KING OF THE HILL
I-Flex Solutions’ astonishing journey from SME to global player proves India can excel in software products – and highlights the CFO’s transformative role.
By Cesar Bacani

Among India’s information-technology royalty, I-Flex Solutions is something of an anomaly. Most IT aristocrats such as Infosys Technologies and Tata Consultancy Services (TCS) focus on software services, consultancy, and business-process outsourcing. Not I-Flex. The Mumbai-based company made its name by making its own software products, a neglected segment that accounts for less than a fifth of India’s US$30-bn-a-year software-and-services industry.

You won’t hear people talking about I-Flex’s flagship product, Flexcube, in the same breath as Excel or Windows. But among the world’s financial institutions, Flexcube has earned a reputation for its comprehensive range of banking functionalities and multi-channel capabilities, including internet banking. Indeed, I-Flex is today a dominant global player in BFSI (banking, financial services, and insurance) software, along with Switzerland’s Temenos.

We have been the number one in the world in the past four years,” boasts Deepak Ghaisas, who has been CFO since 1993 and is concurrently CEO for India operations. Gartner, a technology- research organization, reports that I-Flex now has over 280 banking customers in more than 100 countries. Temenos has installed its T24 software in more than 400 financial institutions, but its revenues are smaller. I-Flex recorded sales of US$336m in the year to March 2006 (and net profit of US$49m), compared with US$168.7m for Temenos (net profit: US$17.9m). JPMorgan expects a 39% increase in I-Flex revenues to US$467m in the fiscal year ending March 2007.

The market potential is enormous. Many banks are chucking their legacy systems, and estimates of the total cost of the overhaul run upwards of US$133 bn in Europe alone. India’s software-services behemoths are being called on to implement the top-to-bottom changes, and they are discovering that end-to-end software packages like Flexcube and T24 are in greater demand than bespoke and departmental software, which take longer to implement.

This is why Infosys (revenues: US$2.1 bn) is refocusing on the software product space. Its banking software Finacle grossed more than US$81m in the financial year ending March 2006. TCS (revenues: US$3 bn) acquired Australian banking-software developer Financial Network Services in 2005 and Swiss software provider TKS-Teknosoft last year. Jost Hoppermann, vice-president at Forrester Research, already includes Infosys and TCS in his list of potential world beaters, in addition to I-Flex, Temenos, America’s Fiserv (revenues: US$4.1 bn), and German giant SAP (revenues: US$11.3 bn), a leader in ERP software.

I-Flex is fighting back. Since last year, the company has been 82%-owned by the American enterprise-software giant Oracle (revenues: US$14.4 bn), gaining access to financial firepower, extensive sales and marketing networks, and a cross-selling platform with other Oracle products. It has been engineering a series of acquisitions to expand into software for risk management, anti-money laundering, consumer lending, and property and casualty insurance. It has also moved into software services, including consultancy and business-process outsourcing (BPO) for the financial sector, crossing over to Infosys and TCS turf.

Then there is I-Flex’s secret weapon: Ghaisas and his finance team. In 2001, CFO Asia named I-Flex a winner of its Achievements in Best Practices awards for managing finance in an SME. The company was singled out for its financial prudence, tight controls, and a sustained focus on cost reduction even during periods of high growth. Six years on, I-Flex continues its award-winning ways, although it has become a sprawling enterprise. Ghaisas now oversees financial management of 15 units in the US, Canada, Europe, and Singapore. “We deal in 17 currencies,” he adds, “print invoices in English, German, Chinese, and other languages, and prepare our accounts under Indian GAAP, US GAAP, and IAS.”

Transforming an SME

How did an SME with annual revenues just short of US$50m in 2001 become a bona fide international player? I-Flex was originally known as CITIL (Citibank Information Technology Industries Limited), a unit of US-based Citibank formed in 1992 to serve banks in India. Rajesh Hukku, formerly an executive at Tata Group, was named CITIL’s chairman and managing director. Ghaisas, who had also worked at Tata, became CFO in 1993, while R Ravisankar served as head of the IT-services business and is now CEO for international operations.

