If you are a Newspaper buff, then you need no introduction to the man here. Yes, we are talking about Mr. Jaithirth Rao who writes fortnightly column for INDIAN EXPRESS news paper. This week’s our Spark of the corporate.
He built a corporate career.
Then he built a company.
Now he's sold it and moved on. This is his story in short.
Jaitirth Rao, or Jerry as he is better known, does not mix emotions with entrepreneurship and it is his philosophy in life.
Jaithirth was born in Bangalore, Karnataka, has done his BSc Chemistry. His dad was working with the Government and so he was keen that Jerry should go into the IAS. As Jerry was just 19 years old, he was not allowed to sit for the IAS.
Two years later, Jerry joined First National Citibank (later known as Citibank) through campus placement. He went to Beirut for training and even sent the forms for the IAS but eventually decided to stay on in a corporate career as Citibank was a good company. It was a heady place in those days, it had great ambitions.
Citibank was then the second largest bank in the world and it was internationalizing its management staff. From a purely 'American' bank it was becoming more multi-cultural. So it was a good time to be there.
He came back from Beirut, worked for 2-3 years in India, and then went to the Middle East. Then he wanted to quit corporate life altogether and decided to go into academics.
In 1979 Jerry enrolled in the University of Chicago to do a PhD. Two years later he realized he wasn't cut out for that kind of life and abandoned the PhD halfway.
He rejoined Citibank, but this time in New York, and then South America. In 1984, a good friend Rana Talwar persuaded Jerry to come back to India and set up Citibank's retail and consumer business. Jerry says "It was within the umbrella of a large corporation but it was very entrepreneurial. Very unusual. We were writing on a blank canvas so it was quite an interesting time. There was no consumerism, no retail at the time. We introduced ATMs in India, for example. Even though the technology was 20 years old, it was revolutionary for India back then."
Nine years later Jerry moved to Europe, and then he was asked to head the technology development division of Citibank, kind of like an R & D unit. He was reluctant - after all wasn't this the job of a techie? "But there was a kind of feeling that in Citibank, technology was getting separated from business. It was felt that someone with a business background would be better to run that division."
It was a very exciting time because the internet was taking off – this was 1995. Jerry redirected a lot of R & D expenditure into the internet. In those days everybody in California was starting a new company and everyday Citibank was giving business to different vendors - many of them in India. That's when it struck Jerry, "Why shouldn't I be on the other side of the table?"
Jerry thought "Financially I was relatively secure so it wasn't a high risk kind of thing for me. And if it hadn't worked I could have always got back into a corporate career. Also my career in Citibank was plateauing. I was in the top 50, but it was clear to me that they were not going to promote me to the top 10 or 15. And I was not excited about pushing my way through corporate politics in New York."
The Birth of the spark
Jaithirth quit Citibank and started Mphasis in1998. Jerry remembers how he got his first work "I went to my boss and said, 'Look, I don't want people to say that you fired me so I want you to be the chairman on my advisory board. I am not going to give you any money, just lend me your name for exactly one year'." He agreed, and Citibank gave Mphasis its first small business. Very soon there were other, bigger clients.
People often ask whether MBAs have any advantage in doing business. Jerry's experience clearly shows how the IIMA network can help.
Early on they acquired a small division of an Indian company called Byzan Systems. Byzan Systems was run by IIMA alumnus Mohan Krishnan. So he became the third founder of Mphasis along with Jerry and Jeroen. Then, when they were looking for money, Citibank Venture Capital was very interested in investing with them and jerry was negotiating with Latika Monga, an IIMA alumnus also.
The Citicorp venture capital investment didn't come through. But the next investor who came to invest was from Barings Private.
Equity was headed by Rahul Bhasin and Subbu Subramaniam, both IIMA alumni. When it came to recruitment, again there were IIMA connections. Among their early employees were Radhika Rajan, Vikram Jaipuria and Preeti henoy.
The Citibank and University of Chicago networks also helped. The first investor in Mphasis was Rick Braddock. Braddock used to be the President of Citicorp and he liked jerry very much.
1999 was a very heady year. Mphasis was growing 100% quarter to quarter. Of course, it was the dotcom boom and everything was growing crazily at that time. And Mphasis positioned itself as a company which did internet based technology solutions for legacy companies - an area where Jerry had been on the other side and knew exactly what a client would want.
Besides, he'd been an early believer in the technology itself.
Jerry recalls "I had started internet banking, internet brokerage and I was chairman of the internet steering committee in Citigroup. So I was very much a part of the internet movement and was one of the founders of something called Online Banking Association. I had gone to Washington DC and testified before the US Congress about internet financial services."
Meanwhile, Barings had invested in a company called BFL whose CEO had quit the year before. Barings had a 25% stake in Mphasis and a 52% stake in BFL. Mphasis and BFL were merged and Jerry became the CEO of the joint company. Actually, it was a reverse merger. BFL was already listed in India.
