Sunday, May 14, 2006

A different sort of oil magnate.

Greasing the flywheel.

link to original article.

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The World According to Azim Premji

He built an outsourcing empire that works for Fortune 500 companies, and still makes cooking oil. He became India’s biggest high-tech tycoon, then finished his bachelor’s degree. It all makes sense, once you get to know him.

BY JOEL MCCORMICK

“Okay, let’s go,” he said one minute and 20 seconds into the conversation. Azim Premji, multibillionaire and leading architect of India’s surging economy, wouldn’t let another second slip away on small talk.

Five minutes earlier I had passed through the main gate of Wipro Limited’s headquarters campus, bidding goodbye to the dust clouds hanging over endless construction sites and disoriented holy cows foraging in garbage-strewn roads. The taxi had made it to the edges of Bangalore with its steaming gridlock and diesel fumes belching from buses—and the city’s ubiquitous three-wheeler autotaxis, which make roaring chainsaws seem tranquil.

The campus opened before me like a mini-Singapore of quiet, undisturbed efficiency, of gardens with footpaths to buildings whose shape and color would fit right in at Stanford. Sealed off from the chaos, you could suddenly imagine hundreds of mini-Singapores springing up: India’s gleaming new IT and pharmaceutical campuses and vast steel and automotive complexes, all spreading like paint poured from cans till the different hues joined together and a picture of India’s galloping new economy was finally complete.

Weeks later, I put something like that image to Premji, ’67. “The picture is quite realistic and hopefully prescient,” the Wipro chairman e-mailed back. “India is a happening place. Industry after industry feels that if the businesses in software services could be world class and out-compete global competition in their turf, they too can do the same.” Furthermore, he added, “there is noteworthy effort from most of the corporate leaders to go beyond our business constituency and influence the issues that matter most to our country.”

Premji ought to know. In the past three decades, he has transformed the family vegetable-oil business into one of India’s top four technology services firms. When American newsweeklies run cover stories about the rise of India, they’re talking about successes like Azim Premji’s. When U.S. politicians and pundits wring their hands about the effects of outsourcing engineering work in nearly every sphere to Indian companies, they’re talking about Wipro and a handful of counterparts.

Premji appeared in the bright long conference room of the chairman’s building with his thick white hair swept back, wearing a khaki shirt embroidered with Wipro’s sunflower logo. But for his patrician bearing, and the setting, you might have mistaken him in that garb for the man who last changed your muffler. “Premji’s pleasant personality and his down to earth traits are not exactly synonymous with the tag of the richest Indian,” wrote Stephen David, principal correspondent for the newsweekly India Today, in March 2000. (In March 2006, Forbes estimated Premji’s net worth at $11 billion, making him the second-richest behind steel magnate Lakshmi Mittal.) Until two years ago, Premji drove a Ford Escort; he’s since graduated to a Toyota Corolla. He remembers his made-in-India Ford with fondness. “They re-engineered the entire suspension system for it,” he says. “It can really take the rough roads.”

Indeed, Premji knows something about navigating challenging terrain. This is a man who transformed his father’s small company, at the time a cooking-oil processor in Jalgaon district 300 miles northeast of Mumbai (then Bombay), into a technology empire with a market cap “equal to Pakistan’s GDP,” as India Today correspondent David joked.

Premji was just finishing his engineering studies at Stanford in 1966 when he got word of his father’s sudden death. “It came as a complete shock,” he says. “I just had to rush back.” He had only one term until his graduation, a passage the news would delay 30 years. (Premji eventually sought—and got—permission to attend arts courses by correspondence to complete the requirements for his bachelor’s degree. “I had met all the core requirements for engineering—I just wanted that degree.”)

At 21 he had to get down to running Western India Vegetable Products Limited (a name later shortened to Wipro). Oddly enough, the thought of managing the family concern had never entered his head. “My interest was more in developing countries, more in a World Bank kind of a thing.” When Wipro began piling up profits, Premji turned his attention back to development causes, starting corporate and family foundations devoted largely to overhauling primary education across the country. (See sidebar.)

As it happened, his dad had had other interests himself and hadn’t been very keen on minding the store. Mohamed Hasham Premji, according to India Today, had been invited by Muhammad Ali Jinnah to come to Pakistan to serve as finance minister in the country’s first cabinet.