Citibank had invested US$400,000 in CITIL for a 41% stake and sold the remaining shares for 10 to 20 rupees to CITIL employees and those in Citibank Offshore Limited (COSL), an IT-software-outsourcing firm established in India in 1985 to serve Citibank units abroad. At one point, COSL began servicing non-Citibank customers, but was later told to stop. Realizing that the company could not simply drop the non-Citibank business, COSL transferred its seven non-Citibank customers in Nigeria, Ghana, and Kenya to CITIL.

Hukku, Ghaisas, and Ravisankar set out to transform CITIL into India’s first global software-product company. Microbanker, the corporate-banking software transferred from COSL, was joined by Finware, an in-house developed software for retail banking and other products for money market, foreign exchange, and leasing. Then in the mid-1990s, CITIL became convinced that universal banking would become the next wave in the coming two decades. That meant one thing: it should be providing a universal-banking solution, rather than the segmented departmental products it was then selling.

Flexcube, an end-to-end software product for corporate banking, retail banking, consumer banking, investment banking, internet banking, asset management, and investor servicing, was a hit. In 2000, CITIL changed its name to I-Flex Solutions, in part to buttress the Flexcube brand but also to signal the company’s independence from Citigroup (as Citibank became known after merging with Travelers Group in 1998). The worry was that global financial institutions that compete with Citigroup would shy away from Flexcube.

Ironically, it took I-Flex three years to sign up its 41%-owner – Citigroup was Flexcube’s 42nd customer. “It had to go through a complete evaluation process,” explains Ghaisas. Citigroup’s new management tested competing products and concluded that Flexcube was the best fit for its needs. “They were very cautious,” Ghaisas continues. Contracts for eight countries in Western Europe were signed in 2001. I-Flex got the enterprise contract for all 90 countries a year later.

Shopping spree

As the money rolled in, I-Flex expanded its range of products and services. “We looked at the total requirements of the financial sector, which includes banking, capital markets, and insurance,” says Ghaisas. “Then we looked at which of our offerings and various products under the umbrella Flexcube brand can meet those needs in various regions. There are open cells all the time.” In filling these, I-Flex was guided by what Ghaisas calls the “BAA model” – build, ally, acquire.

To extend its footprint into business analytics, I-Flex created a US-based company called Reveleus. To get into BPO, it formed Equinox, a subsidiary that offers lending-process outsourcing and knowledge-process outsourcing to mortgage lenders in the US from operations centers in India. For report writing, however, the decision was to form an alliance with Business Objects, a US provider of business-intelligence software, and bundle its MIS reporting tools with Flexcube.

The “acquire” part started in 2003 when I-Flex paid US$11.3m for SuperSolutions, a US consumer-lending software provider. The purchase included Daybreak, a consumer-lending system that automates all aspects of financing, including customer service and risk management. Ten more takeovers have since been concluded – and the stakes are only getting higher. They include the 2005 acquisition, for an undisclosed sum, of Castek Software, a troubled Canadian developer of insurance software, and the US$123m purchase last year of US-based Mantas, which has developed a behavior-detection software that detects risks and addresses regulatory requirements related to anti-money laundering, trading, and broker compliance.

Meanwhile, I-Flex was quietly encouraging Citigroup to sell its stake. The connection was becoming a hindrance, as I-Flex targeted banks in Europe and North America. “If [we went] to American Express or Bank of America, they didn’t like it,” says Ghaisas. “It became a board-level issue.” Citigroup was receptive, partly due to new rules requiring mark-to-market valuation of investments that can cause reporting volatility – its 41% stake in I-Flex has been estimated at a hefty US$600m. “Their investment had grown 4,000 times,” says Ghaisas, who has been granted stock options from 1996 along with Hukku and Ravisankar.

I-Flex came up with six options, including a secondary offering in India, where it is listed, an ADR offering of Citibank’s stake, a management buyout, and a sale to a strategic partner. Three companies were short-listed, one of them Oracle. “We told Citigroup, these three candidates look pretty good to us, so you can talk to them,” recalls Ghaisas, who declines to name the other two suitors. All three wanted current management to continue running I-Flex. “We were talking to them in those terms – how we should run the company going forward, what the rules of the game would be.”

