BANDWIDTH BARON
VSNL owns much of the 21st century’s internet highway. Now it must organize itself as a global company to match its global business.
By Tom Leander

VSNL’s eight-story, white headquarters has a look of repose in the midday heat. The modern building sits at the end of a quiet street in Mumbai’s Prabhadevi neighborhood, facing the Arabian Sea. At its doorstep is a littered beach where dogs wander and scavengers poke through flotsam. Inside, it’s another world. Heated discussions can be viewed in conference rooms – silent but transparent through the glass – between employees, some in ties, some in saris. Executives march between meetings, intoning directives into mobile phones. Amid this purposeful parade, CFO Rajiv Dhar stares at the ocean view from a sunlit office, pondering his company’s all-or-nothing transition. “Most multinationals,” he says, “were created in 40 to 50 years’ time. We’re trying to do it in five.”

The ocean has a central place in VSNL’s saga. The company has built its fortunes on the timely purchase of two assets left behind in the great North American telecom bust at the beginning of the decade, an event that put much of the world’s bandwidth up for a fire sale in 2005. The first was the US$130m purchase of a submarine cable system from conglomerate Tyco, a result of restructuring after Tyco’s CEO and CFO were convicted of stealing money from shareholders. Analysts estimate that it cost Tyco US$3 bn to lay the cable. The second was the US$239m purchase of the wholesale voice and cable capacity businesses of Teleglobe, a move that put VSNL in competition with such major global telecom players as the UK’s Cable and Wireless and US’s AT&T. Teleglobe had fallen on hard times too, having overextended its investments during the 1990s telecom boom. Canadian media giant BCE had bought Teleglobe for a whopping US$5 bn only five years before.

Experts are split on exactly how much of the world’s bandwidth capacity VSNL owns – most say about a third – but they all agree that the company bought it for a song. This “rope around the world,” as Dhar calls it, spans over 200,000 route kilometers, connecting more than 200 countries.

The acquisitions brought to light what those working in the company already knew – that much of the old VSNL, a government monopoly invariably described as “sluggish” by the press, was almost gone. Only five years earlier, it had been the Indian government’s long distance monopoly. In its few years in the private sector, it had set its sights far beyond India, building massive scale in a short time. Globalization rarely comes this easy. And that’s the trouble. It’s as if, in the famous Keats poem, Cortez climbed a peak in Darien, laying eyes on a new ocean, and said, “Now what?”
“They have the dream,” says Alpesh Shah, partner with the Boston Consulting Group (BCG), who has worked with VSNL, on and off, for years. “The challenge is execution.”

Big on Bandwidth

What do you do with a large chunk of the world’s bandwidth? Telecommunications is a business of intense capital investment, and rapid change. Settling on a strategy under these conditions is fraught with peril. For one, it’s best to realize that big fat, data-loaded pipes don’t get you easily into every business that telecom offers. Telecom futurists tell us that a decade from now the world will be wrapped in radio spectrum capable of high-bandwidth applications. Everything at the point of contact in the broadband world – from mobile phones to toasters – will be wireless. But that won’t make cable obsolete. Data will have to get to local transmission points from somewhere, often another continent. When enormous amounts of data are transferred over long distances, backhauling in industry parlance, it can only be done via fiber optic cable. Satellites may be able to backhaul someday, but that’s long in the future. The pipes will be essential for some time.

All telecommunications carriers have to make fundamental decisions about which business they should, and can, survive in. Telecom carriers either sell to consumers, to enterprises, or to each other. VSNL already had a claim on the last of these business plans. It had no experience in telecom’s fabled ‘last mile’ – where information, via radio signal or cable, ‘touches’ the user. Reliance Communications and Bharti Televentures – VSNL’s main rivals in the new, deregulated market – already had strong wireless presence.

Dial back to 2002. After a grueling season of negotiations, the government sold VSNL to the Tata Group for US$572m in cash for a stake worth 50.11% (the government retained a 26.12% stake). Dhar was part of the negotiating team from Tata, where he recently served as CFO in Tata’s oil business. There were eight or nine bidders at the outset. The negotiations dragged on for months because, as Dhar says, “the government wasn’t in a position to understand the complexities of M&A issues with regard to compensation for loss of property.” Eventually only Reliance and Tata stayed in. The price differential between Reliance’s and the winning bid was a mere 10%. Dhar describes it as a very close contest. But Tata won the deal because the strategic fit was better. “We were experienced in wireline, they were more experienced in mobile,” Dhar says.

The feeling of victory lasted about one Mumbai minute. VSNL had been the nation’s official gatekeeper for long distance. All phone calls in and out of India had been routed through VSNL. The money it earned was a substantial 22 cents a minute, equal to about US$1.5 bn in revenue a year, and this accounted for 95% of VSNL’s revenues. But shortly after privatization, the government opened up the long distance business to domestic players. Within months, eight players entered the market, driving prices down. VSNL’s take per call dropped to 1.5 cents per minute. BCG’s Shah recalls, “It was stark. This was not going to be a sustainable business.”

