January 2007 | Ashwin Tombat and Shubha Madhukar

Around the world in five years

Contrary to conventional wisdom, miracles do happen. That is what anyone would conclude after seeing the fairytale story of Videsh Sanchar Nigam Ltd (VSNL) over the last five years. As it celebrates its fifth anniversary on 13 February 2007, India's new telecom MNC, VSNL, has some lessons for the pundits

It's like the story of a corporate Cinderella. Once upon a time, there was a government-owned Indian telecom company called Videsh Sanchar Nigam Ltd (VSNL). Then, it became a part of the Tata group. Five years later, it's still an Indian company, but it is the world's largest player in wholesale voice, carrying nearly 20 billion minutes of traffic annually, has opertions in 30 countries, and is able to offer voice data and mobile value-added services in 240 countries and territories. Around 25 per cent of its employees are located overseas and nearly 60 per cent of its revenue comes from abroad, making VSNL India's first telecom MNC. Last year, VSNL managing director and CEO N Srinath bagged Telecom Asia's 'CEO of the Year' award and VSNL was chosen as the world's best wholesale carrier at the World Communications Awards, London as well as the best wholesale carrier in Asia Pacific.

Amazing as it may be, it is not a result of a fairy godmother waving a magic wand. Behind the magic is good old elbow grease; long term group strategy, taking advantage of market opportunities, regulatory changes and technological breakthroughs, making the right decisions at the right time and – most important of all – the concerted and dedicated efforts of its people to succeed in the face of adversity. Customer focus and reinvention are the defining changes that have marked this makeover. VSNL's transformation from a sleepy PSU to an aggressively expanding global communications company holds several lessons for the new outward-bound India Inc.

The Tata umbrella
Being part of the Tata group has played a major role. Srinath explains, "Working under the umbrella of the Tata group has been very beneficial. All our acquisitions have been made possible only with the active assistance of the group. We have an underlying set of beliefs, values and culture that sets us apart from other corporates. I am able to draw upon the resources of other group companies. I have TCS to help me with IT; I have TTSL to help me with domestic wireless networks." (See interview)

When the Tata group took over VSNL on 13 February 2002, it had a monopoly on international long distance voice in India – which accounted for nearly 90 per cent of its revenue – and was a leading Internet services provider (ISP) in India. But the ILD monopoly was to end on 1 April 2002, in less than two months. With its principal source of revenue under immediate threat, diversification and reinvention were a question of necessity, rather than an inspired stroke of genius.

The company had been dealing predominantly with telecom companies as a monopoly and therefore had limited customer and market focus. So one of the first tasks was to bring in sales and marketing experts from other Tata group companies and elsewhere, who could build the marketing skills and machinery, brick by brick.

Beefing up the infrastructure in terms of strengthening the core processes followed. "We ran a special programme called 'Confluence' at the Tata Management Training Centre (TMTC) for the top 40 officers of the senior management team," Srinath recalls. Simultaneously, the company launched a participative organisation restructuring exercise, first at the headquarters and then at the regional and branch offices, where the employees themselves took on part of the responsibility of identifying people for specific positions. The silver lining was the calibre of the people in VSNL; the skills of many of the technical people were among the best in the world and that made things easier.

The company had the reach, the connectivity, and the technical capability. It knew its customers and suppliers. But the monopoly was to end almost immediately. Besides, in any case, ILD prices, kept artificially high by monopoly economics and to cross-subsidise local call tariffs for so long, were falling fast. VSNL had to look beyond its existing businesses in dead earnest, and find new opportunities for its survival and growth. The company started looking for new businesses, such as national long-distance (NLD), enterprise data and internet telephony services. Mobility was not an option as other companies in the Group were already in the mobile market.

Instead, the company took a stake in Tata Teleservices, and went ahead with plans to get into NLD, enterprise data and IP-telephony. This involved managing carrier relations to work with domestic and international telecom carriers, as well as setting up outside plant (OSP) facilities to implement the countrywide fibre optic backbone for NLD. Simultaneously, Tata group Chairman Ratan Tata's call to internationalise operations was also being put into action.

Going global
The first major step in this direction was formalised in July 2003, when VSNL acquired the business of the US-based Gemplex, which enabled VSNL to offer enterprise customers international IP-based virtual private network (IP-VPN) services.

Then came Dishnet. In March 2004, VSNL acquired DishnetDSL from Sterling Infotech for Rs270 crore, giving it a base of broadband subscribers. Dishnet's 20 dial-up locations were not among VSNL's existing 30 locations of operation, complementing capacities and making the new acquisition a good fit.

The jewel in the crown was the acquisition of Tyco Global Network (TGN), initiated in November 2004 and concluded after regulatory approvals in mid-2005, which overnight catapulted VSNL into a global carrier. Tyco had a 60,000km cable network, including submarine cables linking UK to the US across the Atlantic Ocean, and the US to Japan and Singapore across the Pacific Ocean. It also had a terrestrial cable across the US and two small rings covering northern and western Europe. As Srinath says, "TGN made our India centric story global." Besides, the deal was a steal, as VSNL paid just $130 million for a company that owned a submarine cable network worth $2.5 billion.

