Sramana Mitra: That is the most competitive part in every region. We are seeing getting that talent is the most competitive part of the value chain. How do you compete in that space?
Alexei Miller: Two ways. First, the culture of the company is an area where we invest vast amounts of efforts and money to create a place where people want to work, where people feel taken care of, and that obviously goes beyond compensation, benefits, office facilities, and so on. It is in the amount of fun people can have in the workplace and the number of opportunities they perceive, career opportunities that they perceive to have. We are very active in the local communities, in sponsoring events, in holding our events ourselves, describing how we do things. We publish a lot material in the local markets explain our views on the marketplace and so on. And the biggest source of new employees for us, believe it or not, is not outside recruiting, we don’t really employ any outside recruiting agencies in any of our locations, but it is employee referrals. So, people who are comfortable and pleased to work with the company bring their friends. If we had 60,000 people it may have been a little bit more difficult to control, but at our size, it is indeed the largest source.
The second way is that we are focused on specific industry domains, so we actually bring in interesting work. It is actually not that difficult for us to go out to the labor market and claim you will be working on cutting-edge stuff. You will be developing trading systems for the bank. This is an opportunity that few people in the local marketplace can bring. This is not a Web site that will sell Snickers on the Internet. Not that I have anything against the e-commerce but it is very sophisticated work, and that attracts people.
SM: In terms of growth strategy, you said you were founded about 12 years ago, in the 2000–2001. And you said you had to dramatically rethink your business. Would you talk a little bit about the genesis of how you came together, how did you decide to work on this company? Are you guys from the financial services industries, is that what your background is?
AM: No, we are a band of outsiders in financial services; we are self-taught to a large degree. The group of original founders came together in the late 1990s, and we were very young. There was a desire to do something in technology. There was not clear strategy at the time and we are now painfully aware how not focused we were at the time trying to do many things different. Obviously we worked hard, but to a large degree it was out of luck that we survived those first few formative years. It was only in 2001–2002 that we worked on industry-focused specialization strategy. Originally it was just technology services to the world, and if we weren’t speaking on the phone – you would see I am blushing saying that this could be defined as a strategy today, but that is what it was back in the day. The company always grew organically, never acquired any company, was never acquired itself. All of the people employed by the firm had been handpicked. The top management stayed for company throughout the entire life cycle. There is almost no outside capital, there is very little that is owned by outside investors and a small portion of money that came right before the financial crisis in 2008. So, it is a classic example of an organically grown healthy product.
SM: What kind of profit margins are you able to preserve, given your cost structure, pricing structure and the market’s dynamics?
AM: Not bad at all for the outsourcing industry. Our profit margin is about 15%. It is slightly worse in the growth period, slightly better in the less successful period, and it is interesting in twist of how outsourcing business works, you are actually more profitable and generate more cash when the business is not growing fast. But 15% on average is what we generate.
SM: Do you get a lot of acquisition offers? There is a definite trend right now, the larger outsourcing players trying to acquire specialized expertise. Given that your entire strategy is around specialization and you have successfully executed on that strategy, is that something you are seeing? And also not only domain-related specialization but also geographical specialization. Is that a trend that you are seeing?
AM: There is definitely a trend to grow in size through acquisitions, and we do get occasional offers but not too many. The trend outside of DataArt is perhaps more pronounced than within DataArt. In other words, I learn about this trend more from reading the news rather than from reading my own inbox with the offers. There is perhaps a surprising lack of global players looking for acquisitions in our neck of the woods, in Eastern Europe. There is only been a couple of deals in the past two years of multinational service companies acquiring local shops in Ukraine or Russia. You would have expected more India-based companies or U.S.-based companies that have been so fantastically successful to expand more in that part of the world but somehow most of their transactions to date have been on the western part of Eastern Europe. The Czech Republic, Hungary and Poland, places like that. So, most of the M&A that we see in our part of the world are local companies buying each other or talking to each other about buying each other. But as far as trend, absolutely, the consolidation will continue. But consolidation will continue on both good reasons and bad reasons. Good reasons: obviously there is economy of scale; there is access to more resources; and so on. But also there is this partially false promise. There are good reasons behind M&A, but there is also a bit of a bad one, and what I mean by a bad one is that many companies think they need to get bigger in order to get access their bigger deals. There is this hunt for the brand-name global corporations that have clients. Everyone in the industry likes to brag about serving the larger cooperation’s in the world and a lot of M&As are driven by the need to get bulkier, have more resources because only after you have thousands and thousands of people. They start to become important in this beauty contest which is called large corporate vendor managing process.
I think this is unfortunate for two reasons, first because it overlooks the massive mid-market, which is extremely attractive for outsourcing vendors, and that is the primary market for us. It drives a lot of innovation in the industry toward the larger players, which I am not sure if they even need that at this point. There are some sectors in the mid-market that could definitely use some help. A lot of M&A deals, as I said, are driven by this. So, I am watching this trend, but with a bit of a sadness.