The Upside Of The Downturn – Accelerated Innovation

In this Podcast, Sandeep Kalra, CEO and Executive Director of Persistent Systems, shares his views on how software companies are leveraging their existing funding to tackle the recessionary scenarios with Pari Natarajan, CEO, Zinnov.

Podcast Transcript

Pari: Hello, and welcome to an all-new episode of the Zinnov Podcast Business Resilience Series. I’m Pari Natarajan, CEO of Zinnov, and I’ll be your host for today. Today, we have with us Sandeep Kalra, CEO of Persistent Systems.

Sandeep also serves on Persistent’s Board as an Executive Director. He’s helping in the transformation of Persistent from a niche technology player into a multi-faceted new-age digital transformation partner for their customers. With more than 25 years of experience in the IT services industry, Sandeep has held many leadership positions at the likes of HCL, HARMAN, and Symphony Teleca.

Welcome to this episode, Sandeep. Great to have you with us today.

Sandeep: Thank you, Pari.

Pari: Sandeep, you work with a range of technology companies and regularly meet with CXOs at these firms. Can you give us a view on the current state of the enterprise software landscape and how they are impacted by the current market trends?

Sandeep: The enterprise software industry has experienced significant fluctuations in recent years. While the acceleration in digital adoption induced by the pandemic has positively impacted the industry, the troika of rising inflation, the Russia-Ukraine conflict, and the subsequent action by the Fed leading to interest rates rising over the last 9 to 12 months have created significant headwinds for the industry.

The industry markers, such as deaccelerating revenue growth, declining public company and private company valuations, and drying VC fundings, are just small illustrations of the challenges very clearly.

Pari: You work with various sets of customers. You work with hyperscalers, you work with private equity funded companies, you work with VC funded companies, you work with publicly traded software companies. Are the trends different across these segments?

Sandeep: So interestingly, all these four segments, the hyperscalers, the horizontal vertical public listed companies, specifically the ones that have gone public over the last several years, the PE-owned companies, and VC-backed digital natives, all of these are having a different kind of dynamics.

To give you examples, when we look at hyperscalers, we are talking about companies like AWS or the Amazon AWS part of it, Azure part of it, GCP, and so on. While the pandemic led to a lot of acceleration for these companies and a significant backlog for their cloud services, they’re now facing headwinds in making those backlogs translate into revenues for themselves. And that’s where the enterprises are getting a bit shy in cloud adoption because they’ve seen cloud bills rise significantly on consumption. They are looking for partners like ourselves to prudently work with the cloud provider and the enterprise to have use cases that can drive consumption and get that backlog to revenue.

If we look at private equity-based companies, a certain number of these transactions happened over the last several years. A typical private equity transaction has a life cycle of three to five years, and depending on where in that life cycle the company is, they have to now wait out this whole cycle a little longer because revenue acceleration is not happening at the pace they wanted.

So, it’s about cost optimization while innovating at the same time. There is a different dynamic in the PE companies. And if you look at VC-funded companies, let’s say, late-stage companies which were hoping to either go public or be exiting towards the strategic, they have a similar kind of challenge as well with conserving the cash. Each of these PE companies, whether it’s Sequoia, whether it’s others, are asking the portfolio companies to conserve cash at least till 2025. And so, very different dynamics are playing out. It is all about doing more with less, innovating while conserving cash on things which are business as usual, and this is also throwing up very good opportunities for companies to become leaner and stronger and for partners like us to engage meaningfully.

Pari: Interesting that you talked about your work with enterprise and how you’re working with hyperscalers to help their customers move onto cloud, but also you work in healthcare and BFSI – several of your customers are in those areas. And they have seen massive tech adoption over the last few years. How are they reacting to the current, if you may call it, slow down? Are they slowing down their technology spend, or are they continuing to accelerate? Or is there any change you see in the enterprise segment, especially in the BFSI, healthcare?

Sandeep: In today’s economic climate, any enterprise, whether it is in BFSI, healthcare, or other industry segments, are all facing headwinds from rising costs because of inflation and a slowing economy, given the geopolitical issues and the various other dynamics related to that.

Now all these businesses are reassessing their investments in innovation and digital initiatives. It’s not that they’re trying to stop those initiatives. It’s about doing those initiatives, reprioritizing the spend, looking at what is “must have” in this environment. And within that, also looking at trends where you could achieve. Let’s say, if you were spending $100 on a digital program, how can you reprioritize and get it to $90 and within that $90 using globalization and other nearshore, offshore kind of partners, etc., drive even more — so that you are able to, while you’re reducing the spend, do more with that spend and keep the critical parts of your digital transformation alive. Because a number of these initiatives are long range initiatives.

Second, in Covid times, there was a trend that started, which was deprioritizing physical investments and putting them in technology investments. So, to give you an example, the banks, at that point in time, whatever was their strategy to open branches, they reprioritized that. So, they basically deprioritized physical branches, got away from that strategy, and launched more and more digital products.

