Managing two worlds
Hermelin tells Niraj Bhatt that the traditional IT business is one of price discount and cost management, while new areas such as digital, cloud and AI entail high growth, promotions and salary expansion
The software services industry is undergoing a transformation as old growth engines are not working any longer and rising protectionism is causing concerns about the road ahead. However, Capgemini’s Paul Hermelin is not complaining. He says when client needs change, it is good for software companies.
“I view an IT (information technology) system as a plate of spaghetti and people struggle to eat it. We bring a little tomato sauce, a little cheese and make it edible. If you want an Indian metaphor, we add the masala sauce,” he laughs. We are at breakfast at the JW Marriott, Mumbai, and Hermelin picks a croissant and fruit from the breakfast spread, while I grab a sandwich and orange juice.
In the late 1990s, the growth was driven by the shift from mainframe to client server architecture, and then there was the move to the big packages and the SAP wave. In the past three-five years, it has been mobile applications and big data. “We learnt how to work with unstructured data and the cloud too,” says Hermelin. Artificial intelligence and internet of things (IoT) are the new engines for growth. “We have to adapt and that has always been the challenge, and those who do not adapt will be the dinosaurs,” he adds.
Unlike most of its competitors, Capgemini has grown through acquisitions, and it has acquired nearly four dozen companies in its 50-year history. One of its biggest acquisitions was that of Ernst & Young Consulting for $11 billion, which gave it an entry into India with a 120-member team headed by Salil Parekh. Parekh asked Paul, who became deputy CEO after spearheading the acquisition, to come to India and look at development centres here. In December 2017, Parekh, who was member of Capgemini’s executive board quit to join Infosys as CEO. “Salil contributed in particular to the development of the group in India and in the US,” says Hermelin. He narrates a conversation with Cognizant CEO Francisco D’Souza who told him that Chell Smith, a former Capgemini senior executive, now runs Cognizant’s consulting business. He exclaims, “Indians are poaching from us for some big skills.”
It is now clear to me that Hermelin is a storyteller. He goes on to talk about a call with his friend N R Narayana Murthy who asked him “Paul, I’m no longer familiar with French, can you speak to me in French?” Murthy speaks French as his first job in the IT industry was at Sesa in Paris, a company Capgemini acquired in 1987. “Murthy, Azim Premji, S Ramadorai and N Chandrasekaran make a wonderful collection of individuals to have shaped an industry,” he adds.
Like many French CEOs, Hermelin graduated from Ecole Polytechnique and Ecole Nationale d’Administration, and came to the corporate sector after a 15-year stint in the government. He joined Capgemini in 1993 and has risen to be chairman.
We come back to the software industry’s woes and he says 5-7 per cent growth is not that bad for large companies in a slowdown. The slowdown will bring cost focus, productivity obsession, which are not bad things. Moreover, the wave of protectionism in the US is making the industry pessimistic, but technology skills are not available in the US. “If they want to grow, they will need to import skills,” he says. France has an openminded president in his friend Emmanuel Macron, he adds.
I quiz him on the difficulty of integrating so many acquisitions, and if there is a risk of the company operating in silos. He says Capgemini is not a federal structure even as the culture is entrepreneurial and decentralised. A centralised organisation can be a superpower for a short period, but in the long term, decentralised organisations win. “They can be more resilient because they favour local innovation as long as they are not parochial,” he says.
Serge Kampf, Capgemini founder, who passed away in 2016 built a company not on values like excellence, innovation, performance but around personal values, the first being honesty. The second value — freedom — is unique to it. In 1967, when the company was founded IBM was a superpower, and had more bargaining power than its clients. Kampf wanted the client to be free from IBM and from other vendors including Capgemini. “In 1993, we ran an ad campaign with a photo of handcuffs with the message that you would never see that in your contract with us,” Hermelin says. “The message was that Capgemini would bring value and the client would value us, but we want you to be free,” he adds.
“Based on these values, it has been easy to acquire and integrate companies, because we say, ‘we are ready to change’,” says Hermelin. In India too, its growth was driven by two major acquisitions — Kanbay, a Nasdaq-listed company with most of its employees in India for $1.25 billion in 2006, and iGate for $4 billion in 2015. Kanbay doubled its India headcount to 12,000, while iGate added 30,000 employees to take its India staff to 90,000. Earlier this month, it bought digital technology services player LiquidHub, which has 1,500 of its 2,500 employees based in India, for about 400 million euros. Most of Capgemini’s other acquisitions have been smaller, making the integration process easier.
What is more striking today is that 38 per cent of the Capgemini group revenue is digital and cloud growing at 23 per cent, while the other 62 per cent is shrinking by 6 per cent. “We need to manage two worlds, one is of fast growth, promotions and salary expansion. The other world — the traditional business — is where we are forced to give our clients price discount, and then productivity, relentless cost management and automation become important,” he says.
There has been some overpromising on the automation front by IT firms, which has led to disappointment. “You can’t commit 30 per cent cost reduction due to automation. While the cost reduction is real, I would say if it is 8-10 per cent it is not bad,” Hermelin says. Also, automation is mainly on managed services, be it application, infra or business process outsourcing, but in systems integration and new projects, he expects artificial intelligence to take the lead. “AI will be even more fertile and important than automation, and it is very exciting,” he says. The next big areas are digital manufacturing and IoT. With autonomous cars and connected vehicles, the lines of code content of a car is increasing and there would be more servers and computers in a car than anything else.
Also, the technology spends of marketing will exceed the spends of the IT department. For companies, IT spends are about 2-3 per cent of revenue, while marketing spend is 1520 per cent. Marketing is now spending 30 per cent of its spend on technology, which works out to 5 per cent of revenue. “That is double the IT pie,” says Hermelin.
The existing world was focused on the CIO, now IT companies have to adapt, and the trick of digital is that there are many more buyers. The early winner of this new world are people who have a large share of consulting, which his company has built and invested in. Indian companies are experts at handling the CIO, but will have to learn how to work with the new clients. On the offerings side, besides LiquidHub, it also acquired Lyons Consulting, a specialised ecommerce player. “These are exciting territories. Frankly, I’m not pessimistic at all,” says Heremelin.
Hermelin, who has refused several offers to join the French government, is passionate about wines and collects the best from France, South America and Spain. He is a music buff and listens to a wide range — on Tuesday he went for a rock concert and the next day he was at the opera. As we are leaving, he tells me Norwegian Woodwas the first song in which George Harrison of the Beatles played the sitar.