Dhar recalls the impression of operating against limited time, but with the knowledge that they had the backing of Tata’s deep pockets and a clean balance sheet. Dhar joined a small strategy team, which included CEO Srinath Narasimhan, as well as the head of strategy and networks. “We decided that we had three options,” he recalls. “The first: see how far the business would go as it stood. The second was to sell it off. We chose the third. We asked ourselves, ‘Can we do something that makes us formidable in this business? Can we deal with this whole model of voice, and become a world leader?’”

Instead of trying to compete head to head with Reliance and Bharti for the ‘last mile,’ the first step would be to leverage VSNL’s international experience to grab a portion of the wholesale voice market – selling bandwidth to other carriers – for calls in and out of India. “We realized,” says Dhar, “that mobile growth is coming fast in Asia. We saw a role to play as these companies competed and grew. Because of our infrastructure, we could say to them, ‘I will deliver your packet [of voice communication] wherever you want, because I have relationships across the globe. I have a better understanding, and I do it for a living.’”

But simple wholesale wouldn’t be enough. For one, it’s a commodity business, and like all commodity businesses, there are limits to the value that can be added by scale. The enterprise market provides the most attractive future. This involves using that bandwidth to make communications cheaper and easier for global corporate customers. Demand for such services in India was already strong, given the mix of business process outsourcing (BPO) growth and deregulated communications. The timing was perfect for VSNL to enter as a competitor. TeleGeography, a Washington telecom research group, pegs the total voice traffic into and out of India at the time of deregulation in 2002 at around 4.5 billion minutes a year. It has since nearly doubled, and the ratio of incoming calls to outgoing calls has equalized one-to-one, compared with five-to-one five years ago. This surge in outgoing calls reflects the rise of the BPO industry.

A company can do many things for clients with heavy communication needs. For instance, it can use that bandwidth capacity to link together three data centers – say, in Japan, Singapore, and Mumbai – to such a degree that they are effectively a single unit, bringing obvious savings and efficiencies to the company that owns them. Another service: those pipes have enough range to allow European telecom operators – and VSNL does this for several – to run all their system monitoring from India. These are not call-center businesses, but actual command-and-control posts set up in India to monitor the vital signs of an international network in other nations. All that capacity, too, offers some protection to enterprises. If a disaster strikes one data center, the pipes can bring in services from another instantly. All of these businesses require consultation, and VSNL’s natural partner is Tata Consultancy Services, India’s largest IT consultant.

But to make this business work beyond India, where competitors might kill it, VSNL needed scale. Dhar and his colleagues almost immediately went out to buy it.

Are We Global Yet?

Strangely, for deals that granted a single company such scale, the 2005 acquisitions largely sailed under the media’s radar. The US Congress reviewed the purchase of the Tyco submarine system shortly after the 2005 hubbub over China’s Lenovo buying IBM’s PC division. Despite the strenuous protests of one Republican congressman, approval for the sale came quickly; the same was true for the sale of other submarine assets to Indian firms. (See box, “India’s Undersea Empire”)

The company hasn’t waited long to deploy its advantage of scale. “VSNL’s response to competition was, ‘Whether the big guys like it or not, we want to compete. We’re driving down the price,’” says Kunal Bajaj, managing director of BDA India, a consulting firm. Last year, it slashed prices on its international bandwidth products by 40%. The global network is delivering strategic advantages too, according to Dhar. He describes the Tyco acquisition as a backbone available to all company units. All of those undersea cables allow VSNL to centralize sales services in India, and simultaneously support a kind of ‘point-man’ sales force to move freely to where customers are anywhere in the world.

So far so good, but the dynamism of VSNL’s beachfront headquarters conveys a certain nervousness. Few companies in India have so much at stake. VSNL – in its grown-up, asset-rich incarnation – has only been competing for 18 months and is still absorbing the hits to free cash flow due to the acquisitions; Deutsche Bank predicts that the company will see positive cash flow in 2009. The company has a few tricks up its sleeve to support results, such as the anticipated sale of substantial non-telecom-related real estate investments. It has also diversified into South Africa’s last-mile telecom business by buying a stake in Neotel, that nation’s second largest carrier. But these are sidelights to the main task that VSNL – and its shareholders – expect of it. This is to prove that it’s no longer a government-style asset, and show a competence at global organization that is rare in the world, much less India.

Like a young Hollywood actor expected to win Oscars or a Chinese Olympian headed to Beijing next summer, high expectations are taken for granted. In a 2006 research study, BCG picked VSNL as one of a handful of Indian companies that had become a “Global Challenger” – one of the companies that it expects to form the next generation of world beaters. But how can VSNL make the most of its acquired reach, avoiding the pitfalls that befell the very companies that it bought? Tyco, after all, briskly lost its telecom business because of bad judgment, despite the obvious value of the asset.

