC will tell you, when you are starting out, focus on the product. If it’s good, they’ll keep coming back and bring their friends with them.

I don’t know how good Amanda Hocking is. I actually don’t think she needs to be a Michael Crichton. This is the magic of low prices at work.

Now, can we get songs for a quarter any time soon?

The Role of English in Modern India

The New York Times has a piece India Faces a Linguistic Truth by Manu Joseph

English is the de facto national language of India. It is a bitter truth.

The article goes on to depict this battle between people who want to make English a national language and those who don’t. If English becomes a national language then

Accepting that English is the national language would have benefits that far outweigh soothing the emotions of Indian nationalism….

The chief beneficiaries if English attained this status would be the children who attend the free schools run by the central and the state governments. An overwhelming majority of such schools are not taught in English.

This was news to me. I thought English was an official language. The Wikipedia entry on India says that both Hindi and English are official languages. English is a ‘subsidiary’ official language, whatever that means.

I think the English genie is out of the bottle. It is the language of the aspirations of young Indians. Cultural jingoism is not going to be able to push back the economic drive of English. To get ahead in India today, to get a well paying job, you need English.

There are issues with this situation, of course. From an earlier post

One, English is a self-perpetuating advantage that creates haves and have nots across generations. If your parents can speak in English, if their friends and their children speak in English, you are much likelier to grow up to speak English. This self-perpetuation is true about education in general (if your parents are educated you are likelier…) but while better access to books, schools and teachers can, to a large extent, break the cycle for general education, this is really hard to do when it comes to speaking a non-native language.

Two, an English medium instruction may actually be detrimental to a child’s education. There must be millions of children who sit through say, a History class in English, not understanding much of what is being taught.

From another post English Medium Education Can Lead to Poorer English

Across the cross section of India, I think English medium education works to disperse educational outcomes. For a small minority, it results in better English skills but no better general educational outcomes. This small minority, who have an “English friendly” environment, an English medium education poses no hurdle, or a very small one. But the rewards are linked to opportunities in the global marketplace for higher education and jobs, including the export oriented service industries in India.

For the large majority, however, according to the research, English medium education works differently and leads to poorer educational outcomes and poorer language skills. If this is the case, it must be a matter of great concern to education administrators.

If things continue as they are today the future will see:

  • English, not just talent and hard work, will be a key determinant of income. Did your parents speak English? Could they afford to send you to a English only convent? These factors will determine the kind of job Indians will get perhaps more than their capabilities. Class mobility while not being engrained for generations, will be restrained.
  • We need a well educated population – for a 21st century economy, for a well informed electorate. Is a forced diet of English medium education going to get us there? Will children learn elementary school science better in English or their mother tongue? Do we even have the teachers who can teach Biology in English, in the numbers needed?
  • Will English medium students actually join the work force with good English skills? If you go by the writing skills that one sees in the comments section of Indian websites, I seriously doubt that all the years of English medium education has done them any good.

If there is any policy direction that we need here it’s that India has to pay serious attention to the manufacturing side of the economy. Sophisticated manufacturing industries value skills. Factory workers don’t need English skills to work with global clients. Just like Germany’s world-beating machine tool industry is all German speaking. While the capital markets industry, being integrated into the global capital markets, speaks English.

And if we focused more on teaching English better, rather than teaching every subject in English, we just might turn out better workers.

IBM Watson – Welcoming our New Computer Overlord

Lotusphere11-104Earlier this week the quiz gameshow Jeopardy! had a new champion – a computer named Watson. It defeated former champions Ken Jennings and Brad Rutter with ease.

Watson created a wave of good PR for IBM, its developer. And rightfully so. I think it is indeed a big deal.

Before I get to why I think Watson is a big deal, take a minute and read this Wired article on how Watson was set up for Jeopardy!

The computer is fed the answer in text form at the same time the answer panel appears to the two human players. Watson then queries its database for an appropriate question response, a process that doesn’t involve using the internet at all.

…Watson then must push a physical buzzer to respond, just like its human competitors.

They went to great pains to level the playing field. So it would seem that Watson truly bested its human competitors. So how did it win?

More

Indian IT Services: Quarter’s Roundup

Yesterday Cognizant announced their results for the quarter and the year. That rounded up the quarter for the major Indian IT services companies.

I pulled some data together for the past five quarters. The results were pretty interesting.

First, I wanted to see what was happening to growth. I built an indexed chart which just shows growth for each company over its revenue in QE Dec-09.