Healthcare also became more digital in nature. So, a number of those things are continuing. The tech spend is getting impacted, but it is not the first spend to get impacted. So, while yes, we will see reprioritization, reallocation of dollars, the programs are continuing, and we need to work with our customers to get the priorities right and also see what needs to go on cloud and other things and so on, so forth.

Pari: One of the things which has happened in the last six months is the pace of technology innovations continues to accelerate. With OpenAI, Generative AI coming in, when the companies add a digital transformation roadmap, now they are looking at, ‘Hey, what is this new technology coming in? How do I look at those experiments, continue to invest in those experiments, because that could be very disruptive, but still drive efficiency. You’re seeing that in enterprise asking you questions around, ‘Hey, what are these new technologies coming in?’ And you being their digital transformation partner, how do they want to partner with you?

Sandeep: So, this whole trend about OpenAI part being initiated by Microsoft, the ChatGPTs of this world, while there’s a lot of buzz around it now, this trend started a few years back. We have been working with our customers, and we have been trying to see whether it is about increasing our own developer productivity on programs that we execute for them, whether we are doing product development or we are working with enterprise companies, even things like their own employee-facing initiatives can use chatbots, etc., integrate technologies like a ChatGPT and in an environment where not everything needs to go back to the cloud.

So, there are ways and means of using these technologies in a more private manner. We have a CTO organization that has been working on this. We have about 150 people dedicated to innovations like this at any point in time. So yes, there are some good initiatives, and there are some early adopters and there are some people who are waiting in line.

Pari: We are starting to see a slowdown, but the technology innovation cycle has not slowed down. The enterprise adoption of technology is not really slowing down. So, going back to the enterprise software sector, which is what we started with, it’s just that in this mode where they continue to accelerate innovation, but they got to do more with less. They can’t invest like they did in the last two years. So, what transformation levers are they starting to pull, because if they slow down on innovation, there are lots of interesting VC-funded companies that could potentially go and gain market share. So, they can’t afford not to innovate, but they can’t afford to spend as much as they have during the last two years. How are you helping them navigate these tough times?

Sandeep: There are multiple kinds of companies within the enterprise software companies, and there are different horses for different courses. So, for example, if we are looking at companies that went public in the last two or three years. Now, a number of these companies were very fast-growing companies. And since they were growing very fast, they were never worried about globalization. They were never worried about balancing their spend between, say, the professional services part being entirely onshore versus whatever else. For companies like that, where the revenue acceleration has now slowed down to your point of the rule of 40 and their evaluations, etc., have got hit, their profitability will further go down because the revenue acceleration is declining.

The things that we are discussing with the CXOs out there are prioritization in terms of globalization and prioritizations in terms of functions, like how professional services can be done like a science. Not every professional service implementation needs to start ground up and be custom.

And last but not least, as an organization, for example, we deal with enterprises, and those are customers or potential customers of these software companies as well. Having a thicker alignment on a go-to-market and putting reference architectures for different plays within an enterprise, and partnering with these companies. So, that is the kind of thing we are doing, let’s say, with the companies that are newly public and so on.

For mature companies that have been in existence, they may be large public companies or whatever else, there are product portfolio rationalizations that are happening. There are site consolidations that are happening. There are captive takeovers that are happening.

So, there are different places for different parts of markets, but the essential underlying theme is kind of intermittent fasting, where you are basically going on a diet, making sure that you are cutting the spend where it can be cut while fueling your innovation and not stepping back on the competitive differentiation that you want to create. So, there are different initiatives like that happening.

Pari: One of the other things we hear Sandeep is re-platforming because they bought a whole lot of companies, acquired a bunch of companies, and each of these companies has its own source code. They’re supporting customers through maintenance services. All of that adds to the cost. Are you seeing that as an opportunity where companies are starting to look at, ‘Hey, can I get all of these together in a platform?’

Sandeep: So, there are two distinct opportunities. One is on the enterprise software side, where it could be consolidation of products, retiring some products, putting them in a BAU mode, and so on. Second, on the enterprise side, and when I talk of enterprise, think of even online retailers and so on. What is happening there is that they are moving from a traditional or a legacy stack to some parts on the cloud, not just for cost optimization but for business agility.

We are working with one of the largest online retailers, and they have chosen, for example, Google Cloud. So, the whole initiative here is to use not just the lift, shift, and optimize cost but also use analytics to basically streamline business and get even more agility in attracting business, customers, whether it’s B2B or B2C, and it’s like doing a segment of one and making them much more agile in their marketing campaigns. So, many different things are happening, but all towards increasing business agility and reduction of cost.