Jinnah, of course, was Pakistan’s George Washington. The invitation came after partition in 1947, when the subcontinent’s Muslim-majority states split off to form Pakistan. In the end, Hasham turned it down, opting to stay in India and take his chances, a decision any Muslim businessman must have weighed carefully. Apart from any concerns he might have had over disastrous sectarian relations—hundreds of thousands died in the violence as Hindus and Muslims migrated to their respective sides of the new border—he had the socialist agenda of Indian Prime Minister Jawaharlal Nehru to consider.

Nehru’s Congress government, in fact, forced Hasham out of the export business when it nationalized the rice industry, a move that put him on the road to making vegetable oil. But if independent India’s first government forced the closing of one Premji business, a later one provided the opening to diversify into another.

The opportunity came in the late 1970s, when New Delhi told IBM to shape up or ship out. The memory of it still seems to burn for Azim Premji. IBM was “selling machines that had been obsolete in Western countries 10 years back,” he asserts. “They’d pick them up from obsolete sites, refurbish them and bring them in.”

New Delhi told the world’s biggest computer company that India would settle for only the latest kit—and furthermore, if IBM wanted to keep its subsidiary in the country, it had to dilute its ownership and let Indians buy shares in the company—fighting words, to say the least. “IBM believed that no country could survive without IBM . . .” Premji says, pausing to find the words, “. . . because they were so full of themselves in those days.”

Big Blue pulled out, leaving a gap Indian companies could fill: making minicomputers. Even though it was the size of a large freezer, Premji saw the mini as the precursor to the personal computer. And more to the point, the mini looked doable: “We were a very small organization in the late ’70s, [but] it was not capital intensive so we could afford it.”

Still, making minicomputers was a bit of a jump from making Mazola, so to speak. Wipro would need to get its hands on an operating system and basic hardware design. But that turned out to be the easy part. “We were able to source technology from a very small company which was going bust,” Premji explains. Googling later revealed that was Sentinel Corp. of Cincinnati. In a column published in the Cincinnati Enquirer last November, Leland M. Cole, a Sentinel vice president 25 years earlier, reminisced about helping Wipro shift from Crisco, as he put it, to computers. “I remember visiting Wipro a number of times and helping it launch into the computer world,” Cole wrote. “Today Cincinnati’s Sentinel Corp. no longer exists, but Wipro has become a major IT player . . . [with] 50,000 employees and Fortune 500 clients such as GE, Boeing, Microsoft and Motorola.”

Wipro then supplemented that technology with R&D from the Indian Institute of Science in Bangalore. The collaboration yielded a new kind of computer. “It was the first time that a nonmainframe could have multiple terminals and multitasking at the same time,” Premji says.

Wipro hired fresh university graduates from its competitors, and hived talent from public-sector organizations, where so many of socialist India’s brains were. Premji beams at the thought of it: “We put together a first-rate team. And we took a different strategy: we put almost 40 percent of our people force into R&D; we put probably 40 percent of the people force in customer service and customer solutions development—and 20 percent of our people force in customer selling.”

The company also held onto its IT customers, coming up with more and more products and services to sell them. The minicomputer “was a complete hit,” Premji says. “It took the Indian scene by storm after the junk they were getting used to from IBM. And it got us initial reference customers. We did a damn good job with those customers and we built a business. And it kept growing.”

As time passed, an interesting thing happened. After forcing foreign companies like IBM and Coca-Cola to exit, New Delhi started to loosen up again and relaxed import policy. With the latest foreign technology available and affordable again, there was no longer the need to develop so much from scratch. “We found we did not need some of the team in R&D,” Premji says. Instead of firing excess researchers, he thought, why not establish a global R&D lab for hire?

“And that is just what we did,” Premji says. There wasn’t much to lose in the experiment: client companies could get help with product development at a discount while Wipro used its much lower cost base to reel in a hefty profit.

The idea clicked, and one satisfied customer led to others. India’s giant Tata conglomerate had done the same thing even earlier, building an enterprise that became known as TCS (for Tata Consultancy Services). Infosys and Satyam jumped into outsourcing, too.

“It was fun,” Premji says. “We did our unconventional things—we hired good businessmen who are good profit managers versus good technicians who are terrible profit managers.” The thought folded neatly into a maxim Silicon Valley CEOs might want to remember: “It is easier to teach bright people technology than technicians the fundamentals of business management.”