Hello, Oracle

In 2005, Citigroup’s 41% stake was sold for US$593m to Oracle, which then sought additional shares in the market for the same price of 800 rupees per share to comply with Indian regulations. Few shareholders sold, however, and Oracle ultimately increased its offer to 2,100 rupees, a premium of 175% from the Citigroup price. Even then, Oracle managed to buy only about 82% of I-Flex in total by last year, when it said it would no longer purchase more. Employees who kept their original 10- to 20-rupee shares or sold them last year are now multi-millionaires.

How is life with Oracle? “It has been a love marriage,” Ghaisas maintains. “Everything is going smoothly.” For now, I-Flex operates as an independent company. “Oracle had always bought nothing less than 100%,” notes Ghaisas. “You take PeopleSoft, you take Siebel, you take JD Edwards, those have all been taken over 100%. We are probably the only exception.” I-Flex products slot seamlessly into Oracle’s portfolio, except in risk management, where Oracle had a competing product. That has now been discontinued and replaced with I-Flex’s Reveleus.

In theory, Oracle’s entry strengthens I-Flex for the wars ahead. There has been speculation that SAP may buy Misys, a British banking-software provider, or even Temenos. Infosys and TCS may also pose a challenge, although Ghaisas does not think they are playing in the same league. “We don’t really compete with them in the domain we are in,” he says. “There are very few companies like Temenos, Misys, Fidelity [in the US], or I-Flex that are in multiple countries and multiple regions. We also see Silverlake in Malaysia as strong in the Asian region.” He considers Infosys as strong only in India.

I-Flex may be underestimating the potential challenge. Gartner, the technology market researcher, includes Infosys in the same “leaders” category as I-Flex, SAP, and Temenos. Forrester is equally impressed, ranking Infosys slightly ahead of I-Flex in its first-quarter 2007 report on core banking suites. On a scale of 1 to 5 measuring the strength of current offerings and strategy, Infosys scored 4.33 points to I-Flex’s 4.11, SAP’s 4.1, and Temenos’s 3.86. “Infosys is quite well-positioned,” says Forrester’s Hoppermann, who estimates that its Finacle business has grown 66% a year on average in the past three years.

Infosys is still behind I-Flex in market reach, but Hoppermann attributes that in part to its strategy of pursuing strategic customers. “Many vendors, including I-Flex, are looking to get some kind of regional footprint,” he says. “Infosys is quite selective in pursuing opportunities where their system provides a good fit.” Finacle clients currently include State Bank of India, ICICI Bank, Bank of Baroda, and Punjab National Bank, all in India, and foreign names such as ABN Amro, DBS Bank, and Arab National Bank. Says Infosys vice president Edwin Fernandes, who heads Finacle: “This is the very conscious strategy that we have followed, that we go after a particular segment in retail banking and target mostly large and medium banks.”

Forrester is also positive on TCS’s acquisition of Financial Network Services and TKS-Teknosoft. “These two companies have different target communities in banking, and both showed quite reasonable success in 2006,” says Hoppermann. Gartner estimates that the TCS banking-software product division had revenues of US$41m in 2006. “Although initial opportunities for [TCS’s core-banking software] Bancs were in the Australian market,” Gartner wrote in a recent report, “large banks in Asia and the Middle East are currently targeted geographies, and there are opportunities in Europe and North America.”

The expansion of the Indian services giants into software products is probably inevitable. The line between software services and packaged solutions has blurred, at least in the BFSI space, which accounts for more than 40% of TCS’s total revenues and over a third at Infosys. “If you are a purely services company, it will take 12 to 18 months to deliver solutions,” says NG Subramaniam, TCS vice president and head of banking practice. “Nowadays, customers want it faster. If it takes six months, that’s already Christmas.” Pre-packaged software can potentially speed things up.

Up to a point, at least. One Infosys banking project, says Fernandes, involved around 4,000 interfaces, which the Finacle solution brought down to 400. “But you still need to take care of those 400 interfaces,” he says. “Especially among large banks, you don’t simply buy out of the box. There’s a lot of change management, program management, and very complex systems integration.” The rule of thumb for any enterprise software, he adds, is that you need to spend anywhere from four to eight dollars for every dollar spent on license fees.