Mphasis changed its name to Mphasis-BFL Ltd and got listed. The valuation was excellent; in fact, the combined stock price went "through the roof." Mphasis and BFL combined, the fiscal year ended March 2000, had done $34 million top line and had broken even on the bottom line. For the fiscal year ended March 2001, the company did $64 million in revenues. Almost a 100% growth and a 10% bottom-line ($6 million). So basically the merger seemed to have worked.
But there was a problem. Starting January 2001, as dotcoms crashed, the business also ran into trouble. Luckily in 1999, almost by accident, Mphasis had started a small call centre operation. In 2001, when the IT business slowed down, that took off. And today, of course, Mphasis is a major player in the BPO segment. 33% of its revenues come from BPO operations. So you can plan and plot but who can actually see the future? Putting your eggs in multiple baskets makes a lot of sense. Jerry says "In 2001, among the Indian public companies in the IT space, we would have been number 25 or 26. By 2006, we were in the top 10, basically because we continued to grow as others faltered. But also, it was becoming clear that this call centre business is capital intensive."
Mphasis raised capital from ChrysCapital. They were very bold investors because they invested with premium over the prevailing prices. But you know, nevertheless they did quite well with their investment.
Actually the company never used their money - the 10 million dollars was simply put away. "It helped us to sleep better." However by 2004-05 it became clear that something peculiar was happening. The top six players in IT and the top two in the BPO industry were growing faster than the industry average. Usually smaller companies grow faster than the bigger companies. Jerry and his team realized that the consolidation phase had set in. Also IBM, Accenture, all the global players were becoming big in India. It was time to look at a different strategy.
Jerry recalls saying "We could have continued as an independent business - it was nicely profitable. But we said 'No, then we will be marginalized.' So we initiated discussions with EDS and finally we became an EDS subsidiary."
This made sense because now Mphasis had a great marketing engine. And the EDS brand to get business. Post merger the company once again started growing faster than the industry average, proving Jerry's point. But of course it meant selling out.
Jerry recalls "In America, if you look at it, people are much more cold blooded about their companies. At the right time, the CEOs resign, retire, and sell out. In India I think, the first generation entrepreneurs get very, very attached to their companies. Not in rational market related terms but in very irrational emotional terms. We didn't have that. That is what made the EDS transaction possible." It's a cold blooded, clinical assessment. Actually the entire story has been related with a kind of detachment.
Some important experiences in Jerry's life
Jerry always believed in time; which is very critical. He says "In 1973, even if I had wanted to start a company, there was no private equity, nobody would have invested. Whereas in the 1990s, and today of course, there is capital available for people with ideas, people with intelligence and risk taking ability."
"Second thing is, networks are very important. Because networks give you credibility, they give you access. It still means you have to do your job, but at least it opens the doors."
"The third thing that I could say I take away from all this is you need some luck. In fact the call centre decision was luck. Originally our board was against it. They said: 'Oh my God! You are such a high end IT, internet systems architecture company. Why do you want to do this low cost call centre work?' In fact they forced me to put it in a separate subsidiary with a different brand name so that it wouldn't confuse with the high end brand name. But it was a lucky and a good decision."
"A couple of other lessons that I have is that particularly in the initial days, you have to be focused on two things. You, the founder, have to spend a lot of time with customers. It cannot be delegated to junior salespeople. You have the passion, you have the conviction, and nobody else can replicate that."
"And if you are a small company, you have to be extremely transparent and honest. Big companies can afford to cover their tracks, but in small companies, you have to say, 'we did a bad job, sorry, here is a refund'. So you establish a reputation of being reliable, of high integrity."
"Reputation is very important for attracting talent. Because when you are a small company, nobody has heard of your brand, you are not important. Why should anybody join you! One reason why many people joined me was that I had a very good track record at Citibank as a manager. People knew I always took good care of the folks who worked for me. I was fair to them."
Now research has shown that transparent companies have a lower cost of capital. But purely from experience Jerry believes that the more transparent you are, the more people are willing to invest in you. So from day one, Mphasis hired KPMG for audit. The company kept very strong, very high standards. The other thing you have to do in business is take some very tough decisions. There were two senior co-founders. "We had to part ways. It's tough when you have to sit down in the same room with a co-founder and say goodbye to him. But you need to look ahead, not look back as you grow" says Jerry.
Another lesson was that a company which is growing had to keep improving systems and processes. "We had absolute pain when we grew from $100 to $200 million. We suffered everyday because our systems were all cottage industry systems."
And of course one has to plan to set up these systems some time before they are actually required. Not too much in advance because no small company can afford to over invest. Focus on cash is very important. Jerry recalls "We had even taken a small loan which we didn't use. But that didn't matter. We were always sure that we would have cash. In some of the early months, I had to write personal cheques to meet our payrolls. Because cash is what can get you into trouble."
Mphasis, in the initial days, was very cost focused. The founders used their frequent flier miles for traveling. They lived in a friend's home in New York, never in a hotel. The idea was - don't create overheads you can't sustain.
