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Manoeuvring In Tough Times

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On 28 January, in a surprise development, Ashok Soota, co-founder and executive chairman of Bangalore-based MindTree, announced his decision to resign from the company with effect from 31 March this year. Soota cited personal reasons and said he would soon announce plans for a new business venture, in the press release sent out. Since then both Soota and the Bangalore-based software services company have been incommunicado.

The resignation comes in the wake of a disappointing earnings quarter. The BSE-listed company reported a 43.3 per cent decline in net profits at Rs 30.4 crore for the quarter ended December 2010, against Rs 53.7 crore in the corresponding quarter in the previous year. Revenues grew 16 per cent to Rs 384.8 crore during the quarter. MindTree's stock has fallen over 13 per cent to Rs 448 since 28 January.

Soota co-founded MindTree in 2009 with nine other colleagues from Wipro Technologies. He is also currently the single largest promoter-shareholder with an 11.1 per cent stake. The company has three private equity investors, Walden International, Global Technology Ventures and Nalanda Capital, as shareholders, who together own 26.4 per cent of the company. Sources close to the company, who did not want to be identified, say that Soota may have stepped down on pressure from the private equity investors because of the marked slowdown in growth. This, however, could not be confirmed.

However, MindTree is not the only high-profile Indian software services company in recent times to experience a slowdown in growth. Infosys Technologies has had a slower than usual third quarter — net profits grew slower than expected at 14.1 per cent and revenues 23.7 per cent. Wipro, the country's third largest software services exporter, also reported a slow quarter growing profits at less than 10 per cent.

The slowdown in growth, however, is not the only factor that unites MindTree with its larger and mightier Bangalore-based peers. A week before Soota announced his surprise decision, Wipro promoter Azim Premji undertook an equally sudden shake-up in the company's top ranks. Joint CEOs Girish Paranjpe and Suresh Vaswani, who had helmed the company for about five years, were replaced by Premji nominee T.K. Kurien. Premji cited the need for a simpler organisational structure in the present market environment as the reason for the replacement.

Meanwhile, media reports suggest that a shake-up, though voluntary, is also imminent at Infosys at the end of the fiscal. Current CEO and MD S. Gopalakrishnan is set to step down in favour of co-founder and COO S.D. Shibulal. However, going by Infosys's past track record, this change will be in tune with a pre-determined rule to rotate founders in the CEO's chair periodically.

In the case of MindTree and Wipro, the top-level shake-ups, following a dip in performance in a year when global IT outsourcing spends have bounced back, seem to indicate that companies, both large and small, could be facing new market challenges in the post-recession world. While IT spends may have bounced back, customers of software services have become more demanding. One of the key changes in the post-recession world has been the move towards more multi-vendor contracts, which makes the marketplace more competitive.

Indian IT companies, which have largely depended on the US market for their revenues, and for the most part ignored even the European markets, have been hardest hit. A re-alignment in strategies does seem to be the order of the day. The shake-ups at the country's best companies may not be isolated incidents.

(This story was published in Businessworld Issue Dated 14-02-2011)