When Grandfather Wants To Be Godfather

Inscrutable, intense and extremely quiet, Anand Deshpande looks like he has all the answers. He does: If you are talking databases. For the last 19 years, giants like Oracle, IBM and Microsoft have relied upon Deshpande and his company Persistent Systems to remove the bothersome bee from their database bonnet. He is considered the grandfather of outsourced product development (OPD). OPD is when an Indian company does work for tech big daddies like IBM and Cisco and not tech users like Citibank and General Motors. Persistent, cast in the mould of its founder Deshpande, is all about substance and rigour.

It is also a slow-coach. After huffing and puffing all these years, Persistent has a turnover of only $100 million. When Wipro was 20 years old (in 2000) it was six times as big; Infosys was four times as big in 2001 and Cognizant, just 15 years old, is already 28 times the size of Persistent.

There are a couple of explanations for this slow growth. The first is bad childhood memories. Deshpande had to struggle for two years to get land and bank finance to start the company. Then, during its formative years, Persistent’s main customer shut shop. Professor Ed Robertson, who had taught Deshpande at University of Indiana, recalls those days, “I don’t think Anand ever forgot that. He learned a valuable lesson about what can happen to risky start-ups.”

Such experiences made Deshpande very cautious. He avoided the big risks and thus the big opportunities. “Deshpande has never lost money,” says Promod Haque, managing partner at Norwest Venture Partners, and an investor in Persistent.

There is, of course, the “infant industry” argument. “Outsourced product deve¬lopment was only properly born in 2002. Companies are now going fabulous on one or more product lines,” says Peter Harrison, CEO of Global Logic, an OPD firm in Bangalore. Most Indian firms were providing software services. Persistent steered away from that beaten track and followed a different growth trajectory. Deshpande has just this to say, “There is a steady growth at which one likes to operate.”

Steady growth looks great when a company is $5 billion but when it is just $100 million perhaps it is time to be a bit more aggressive.

Now, finally, Persistent is doing exactly that. The grandfather now wants to be the Godfather.

The New Way
Till now, customers told Persistent what to do and then paid for it by the hour. Now, Persistent will propose a solution and get to keep the upside from its sales. It will also get to keep the secret sauce (intellectual property) that it uses to develop the solution. Later, the intellectual property can be reused the same way Google reuses its search technology across the Web, email and documents.

It was crisis that brought opportunity. As the recession took hold, Persistent’s clients took a hard look at their technology spending. Deshpande says he felt the need to change when he saw a presentation from Sequoia Capital. The Silicon Valley venture capital firm projected doomsday in one of its “infamous” presentations on the market, and told all companies, in which it had invested, not to spend. Following that presentation and other gloomy predictions, most of Persistent’s customers reduced their budgets by 15-30 percent.

Not content to remain stagnant, or let Persistent’s reputation bring in business, Deshpande decided to go beat the bushes. “We wanted to go meet them right away in October, but we had to wait, because people were too scared then,” he says.

So, in early January this year, Deshpande finally left for the US, with plans to meet the CEOs of every single customer, and ask what he could do to help.

The scared, cash-strapped CEOs who met Deshpande all told him the same thing: We want you to take responsibility and ownership of the products. Here is our product — show us how to make more out of it. And then, to Deshpande’s disbelief: Can you take some risk on this? You will get some reward.

“When people are down, they are more humble, right?” Deshpande says. “The market is tough. So there is so much more room to discuss new ideas. Even they don’t know what they’re doing right now. So we are taking advantage of that.”

Putting money upfront is clearly one new idea. Take, for example, the work Persistent did for a customer who brought an American product to India in June. Here, Persistent developed its Indian version. The product has now been released through banks in India and Persistent will get paid depending on the number of users that sign up. If the product flops, so does the company. “It shows our willingness now to put our skin in the game,” says Hari Haran, president of Persistent.

Shailendra Singh, principal at Sequoia Capital, who has invested in OPD companies such as Global Logic, talks about the enormous revenue opportunity in doing this. “OPD companies can really move the needle.” Kiran Karnik, former Nasscom president, agrees, saying the risk-revenue model is very appropriate for right now, and that it will even be the model going ahead.

For the model to work, Persistent will need to own the intellectual property. If it has to reinvent the wheel every time, it won’t travel far. Persistent builds drivers, the computer programs that allow higher-level computer programs to interact with a hardware device. “We used to just build drivers for one company. Now, we are building drivers for that one company, and for all their competition,” says Deshpande, smiling at the improbability of it.

Match Maker
Even so, Persistent can’t do everything; the company is still too small. This is where Persistent has come up with a brave approach. It now introduces smaller Indian start-ups to Fortune 500 companies, vouches for them and gets paid for it! For example, if the bigger company has to build a product from scratch, it might cost it $100. But a small company would do it for $30. Persistent gets $15 for its integration efforts, and the larger company still saves money.

“Big companies want to, but are hesitant to use start-ups that may disappear. So we introduce them, because we can vo¬uch for both, and provide the long-term support,” says Deshpande. Persistent has done that for Lipikaar, a start-up that makes multilingual software, often for social networking sites. Similarly, over the past six months, Deshpande has formed more than 25 partnerships between customers. Persistent often (but not always) gets paid in cash for its “integration” efforts.

What’s critical to the success of Persistent is its ability to hire the right sort of people because you need to sell right and assess risks accurately. Persistent is on the ball there. Since 2005, Deshpande has brought on board Srikanth Sundararajan, who has 20 years of international IT experience with Hewlett-Packard, HCL and Cognizant, as its chief operating officer; and Rajesh Ghonasgi, who has a background in finance and legal functions at Wipro, Deutsche Software and ICICI Venture Funds Management, as its chief financial officer. Hari Haran, who was hired to head US operations, has 22 years of experience scaling organisations such as Lucent Systems and Openwave Systems.

So Deshpande has a plan and he has the men. Can he hit the target? (In this case, $500 million turnover by 2013.)

Haque thinks so. “Yes, because he is a visionary, and he’s set the right culture. And not just him, but the entire team, especially the senior folks who have been in much bigger organisations. They can pull it off without any stretch.” Karnik thinks Deshpande has matured, calling it “a real change in his mindset”. Robertson thinks carefully. “Well, Anand will never put himself in a situation where he can’t deliver quality. So if he is doing this, it is because after all these years, he’s built the relationships to ameliorate that risk. He knows it can work.”

Nevertheless, the risk-reward model is a tough one to pull off. The model is most often used by risky start-ups. “They are interested in this model because they are cash strapped and haven’t done the market research,” says Haque. Competitors in the OPD market also say the model can never be the only revenue stream.

Keeping the intellectual property for products too will be a challenge for Persistent. For instance, Intuit, an American customer, says it is just not comfortable with Persistent keeping the IP.
Deshpande will get to his target without a doubt; the interesting question is when. He sums up what lies ahead for him under the new plan: “Previously, our business risks were zero. Now, you win some, you lose some. But everyone gains when the right kinds of deals happen.”