We are recession resistant

For some time now, India’s information technology (IT) services companies have been trying to separate revenue growth and increases in staff strength, mainly by offering intellectual property (IP)-led products and platforms, outcome-based pricing, and higher-end management consulting.

Canada’s largest IT services company, the 35-year-old CGI Group Inc., is an example of such a business model. While its revenue is comparable with, say, India’s third largest IT vendor Wipro Inc., its manpower, at 31,000, is one-fourth of Wipro’s.

Indian companies derive less than 10% of their revenue from products and platforms, while CGI boasts of a 20% share. Chief executive Michael Roach wants to take it to 40% in 5-10 years. And with a $13.5 billion order book, three times its current revenue of $4.5 billion, Roach considers his company “recession resistant”. Edited excerpts from an interview:

Give us a sense of your business model. Your practices and divisions are similar to Indian IT vendors, but you do more government work.

Government (work) is 36% of our revenues, financial services 30%, telecom 15%, and manufacturing and retail the rest. As for offerings, 60% is application development and maintenance services, 20% infrastructure services, and 20% from products and platforms.

We have a proximity model where we differentiate ourselves, with a lot of people close to the markets we serve. Fifty percent of revenues are from Canada, 45% from the US, and 5% from Europe. We offer clients a menu of choices, on-site, off-site, or in a low-cost centre within their country, or combinations of that. Ninety-five percent of our projects are delivered on time and on budget; 97% of our employees in India own CGI stock. Companywide, it is 90%. It is a profit-participation model. I always say, no one washes a rental car.

But your margins are not very high, with operating margins at around 13%?

Our margins are the best in North America and Europe, and have been so for four years. We have a lot of intellectual property, which we leverage. Twenty percent of our revenues come from solutions which we sell as a service. We don’t have a relationship with people and revenue. Over time, the revenue goes up, but the people rate does not go up. In India, we are growing at 30% though.

Clients do not want to buy inputs—people. We take on a whole function, reduce price, and take the full risk on delivery. Clients don’t know how many bodies we have and they don’t care. And IP is now a part of this. We have been doing this for the last 20 years. Sixty-eight percent of our revenue is recurring.

In the worst days of the financial meltdown, when stocks went down 40%, we went down 20%. When it went up 20%, we went up 60%. Our stock valuation is bigger than some companies three times our size in revenue. We have a signed backlog of $13.5 billion of total contract value. And the average age is 6.5 years. Even if there is another downturn, we have that floor. We are recession resistant. And I want to take my product and platform solutions to 40% of revenues in a 5-10-year timeframe.

Apart from India, do you have low-cost centres within your markets?

Yes, in Canada, US, Spain and Poland. In the US, we opened one in rural Virginia with 400 people. US President Barack Obama appreciated that. This will grow, given the political pressure (against jobs being outsourced) to balance things. But again, the component of India is a differentiator; without it you are not necessarily going to be competitive. We will be competitive for government work, as that does not move offshore. But for enterprises, looking for better price, quality and risk. India is important. Here we have about 4,000 people, with capacity for another 1,500. And I want to have the lowest turnover rate. We have 12% attrition in comparison to 20%-plus in the industry here. And we want to keep working that down. If the turnover is 20%, clients are thinking, “one in five people working on my project may not be there soon”. That is very worrisome for clients.