Revenues for the previous quarter are in the same ballpark – between HCL’s $800 M and TCS’s $2 B a quarter. In that range, the size of the base should not impact growth much. Also, there were no major acquisitions during this period.

Cognizant is clearly pulling ahead of the pack. Wipro is falling behind a bit. HCL has upped its game and is keeping pace with Infosys and TCS.

What can we expect in the future? It’s hard to say. I think Cognizant will continue to lead the growth tables in the near term. The rest is anyone’s guess.

The long-term is a different matter. IT Services companies have a lot of inertia. These companies are like rolling, massive boulders. Changing speed or direction takes a lot of effort. And time. The companies that want to take the lead two years from now, better start making changes now. Managing results quarter to quarter, isn’t going to hack it.

The other interesting thing is the spread in margins in the industry.

The margins range from 10% for HCL to 25% for Infosys. (Wipro does not report net margins for its IT Business separately.) It is uncommon in an industry to have four similar sized companies in the lead with such a wide range of margins. Especially, in an industry where there are no entry barriers of technology.

My take is that this range of margins will narrow in the long term. Since Cognizant is now the growth leader, it can afford to stay put. But Infosys, TCS and Wipro will find it difficult to stay where they are.

If they execute well, these companies will be able to gradually up their spend on the things that matter and protect pricing. If they don’t, their pricing power will erode.

Protecting price levels is all about reducing competition. Superb account management and client service can do that. Investing in solutions that create measurable value for clients can do that. And new services and IP can do that.

Yes, a strong brand will also help, but the leverage from better marketing today, with five major players in the market, is not what it used to be. Good marketing is now table stakes.

On a related note, fellow EI, Ray Wang, who is just back from a NASSCOM conference, has a great post on how Indian services companies can start leading.

Bollywood Music – the Android Opportunity

Can Indian digital music become a legitimate business? Or will it stay stuck with a 20th century distribution model?

You might say that Bollywood is already digital. You already get popular music on iTunes and amazon.com outside India. But the problem is that Apple and amazon.com are force-fitting their template for western music onto Bollywood music.

Take pricing. iTunes pricing for Bollywood songs is its standard 0.99c. Amazon.com is the same, though I saw a few songs for 0.89c. The Dabangg CD costs what? Rs. 150? For 10 songs. That works out to 0.33c per song. And the shame is that the 0.99 pricing is not because the Indian studios want that pricing. It is because Apples forces a standard template on everyone.

There are a bunch of other things that I would expect from a music service that specialized in Indian music. Don’t expect these from Apple or amazon.com. Correcting spellings, for instance. I find the “did you mean ….” in Google is very helpful. But when I am looking for music on iTunes for the movie Awaara, I don’t know how it’s spelt. Aawaara picks up something, so does Awara, but neither is Raj Kapoor’s Awaara, which is what I want. It should be so easy to build an intelligent, forgiving search for spelling Indian movies in English.

Here’s what came up when I was looking for Dabang on iTunes (instead of Dabangg).

Indian popular music is about the movies. The movie is part of the experience of the song. It is also a revenue making opportunity. Sell music videos. The cross sell opportunity between music, music videos and the movie itself is enormous. It is not being leveraged at all today.

I am sure Bollywood executives wonder about how to leverage this opportunity. Indian music is just too different. It’s not just a matter of pricing. Waiting for Apple or amazon.com to wake up to the opportunity is not the answer. So what do they do?

There is a way opening up. Because of Android, 3G and more broadband.

As I write this, I am listening to Shreya Ghoshal on iTunes/MacBook – WiFi – Airport Express – Denon receiver – Polk speakers. But most digital music is consumed through a portable player. The world’s dominant portable music player is the iPod (and the iPhone). The iPod never really caught on in India. Neither did the iPhone. Too expensive. So most of the market comprises of cellphone mp3 players.

Android is going to be big in India. People who own cellphone mp3 players today will have Android phones within 2 years. Android is the perfect platform to build a digital music player for. And its user base will have size and depth.

I think Bollywood should do a Hulu. Two or three leading studios [labels] should come together with a VC and form a company. The company’s mission should be to build a digital music business in India.

There are many models out there that could be candidates. Download with/without DRM (iTunes, amazon.com), Subscription (Spotify), Streaming and ad supported (Pandora). The technology too is mature. Scores of Indians in the Bay Area have the expertise to build digital media systems.

The key challenge is on the deal-making side of things. The ownership of copyright in India is a little more complicated than in the US. Also, the industry is more fragmented. To get a critical mass of copyright owners on board will take a lot of doing. But hopefully, the opportunity ahead is what will convince them to sign up.