Pari: Got it. So, one other dimension when we talk to CEOs and CXOs — they say that we are collecting a whole lot of data — you call it digital transformation 1.0. You put all the data, you put it on the cloud. Now we are going through this tough macro situation, and we need tighter control on how we run the company. And how do I drive analytics and insights from the data around what we have already collected about customers, employees, and business operations? So, that seemed like another trend that we are seeing. Are you also starting to see analytics as a key area for them to get more control over the ship?

Sandeep: Again, multiple things are happening there. It’s analytics for their operations. Analytics for analyzing the customers, customer behavior, and customer requirements.

What is it that the analytics can lead to in terms of revenue acceleration? So, one is optimizing your own self. The second is revenue acceleration. And third, there’s another trend under all this where a number of these companies went to the cloud. A number of these cloud platforms, while they provided them all this flexibility and nimbleness and so on, the costs have spiraled.

So, they’re questioning that as well. There is something called cloud remediation and digital remediation that is being talked about now among the CXOs in the boardrooms, and so on, where it is about doing all these we talked about, but also making sure that this is done prudently and some of this is not going to the cloud.

Some of this is being done on-prem and a combination of cloud and so on, so forth, to contain costs. So, it’s getting all the benefits but doing it at a cost you can afford.

Pari: Got it. You work with companies like OutSystems and Appian, which are largely low-code, some no-code providers.

In some level it’s disruptive, right? One says, ‘Hey, I can work on a low-cost location, or I can use low-code no-code solution, or now with GitHub co-pilot, that is going to create codes.’ When you talk to customers as a product engineering service provider or digital transformation provider, do they look at these technology as in some level competition to your engineering capability or they think of this as augmenting your capability?

Sandeep: This is definitely augmenting the capability. So, if you were to do a parallel, if you have a car that is more intelligent and if it has driver assist in different forms and shapes, it is not a replacement for the driver. It is a tool for the driver to be more safe, more secure.

Now, if you look at OutSystems or Appian, or any other low-code no-code company, we are using these platforms for rapid application modernization or rapid application development. And all of these are tools in the service of the business problems that the customer is trying to solve. And we are truly a trusted partner. At the end of the day, we have to do what is right for the business, and there’s enough work for everyone and more to be done. All these are very good tools, and we are seeing big programs one way or the other based on all this.

Pari: Great. And you did mention that you’re one of the fastest-growing engineering services firms. Congratulations. I think it’s a great achievement, especially with the kind of rollercoaster ride the market is going through over the last few years. How are you navigating the current scenario as the CEO of one of the fastest-growing companies?

Sandeep: Pari, it is the same thing we do with our customers. If we are looking at their business and advising them on how to optimize it, we are basically dogfooding our own thoughts. So just to give you proof point of that, not only have we increased our business by 35% year on year, last year, for example, our profitability has improved better than that.

So, we have not only accelerated our revenues, but we have executed well. Now, underlying that there are various teams, we’re starting by building a good franchise of capabilities so that we are very relevant to our customer base. So, not only have we invested organically in building capabilities over the last several years, we have deployed roughly $200 Mn of our capital in acquiring more capabilities on the Salesforce stack. So, for example, we acquired a company that had MuleSoft capabilities and marketing cloud capabilities. We have acquired companies in the Azure, GCP spaces. We have acquired companies in the BFSI vertical in payments.

So, wherever we believe there’s an addressable market that is very attractive for us in line with our capabilities and where we can become a sharper tool in our customer’s toolkit, we have put our money to work. Today, based on that, we have been winning even more deals, whether it is our own existing customers or prospects.

So, it’s about bringing the right talent through all these acquisitions and growing our own talent. Last but not least, our industry is a talent-based industry, so we have to make sure that the talent that we are grooming and nurturing is here with us for the long run. So, we have campus programs on one side. On the other side, we have 80% of our employees covered by an employee stock option plan, which in our industry is unheard of. And I would say that even in the broader industry, there may be only three or four companies that are public and that have 80% of their employees covered in the stock option plan.

What it means is that, as we do well, our employees not only have a very good career path, but they’re also creating wealth for themselves. And it is very good for our customers because they get to have folks who are very good from a technical perspective and who have longevity with the firm and with the customers they work for.

Pari: Great. So, it seems like you’re doing a lot of things, Sandeep. Give us a view on what a regular day for you looks like.

Sandeep: So a regular day… it’s all very exciting. We are working in a global world. So today there are and US.

So, earlier in the day starts with our India side of the house. During the day, it’s customers. Sometimes it’s customers and investors. Because we are a public company, we have to take care of our various stakeholders, and the evenings end up with a few small calls with India and so on. Yeah, there are downtimes, but this is fun for me. These are exciting times for us. The last four years for us have seen a pretty good acceleration of revenues, good customer acquisitions, and so all good.

Pari: Thanks, Sandeep. Sounds like you’re keeping your day very exciting. And your insights around how the enterprise software industry is changing and what are different ways they are improving and optimizing their business, and the role Persistent Systems is playing as a trusted partner to enable the transformation among your customer base.