Oracle and i-flex: Not Too Close

The software giant may own a big stake of the Indian company. But i-flex Chairman Rajesh Hukku says his company has seen "zero interference" from the larger outfit -- and it's working well that way

India's leading corporate-software maker, i-flex Solutions, rose to greater international prominence after U.S. software giant Oracle (ORCL) bought 41% of the company from Citigroup (C) last year. For Oracle, the acquisition meant a bigger stake in an expanding market, while i-flex gained added leeway to court clients in global financial services (see BW Online, 8/03/05, "Why Oracle Has Its Eye on India").

Yet even as Oracle and i-flex are closely aligned, i-flex is still run independently by the same veteran management team that built it into a worldwide player in banking software. Now i-flex is plowing ahead with ambitious goals of making its software the top choice for the world's banks.

BusinessWeek Senior Writer Steve Hamm recently interviewed i-flex Chairman Rajesh Hukku, who discussed strategy, interaction with Oracle Chief Executive Larry Ellison, and the prospect of closer ties with its new part-owner. Edited excerpts follow:

How did i-flex become India's leading software-application company?We were a spinout from Citicorp Overseas Software, their captive offshore business. This was in 1992. We saw that India had established a successful software-services industry, but the only differentiation was we were cheaper than somebody else. We asked: Is there something we can do to move up the food chain and do something different?

Also, while Indian software services had brought a lot of value to customers in terms of cost reduction and the speed of getting things done, they had not transformed the way the customers were doing things. We wanted to come up with something that would make it possible for the customers to do something they had not been able to do.

How did you do that?We had simple guiding principles from day one. We followed them until now. After Oracle, we're still following them. The first thing we said is we'll focus vertically. We'd only do financial-services software and consulting. The second thing we said is we'd actually start hiring people who had spent 10 to 15 years working on the customer side.

Also, in addition to building custom solutions, we decided to conceptualize the next-generation product. Could the (chief information officer) of a bank reduce his costs dramatically by throwing away the old engine and bringing in a modern engine? Then we started adopting CMM (the Software Engineering Institute's Capacity Maturity Model standards for software development), and that gave us credibility.

Now we have core banking programs, Flexcube, plus a suite of other solutions -- credit-card analytics, mortgage analytics, profitability analysis, and regulatory compliance solutions. Within a month or two after Oracle got involved they decided to sell our Basel II compliance program worldwide.

When you started working on your core banking applications, from the very beginning you said this is going to be a worldwide product. What did you do to make that happen?Even before we came out with Flexcube, we sold MicroBanker from Citicorp, an old program. We couldn't launch it in Europe and the U.S. So we tried it out in Africa. We found out that banks are similar everywhere. As far as running a bank, it was good enough.

We started in Africa, but then later moved to multiple countries. In the early days, we didn't even have the money to fly into the U.S. and stay in a hotel. When we built the new application we designed it so it could run anywhere. That's why it's called flex.

The other important thing we did is create an alliance model. We didn't have the resources to go everywhere and sell things ourselves. Our first alliance was Stratus Computer, then Hewlett-Packard (HPQ), Sun (Microsystems) (SUNW), and IBM (IBM). We went to the hardware guys. We dealt with all of them.

Our software was hardware-independent, so you could run one branch on HP and another on Sun. Then in countries, we identified the one or two best systems integrators to work with. We used to run after them. Now they run after us. We're in more than 100 countries. We'd establish ourselves in a market and then every two to three years we'd move to a new market.

When did you enter the United States?The U.S. was very different because of the Glass-Steagall Act (the Banking Act of 1933). Because Citibank owned 43% at that time, we could not come back to the U.S. and work. We could only sell within Citigroup. But four years ago that got changed. It took us one year to get set up, and it took another year to penetrate.

I have lived in the U.S. for the past 10 years. I'm comfortable here. I was really the main salesman to Citicorp.

When and how did the Oracle deal come up?It all happened very quickly. Some (large banks) wouldn't talk to us because we were more than 40% owned by Citibank. They didn't want it. We got to a stage where we lost some significant deals. We were wondering, how do we get out of that?

At the same time, Citibank was thinking about seeing the money. How would they exit? At the same time, Oracle had come out with a strategy at the board level they wanted to do different kinds of acquisitions. Not the consolidation-type acquisitions. They had to participate more fundamentally with their customers. They'd go into vertical industries one by one. And they'd do it one by one and acquiring the best company in an industry.

So, we were wanting to do something, Citicorp was wanting to do something, and Oracle wanted to do something. After that, it was very fast. Charles Phillips (Oracle co-president) came to talk to me here in New York. We weren't selling our stock; Citicorp was. But we had to like each other, and we did.

We're independent. We have seen zero interference. They didn't put in a guy to supervise us. Charles is on our board. That's it.

On the operational level, what do you do together?We have looked at it very systematically. Last quarter, we signed a memorandum of understanding. We're selling together, product by product. Oracle becomes a super-distributor for us. But we're still free to deal with IBM, selling with its DB2 database, not just Oracle's database.

Things are going well with Oracle. We have already had situations where they introduced us to customers and a couple of deals are already done.

We also agreed on financial reporting. They're not 51% owners, so the numbers aren't consolidating, and we don't show them more than we show the rest of the board.

Are they going to be majority shareholder at some point?They did an open offer, by Indian law, to buy 20% more from the public. But almost nobody sold. I'm not sure if they did it because they wanted to own a majority share, or they just were following the law.

Oracle has made a play for a piece of the market by buying a stake in your company. They prevent another large player from getting you. But I'd think that eventually, since their strategy is all about an integrated suite of software applications, that they'd want to be more integrated. Have they talked about, down the line, buying more of your company?There's no talk either privately or publicly about a total acquisition. I think it would be smart for them not to do it. The nimbleness we can have as a small Indian company is valuable to them. If they merge us with them, it ruins the whole character. Also, now, if a customer wants us together we can be together. If they don't want us together, we're not together.

At the same time we're talking about their Fusion middleware strategy. We're working closely with them on that. We're going to make the banking piece of Fusion really seamless. We won't be exclusive on Fusion middleware, but it will be a beautiful solution and a great choice for the customers.

Another thing we haven't even started talking about, but I think it can become very significant. They have all those applications, and we have a big package implementation business. We can do that for them at Indian wages.

Have you met Larry Ellison?Yes, I visited him in California before we agreed to the deal. I said, "What about IBM; what about my services business?" We cleared those things.

You couldn't get him to go to Bangalore?I understand he doesn't like to travel much. (Microsoft Chairman) Bill Gates goes to India every other weekend. I'll have to get Larry to go. Charles is the one I work with. We're always working together. The amount of time and passion he has shown for helping us is the big thing. He comes to India.

When you look out three to five years, what difference do you think the Oracle investment and relationship will have made?What's possible is that because of the Oracle relationship and the lack of the Citibank hangover, our ability to reach out to banks will grow rapidly. Can it double my revenue, or increase it by 20%? We'll have to see. But it will certainly boost it. We'll also be able to deal with smaller banks we never would have reached before.

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