Wipro also did not forget its roots. Peanut oil, in fact, provided the grease for Wipro’s expansion into a wide range of consumer markets and underwrote the company’s whole drive into technology. Today, the company continues to make cooking oil, and the consumer products division doesn’t consume much of the chairman’s time. “It’s fun—you can touch and feel it, it’s not like software,” Premji says. “Besides it’s profitable, growing at 25 percent a year. And it produces excellent managers for us, excellent marketing people, excellent CFOs, excellent logistics and distribution people for the rest of the company. Plus it is a business which funded our entire group—all the cash flows from that were put into it. Without that business you would have no IT business.”

And what an IT business Premji has. He’s been able to capitalize on the trend that began with outsourcing manufacturing, to China and other low-cost countries. In outsourcing, a company identifies which aspects of its business can be most cost-effectively performed within the company, and which elsewhere. Companies can offload any functions they aren’t absolutely tops at: operations such as manufacturing, product development, human resources, customer support, systems management and so on.

Service industries consider which nonessential functions they might outsource to companies like Wipro. That might be Oracle asking Wipro to make its software work in China or some other market, or Motorola asking it to develop embedded software for a new phone. In financial services, it might mean Wipro developing a portfolio of insurance products; or developing an interactive staff training system for a retailer’s HR department; or managing payroll for a global bank; or running call centers to provide tech support. Wipro works with 400-plus multinational corporations, more than 150 of them Fortune 1,000 companies. It could add 400 more and do more jobs for every one of them—at a fraction of the companies’ current cost.

Professor S. Krishna of the Indian Institute of Management in Bangalore says that while each of India’s top four tech companies offers a broad range of software and IT services, and overlap one another, Wipro is more focused on technology systems than anything else. “They may seem less of a threat to business systems consulting companies and therefore may be able to partner with them.”

Much is being discussed about the economic and cultural implications of outsourcing, for India and for the United States. India continues to be the lowest-cost quality provider of IT services, and its companies take on increasingly sophisticated work. Less clear is how effectively workers can transition back and forth between India and the West, or whether the United States can sustain its pre-eminence in technological innovation.

“Engineering as a profession in the United States and other developed nations may soon face a crisis,” write Rafiq Dossani, a senior research scholar at Stanford’s Asia/Pacific Research Center, and UC-Davis professor Martin Kenney. “[E]ven as barriers to performing conventional engineering work remotely are eroding, a global pool of conventionally trained engineers is growing. This means that U.S. engineers are now in global competition with engineers in developing nations whose wages are 40 to 80 percent lower than ours.”

The authors cite a McKinsey Global Institute study on the potential for offshoring in 10 industries, and in just three—automotive, software and IT services, all big employers of engineers and scientists—“59 percent of the work could theoretically be offshored.” The MGI report was published last year, before cost-cutting General Motors announced it was outsourcing $15 billion in work to IBM, EDS, Wipro and others. “Among automobile assemblers alone, MGI estimated that 198,000 jobs in developed nations could be offshored in engineering and R&D,” Dossani and Kenney say. “Job losses in the United States could be even greater in percentage terms because our manufacturers are also losing market share.”

Moreover, because of tighter visa rules imposed in the wake of 9-11, the United States is enrolling fewer international graduate students in engineering. (With respect to India, Stanford is bucking the trend, with 291 Indian graduate students in engineering last fall, up from 220 in 2001.) “You’re suddenly having senior professors from Stanford, Harvard, MIT and Caltech visiting India to encourage Indian students to apply for advanced studies there because they’re not getting enough local talent,” Premji says. “Emigration is significantly cut down, both for higher education as well as for jobs.”

This is not altogether a bad thing from Premji’s perspective. “It does help,” he says. Whereas once it was unthinkable to pass up the opportunity to study and work abroad, more and more Indians are happy to stay home and catch the boom, a welcome turn of events because Indian companies, despite the country’s apparently abundant supply of engineers (see sidebar), could be facing a talent crunch themselves.

Assurance of India’s overflowing stream of low-cost skills has helped drive surging tech-related foreign direct investment into the country. New FDI commitments from Microsoft, Cisco Systems and Intel alone in the last quarter of 2005 totaled nearly $4 billion. Microsoft wants to add 3,000 more employees to the 4,000 it has now, for example.