BCG’s Shah says the company has to meet signal challenges. “Change is happening very rapidly,” he says. “They used to be an Indian company – now they have to grasp that they are not. Moreover, as they acquire overseas, they will have to make tough decisions. A lot of people in North America may have to lose their jobs. They’re also overstaffed in India; this is the legacy of government ownership. Finally – and this is strategic – creating enterprise solutions is one thing, but they will also have to get their customers to buy. They’ll have to be very creative in devising methods of delivery.”

Dhar agrees that VSNL is no longer an Indian company. “While the whole company is trying to become India enabled,” he says, referring to India’s low-cost labor advantage, “we as an Indian company are trying to go to the globe.”

At least, on the “Indian enabling” part, the company is making headway. Dhar is in charge of centralizing the company’s functional units, including finance, network management, IT, HR, legal, and customer service, to better serve the main lines of business. The company plans to pull 600 network management and support functions jobs back to India (so far, VSNL has met half that goal). Bringing these jobs to India will help achieve the company’s savings goal of US$15-20m per annum from the acquisition, according to Deutsche Bank’s Srinivas Rao in Mumbai. Rao added that VSNL has so far succeeded in this transition without disruption.

BDA’s Bajaj points out that this approach to centralization is not necessarily the best choice for this generation of India’s telecoms. Bharti-Televentures has outsourced much of its infrastructure to IBM and Nokia, in contrast to VSNL’s move to use the shared services captive model that has failed as often as it has succeeded (see “Will Outsourcing Fly,” July 2007).

Internal reorganization reaches far beyond centralization of services. The company has 45 projects linked to its five-year plan, each monitored by three executives. Dhar leads 15 of these projects, some of which, he says, have a direct link to his pay. The activities include the type of changes that rival Bharti – born into a world without legacy systems – hasn’t had to grapple with, such as switch to a global electronic platform from a manual billing system. For the most part, he says, his finance group has been able to master the complexity of these projects. “What we do is define the objective of the project and write the plan. It goes into a tracker, everyday.” Adding to the difficulty, many of the projects involve issues that are interlinked. A problem with billing, for example, will highlight a deeper problem in sales.

Dhar learned that it’s a mistake to swing into action too quickly. “Last year we did a small migration of the billing activity,” he recalls, “to centralization mode. We did not do a good job and we had lots of challenges. The guy who was leading was not in a position to foresee the problems. We did not spend enough time in planning.” He now advocates that for a six-month project, it may be necessary to plan for 30 days, studying the problem thoroughly before launching the solution.

Dhar argues that managers’ motivation becomes the crucial element in successful change projects. He’s learned this in finance, he says, where projects are driven by young chartered accountants who are exhilarated by the prospect of leading influential projects. Dhar has helped drive the company’s effort to confer more responsibility and power on middle management in every company department. “We have to make sure that they have a sense of fulfillment,” he says. “Otherwise most of the managers would say everyday is the same. We learned this the very hard way. We were not doing this a few years back.”

Senior management addressed this in 2005. To ensure that acquisitions would be well managed and integrated, VSNL made operating unit managers responsible for profit before taxes, not just topline growth. “This was an enormous change in mindset,” he said. “Before everyone looked only at the revenues and said that the costs were beyond their control.” He says this empowers managers. “We want to give managers of the subsidiary businesses the ability to change the destiny of those businesses,” he says. It is finance’s job to help these units provide a transparent “revenue prism.” Dhar explains once this is achieved, “you don’t need every decision thrown up to the corporate level.”

Dhar seems keenly aware that VSNL bears the legacy of state ownership, no matter how visionary its executives appear to be. He worries, for example, that this exacting level of accountability might stall initiatives at middle management, where some bosses might hesitate to delegate projects, given the added pressure – and opportunity.

Experts harbor doubts, as well. Analyst Sunil Tirumalai of Credit Suisse in Mumbai says that VSNL is less forthcoming about the financial performance of its business units than its rivals. Deutsche Bank’s Rao says that a lack of visibility
into operating information weighs on his valuations of the company. And BCG’s Shah worries that VSNL may not be investing enough manpower in R&D to create the innovation necessary to make the enterprise business take off.

But for the moment, the company has momentum. Given the distance VSNL has traveled and the focus it has brought to its acquisitions and planning, analysts and competitors regard VSNL as a force that cannot be ignored. Whether that’s enough to pose a long-term challenge to AT&T – or Reliance – in this changing industry remains to be seen. They have the assets, but Dhar argues that the challenge is in “mental, not physical connections.”

He elaborates. “Customers used to have to line up to see us. Now, we have to go to them. This is a tectonic shift, but we’re no longer the company we used to be. We can do it.”

Tom Leander is editor-in-chief of CFO Asia