This explains I-Flex’s big push into banking-software services – and why both Infosys and TCS are careful not to tie their banking-software products too closely to the services side. “There are definitely advantages if you go end-to-end with Infosys, one of them the extra comfort you get that nothing will fall between the cracks because one company is taking the responsibility for everything,” says Fernandes. “But we leave it to the client. Some prefer to take a different route and we are equally comfortable working that way” – even if the software package Infosys is asked to implement is the rival Flexcube, T24, or Bancs.

Secret weapon

With the stakes so high, I-Flex can use all the help it can get, and that extends to financial management. Finance, of course, is a key player in M&A. “As a CFO, I always think that things can be done much cheaper,” says Ghaisas. “But ultimately it’s not the cost, it’s the value that we get out of it.” All the acquisitions except Mantas were financed by internal resources. Ghaisas says I-Flex still has US$135m in cash, which may be used to acquire companies in China and continental Europe.

To finance the US$123m Mantas buy, I-Flex issued shares equal to 2.3% of its stock to Oracle. “I got the money at a multiple of around 45 times [I-Flex] earnings and seven times sales, and I paid the money at around 17 times [Mantas] earnings and three times sales,” says Ghaisas. “It was good for shareholders, because they got a good deal.” The CFO does not rule out leveraging I-Flex’s strong balance sheet to take on debt. “We’ve done some projections,” he says, envisioning a situation, for example, where I-Flex borrows in yen at 1.5% annual interest, buys assets in US dollars, and then hedges the exchange risk. He estimates the total interest cost at around 6% a year.

Ghaisas is a great believer in hedging, but always in the context of managing risk. “We make money from software, not from the exchange rate,” he says. That philosophy served I-Flex well in the Asian financial crisis of 1997. A line manager had suggested in 1996 that a contract in Malaysia be written in ringgit, which was strengthening against the dollar. “I was told that we could make gains of at least 30%,” Ghaisas recounts. He said no, and was proved right when the ringgit later fell against the US dollar by more than 90% until Malaysia imposed currency controls.

Another tenet is growing sales and profitability without substantially increasing costs, always a challenge to CFOs. I-Flex revenues in the quarter to December 2006 rose 39% year-on-year, but cost of sales grew faster at 51% because of expenses associated with the Mantas acquisition. Still, Ghaisas managed to reduce general and administrative expenditures by 130 basis points to 15% of total revenue, and the tax rate in India to 4% (from 14% in the year-ago quarter) because of a tax credit for foreign taxes paid. Company-wide, including subsidiaries, withholding tax, and Indian tax, Ghaisas aims to keep the full-year tax rate at 17% of revenue, down from 18% the previous year.

He is also leading the charge to shorten the cycle of receivables. In 2002, days sales outstanding was 158 days. That’s been brought down to 120. The goal is to reach two digits, a feat I-Flex managed in two quarters in 2005 when DSO was 98 days. Automation should help. After implementing HR and CRM solutions from PeopleSoft, I-Flex has begun centralizing its entire accounting operations on the same platform. Accounts-receivable reports will be updated daily and reported via the screen dashboards of each sales person and supervisor. “We want collection to be a matter of process, not enforcement,” Ghaisas explains.

As it happens, PeopleSoft is an Oracle company. “I’m still negotiating maintenance fees,” Ghaisas laughs. “Life hasn’t changed.” In fact, it is beginning to. In January, mid-sized People’s Bank in the US agreed to install Flexcube and Reveleus in conjunction with Oracle Database, the first joint I-Flex-Oracle engagement. Analysts expect more wins. “We see the Oracle relationship as a key differentiator for I-Flex and believe this could open up significant business opportunities, in addition to endowing it with an MNC parentage,” Kotak Securities wrote in a recent briefing to clients.

Ghaisas acknowledges the marquee value of the Oracle name. “‘Made in India’ as a brand is not as popular as ‘made in the United States’,” he concedes. “So we needed a strategic partner like Oracle, which has 8,500 relationships in the banking sector.” Going forward, though, he is confident that made-in-India software can eventually make it on its own. Ghaisas chairs the product forum of Nasscom, India’s software-and-services industry association. “We now have 175 product companies in this country,” he says. “They are all small-sized, but they look at I-Flex as a model of what they can be.” Someday, one of them could become the acquirer, not the target, of an Oracle.

Cesar Bacani is a contributing editor at CFO Asia