The cherry on the icing was the acquisition of the Canada-based Teleglobe for $239 million, initiated in July 2005 and concluded in early 2006. Teleglobe had an extensive global network reaching over 240 countries and territories, with advanced voice, data and signalling capabilities and ownership interests or capacity in more than 80 sub-sea and terrestrial cables, with more than 200 direct and bilateral agreements with leading voice carriers.

It immediately turned VSNL into the third-largest carrier of voice minutes in the world. But, as Kishor Chaukar, managing director of Tata Industries, and a director on VSNL's board, explains: "Teleglobe's greatest asset was their software system which facilitates the location of every roaming mobile in the world. Every time anyone makes an international roaming mobile call, it is logged in and a fee comes to Teleglobe. Because of this system, 95 per cent of mobile telecom operators who offer services around the world are Teleglobe customers."

In the meanwhile, in October 2005, VSNL bought out the entire stake of Tata Power in Tata Power Broadband, bringing its fibre optic network in Mumbai and Pune under its fold. The acquisition boosted VSNL's retail broadband services and, along with the Dishnet acquisition, strengthened its internet and broadband business.

Transformation tantra
These acquisitions transformed VSNL. TGN gave VSNL phenomenal connectivity, almost unique in the world. Teleglobe brought a huge network that made VSNL's business truly global. As Chaukar points out, "It is reasonably easy to create hard assets, but it is very difficult to create soft assets. The acquired knowledge of people in say, 50 companies and 100 geographies, is very difficult to generate. It takes a long time to collect, and requires lots of verification, testing and correction. Getting it readymade is a massive advantage."

But the history of mergers and acquisitions (M&As) is not a always happy one. Buying companies is easy enough; integrating operations and leveraging the projected synergies is an extremely difficult and challenging task. And, when the M&As span different continents, language and culture are additional spanners in the works. But VSNL has had a smoother ride than most others, thanks to the atypical angle it approaches the issue. "We did not look at challenges as deterrents and never thought of them as insurmountable," Chaukar says, adding: "Problems are not something unexpected in an M&A. But overcoming them is what the fun and happiness in meeting a challenge and achievement orientation is all about."

Flexible management and flexible people is the key. VSNL's people were willing to put themselves in the other person's shoes and appreciate the anxieties and challenges an acquisition presents to their counterparts in the acquired company. It is this that has given them an ability to build a quick and strong integration process.

With the completion of its major overseas acquisitions – TGN in July 2005 and Telelglobe in February 2006 – VSNL is no longer dependent on business from one country to support its growth. The business is now structured around business lines and not individual companies. Srinath explains, "We are one global company with three business units: global voice business, global carrier and enterprise data business and retail business in some selective markets."

The acquisitions have also enabled VSNL to build a significant presence in the enterprise business in India and arm it with the wherewithal to take the same services to the global market. Says Srinath, "VSNL has transformed itself from an international long distance voice company in India to a telecom multi-services MNC."

Fittingly, VSNL should close its fifth year with close to Rs9,000 crore in revenue going by the 9-monthly reported performance, the highest for the company in its history. Turnover went down from about Rs7,000 crore to about Rs3,500 crore after VSNL lost its monopoly, but now, as a proud Srinath says, "We are getting back to the pre-privatisation revenue levels."

Looking ahead
From a multi-services company to a managed services company is the new guideword at VSNL. Increasingly, enterprise customers are looking for a single partner to offer them an integrated IT and telecom solution. Srinath explains, "Infrastructure by itself is becoming a commodity. The way forward for us is to move to a value-driven market, where our customers make their buying decisions based on the value of our service, not on its price."

A strategic link with Tata Consultancy Services (TCS) has given VSNL the advantage of offering customers a single partner option that can deliver a combined IT and telecom solution. Work has already begun in the area and the offering today goes out as Tata Indicom Enterprise Business Services providing integrated solutions to banks, manufacturing companies, FMCG companies and the like. TCS and VSNL together make a combination that is difficult to beat in terms of scope, effectiveness and inter-operability. The future holds a lot of promise for VSNL in this area.

Talk to Chaukar about VSNL in the next five years and he muses: "I see the managed services business catching up well. I see the Tyco and Teleglobe acquisitions as capabilities starting to generate returns according to our expectations. I see the second national operator (SNO) in South Africa, called Neotel, starting to earn cash as it takes on the former monopoly operator, Telkom. I see retail broadband come up to a critical mass and starting to take off; may be even entering new geographies."

The corporate Cinderella isn't done with transformations. Neither should she be, because as Srinath says, telecom technology changes so fast that he's not willing to make any predictions about the next two years, let alone five. Remember the original story, where the carriage turns back into a pumpkin and the princess into a pauper at the stroke of midnight. As far as VSNL is concerned, it is determined to stay nimble and flexible enough never to be caught on the wrong side of midnight.