But this is nothing compared to what Indian companies like Wipro want to hire. With nearly 50,000 employees, almost 11,000 of them at its showcase Electronics City campus in Bangalore, Wipro plans to hire 18,500 more in India over 2006, as it responds to rising demand for design, management and voice (call center) services in cities across the country.

All this hiring virtually guarantees that India’s comparatively low costs will rise sharply as companies bid up salaries to retain staff and attract talent.

But then, Indian salaries are so much lower to begin with that India will have a competitive edge for years to come. An Indian engineer’s standard of living is not nearly as low as wage levels might suggest, because a little goes a very long way in India.

Premji says that the U.S. engineering grad heading to her first job paying $40,000 or $45,000 is ahead of her Indian counterpart on his entry-level $7,000, which has the purchasing power of roughly $35,000 in the United States. “But if you start getting into senior positions of 10 to 15 years’ experience plus, the quality of life is certainly better than the quality of life you can enjoy in America, and probably close to what you can enjoy in Europe.”

You might think he would be happy with the situation, but it has created a big headache as Wipro expands operations overseas or buys more offshore companies. (The company, which plans to stock up on new properties in 2006, announced its $56 million acquisition of Austrian wireless semiconductor design house NewLogic in December.)

“Our biggest problem today is getting senior management to transfer to the United States,” Premji says. “If they want to go with their families it’s too complicated because they’re too comfortable here—they have high disposable income, they have the advantage of servants, the advantage of a chauffeur.”

Complicating matters further are the so-called NRIs, nonresident Indians who hanker for home. The journey back can be bumpy. In his recent memoir/biography, Two Lives, Vikram Seth, MA ’79, describes the trap young Indians can fall into when they’re drawn to the United States: they take a few laps in the pool and emerge to discover they’re 50, raising kids who are more American than Indian, and strapped to a mortgage— finding themselves “so embedded in their temporary lives” that they only return home on brief visits when a parent becomes ill or dies.

Premji, too, has seen how America’s melting pot can bend Indians out of shape. “Our experience typically with Indians who have been in the United States for 10 or 15 years is they become cultural misfits. If they haven’t become cultural misfits, their families have become cultural misfits for India, so we would be very hesitant to take back an Indian settled in America for 15 years into a senior position.

“But if you’re talking about people with less than seven, eight years, absolutely no problem—they’re starting their careers, they see the opportunity, the size of the campus. If you see people with strong family roots, they settle in well.”

The key, Premji says, is to provide competitive compensation, campus facilities that match the best in America and Europe, and exciting opportunities. He points to General Electric’s success with technology research in India. “They have 2,500 people and of that, 1,200 probably would be R&D scientists and sales staff they hired back from Europe and America,” Premji says. “Their track record of integration has been wonderful, even at senior levels—because they’re doing leading-edge work.”

Wipro, by Premji’s account, is moving in the same direction. Whereas once it merely augmented a client company’s IT infrastructure with call-center and other support services, Wipro now helps companies plot their futures.

“You’ll rarely find today a CEO, CFO, CIO of an American corporation who’s not heard of Wipro because virtually every CEO, CFO and CIO is looking at a global delivery model for services, whether that’s software [design] services, voice services or back-office processing services,” Premji says. “Whenever he thinks of that, the first level of detail he has to deal with is global partners, of whom Wipro will always be in the top two or three.”

If China has taken the blue-collar jobs, is India going to finish America’s “hollowing out” and take its white-collar jobs? Premji wouldn’t go that far. “There are several aspects to managing a company. Many activities such as manufacturing an end product, doing due diligence for a business or a product, etc. can be easily outsourced.

“In every business there are functions which require deep customer intimacy and market knowledge . . . such as conceptualizing a product or a product line, feature trade-offs in products, consultancy to set up a business. I don’t think one can outsource these core management activities,” he adds. “The thought leadership cannot be outsourced.”

Yet what is “core” can always be narrowed and redefined. “In the future we will see an increased variety of products that are personalized as opposed to standardized. It will take time for this concept of personalization to reach maturity, and only then will outsourcing of this effectively begin,” he says.

But if Americans have a sense of doom about the future, Premji doesn’t share it. “Their culture of innovation and resilience is incomparable and unlike that of any other. And they will find a way to remain the most competitive nation, albeit with a new set of alliances and partners.”

Indians, for instance.

JOEL MCCORMICK is senior editor at Red Herring magazine.

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