The use of PR is also crucial for small companies which cannot afford to advertise. For instance, Mphasis had a small PR agency in New York who managed to get Jerry a front page article with his photograph in the 'American Banker'. "By God! That did so much for us. We were able to go to so many banks with that article. And it gave you immediate credibility. 'Ex-banker has started an IT company'. It was a great piece. I think investment in PR is very very important. It pays off disproportionately compared to advertising or general marketing."
Recruiting senior people is a major problem. It is as much a headache as buying a company. "Integrating a senior person who doesn't know your culture and who is not part of your original founder group, is very very difficult. We made at least two-three mistakes with that and it's very expensive" says Jerry.
Not only do you have to pay salary, which is expensive, but headhunters fees also. The person will bring in his/ her own people, bring his/ her own systems.
"When in doubt frankly, if the person on the inside is only 80% suitable, I would say promote that person. Because when you are in a growth phase, it is better to take that gamble than try and recruit senior people. Try and recruit people at middle level, and grow them. Do not try and get the senior sales person who is going to solve all your problems. Usually that doesn't work. It didn't work for us." There are no shortcuts!
Lastly, you have to offer a clear and definite advantage. If you are coming into a business where there are already existing players and you are 10% cheaper, don't even bother. You have to come into a business where you are 50-60% cheaper, by doing something different.
Mphasis also recruited some unusual talent. The company was very flexible with location, working from home and so on. And of course, like all new economy companies Mphasis-BFL shared a large chunk of equity with employees -15-20%. There is also a sense of pride in the fact that Mphasis contributed to the larger scheme of things. "We are doing to the service industry what Henry Ford and Frederick Taylor did to manufacturing and we are doing it globally... We also created 12,000 jobs in seven years. And each of them probably created four or five indirect jobs."
We are nearing the end and he hasn't yet mentioned the 'P' word (Passion). Is that part of the whole 'let's not get emotional' approach to running a company?
"I talk about passion, not emotion. The two are different words. Emotion is what you feel for your children. Even when they do something wrong, you are willing to overlook it. But passion is different. I did believe and I still believe in the liberating and productivity-giving power of internet technologies. I do believe and still believe in the Indian talent story."
"Emotional, one shouldn't be, that is my personal view. Some people are. Because emotion, translated in Sanskrit is moha. Moha is this kind of false attachment you feel that this is my company, I have built it, I don't want to leave it. I think that is stupid. I think you have to know when it is the right time to detach yourself and change your role. And maybe eventually leave it; at least be willing to change it from executive to non executive. From leader to mentor. All these things, you have to be willing to do."
Currently Jerry is on the Asia Pacific Advisory Board of EDS VP - a non executive role. Clearly, he has scaled down his involvement even as the company is going from strength to strength.
So what does it feel like to semi-retire after working 20 years and a 7-8 year stint as entrepreneur? Is it that stage of life now where you feel "Ah, I can now spend the next 20-30 years doing 'whatever I want'?"
"But why do you think I haven't been spending the last 20-30 years doing what I want? That too was what I wanted. I enjoyed every minute of working in Citibank. And in the last few months when I didn't enjoy, I made my plans to quit."
"You can't postpone your whole life to the future. People who are endlessly planning for their retirement are stupid. You could die tomorrow. There is no point in planning for retirement and saying 'When I retire, I will do something'. In short, anyone who thinks, 'I am doing this business so I can sell out and then enjoy my life' is an idiot. But there are many idiots out there. I sincerely hope you aren't one of them!"
This certainly is an important lesson for all the young entrepreneurs out there!!!
More About Jerry
Country of Citizenship : India
Residence : Mumbai
Alma : MBA from Indian Institute of Management, Ahmedabad and The University of Chicago
Occupation : Founder of Mphasis
Marital status : Married
Children : Three
Awards and Accolades:
1. Ernst & Young 'Entrepreneur of the Year’ 2004
2. Karnataka honored him with the prestigious Rajyotsava Award of the year 2005
3. The University of Chicago has conferred a ‘Distinguished Alumnus’ award on Mr. Jaithirth Rao for the year 2006
4. He was also given the ‘Entrepreneur of the Year’ award by the Economic Times
Quotes by Jerry
- "Why didn't other people see the crest and ride it? That's where I took some risks."
- "In India I think, the first generation entrepreneurs get very, very attached to their companies. Not in rational market related terms but in very irrational emotional terms."
- "You can't postpone your whole life to the future. People who are endlessly planning for their retirement are stupid. You could die tomorrow."
- "There is capital available for people with ideas, people with intelligence and risk taking ability."
- "If you are a small company, you have to be extremely transparent and honest."
- "You need to look ahead, not look back as you grow."
- "I did believe and I still believe in the liberating and productivity-giving power of internet technologies. I do believe and still believe in the Indian talent story."
- "I enjoyed every minute of working in Citibank. And in the last few months when I didn't enjoy, I made my plans to quit."