Companies and businesses have always tried to measure productivity. In the early days one simple way was to have a punch-in time clock machine for employees. In 1977, an MIT alumni, Mark Ain put together one such clock and thus was born Kronos Inc, which even today is one of the largest players selling workforce management solutions.
Today Kronos sells software and services for scheduling, time & attendance, HR & Payroll management, hiring and labour management. Mark's brother Aron, who now runs the $1.2-billion company, was in India recently when BT's Venkatesha Babu spoke to him. Kronos India has not only a large employee base serving its global customers but also counts the likes of Mahindra & Mahindra, Ultratech Cement, Bharat Forge, Croma and GMR Group amongst its marquee customers. Aron spoke of Kronos evolution and the India opportunity. Edited Excerpts:
BT: Your brother Mark Ain started the company…
Aron: Yeah, he was one of the founders. He along with one partner stated the company. He retired in 2005. It took us 30 years or so to touch roughly $500 million of revenue. (But now)… we've a turnover of $1.2 billion. The fact that we've grown to be so big and successful explains that it's not just about being a suite provider like Oracle or SAP or Infor. People are buying what we offer every day and the business is coming in all different dimensions. It's coming from industries like manufacturing, retail, hospitality, public sector services, distribution, healthcare. Any company who wants to track employees, be it great big companies, or small and medium businesses, all are now our customers.
When we first started Kronos the demand was cost driven. People wanted our products because they were trying to save money. (But) it has moved way past that point today. Certainly people still focus on cost a little bit. But now it's about driving real business outcomes. People tell us that by using the workforce management system they can deliver better service, build better products, enhance customers' and employees' experiences.
BT: Companies like Oracle or SAP is several times your size. How do you compete with them?
Aron: It's pretty simple, their products are not as good as ours. When companies compare our products with them they see the difference. Companies like Oracle and SAP are selling products ranging from CRM (Customer relationship management) to supply chain and financials to HCM (Human capital management). But, we are just focused on the little narrow slice of workforce management products. So that means we have over a 1,000 full time development people working just on making the world's best workforce management products.
They have only dozens of people working on what we have over a 1,000 working on it. You might say that it can't be true; they are Oracle and SAP. But, the fact is that Kronos has grown to be a $1.2 billion company selling this narrow slice. We have grown because our products are better.
BT: For a little over a dozen years you were listed and went back to being private. Have there been advantages because of that? Private equity players have a large stake in the company today, do you get business from their portfolio companies?
Aron: First of all, it's glorious not being publicly listed anymore. It's one of the best things that we did as a company. I don't think it's an accident that our business has doubled since we went private. It's much easier to run the company as a private one with just one or two owners. We don't have to worry about short-term decisions or about quarter-to-quarter anymore. We think more about what's best for our long-term interest. We discuss plans with our majority owners Hellman & Freidman and minority owner Blackstone and when we reach an agreement we don't have to second guess it every 90 days. So, it's much easier for us to manage things and care our employees and customers more effectively.
BT: Out of the $1.2 billion what percentage of your revenue comes from the portfolio investors?
Aron: Very small. We have 25,000 customers and I think Blackstone's portfolio has 55 companies, so even if we start selling to every single Blackstone company it would be a very small percentage of our total number of companies.
BT: How has the shift to Cloud impacted you. Also do you continue to sell any hardware?
Aron: Yeah, Cloud has made a huge difference for us. Over 90per cent of our new customers are from Cloud segment compared to 3 years ago when they were only 40 per cent. But we still sell hardware. We try not to be too evangelical one way or the other. We let customers choose.
BT: Cloud is what percentage of your current revenues?
Aron: About 40 per cent of all product bookings, from existing customers and new customers, are in the Cloud segment; from virtually nothing 5 years ago. But, this figure rises to 90 percent for our new customers, who have not been Kronos customers in the past. We don't push our customers to move to Cloud, but we've had 500 legacy customers in the past 2 years who have moved to Cloud.
BT: Are the margins better in the Cloud segment?
Aron: Not as good. Let me fair about that, the percent margin isn't as good, because we have to host the application. The cost is higher. The absolute margin dollar, the gross margin, is a little higher because the revenue is higher. Because for other products we are only charging them for licencing of the product. But for Cloud we are charging them for the license, the product, the support of the product and the hosting cost. So the gross margin percent is lower but the absolute dollar margin is higher.
BT: Since inception, you have acquired 60 odd companies. What's the thought process behind that?
Aron: We just acquired our 68th company in January. We do it for 4 reasons: to acquire new technology, to acquire new features, to expand globally and to gain market share. So examples of those might be that if we find that we don't schedule the physicians in hospitals the right way, we have a choice to either write something our self to solve the problem or see if there is someone else who has done it.
So, last year we acquired a company that had developed a product specifically to schedule physicians in hospitals because physicians are scheduled is different than nurses or other hospital staff, it's unique. So that's an example of acquiring something for a new feature.
We also might do it because we want new technology, we might want to get more active in the mobile area. So we might say instead of developing it all by ourself, let's acquire something so that we can get to the market faster.
BT: And you are a private company so doesn't need to go through all the regulatory challenges. Is the company also being burnished at some point in time wherein you know….
Aron: Yeah. I think anything's possible. I think there are three choices in the future. You get Kronos stay private with this ownership or another ownership; it will go public again; or it will get bought by a strategic buyer. I think the challenge with all this will be of size. Because you get to a certain size, our market capitalization in 2014 when GIC and Blackstone became investors was $4.5 billion. We're worth more than that now. There is not a lot of deals happening between $5 billion and 10 billion. So price will be the biggest obstacle in my view of getting bought by someone else. It's not that it won't happen. It means that the number of companies that could do it are very small because of the size of it. But I don't know. We're not running the business for that today. We're running the business to keep improving and growing and moving forward.
BT: Given your legacy of selling time clocks, do you continue to sell hardware in any form at all?
Aron: We do. We still make devices that look like something that hangs on the wall. And it is a badge reader or a biometric reader or a proximity reader. And it basically acts as the data collection point for mainly blue collar hourly workers who are coming and going. So we still make that hardware. In the last March quarter we have had the best hardware quarter in our company's history.
BT: Hardware is what percentage of your overall revenue?
Aron: It's about 10per cent.
BT: Interesting, that a software and services company would still be making and selling hardware. I am sure that the actual making of the hardware itself is outsourced I presume.
Aron: It is. It's done by a contract manufacturer. But we have to continue making because our application requires software and hardware. Our customers need to collect this information for their employees. So we can't be in our business unless we offer both. You know you asked earlier how do you go and compete with the giants like SAP and Oracle? I don't know. Do SAP and Oracle offer hardware to solve this problem?
BT: This segment of the market, who do you head butt against in the market place? Somebody else who offers this integration of hardware plus the software and the service.
Aron: It's a very good question. So it's different in every country and it's different in each vertical market that we serve. If you're going to ask me who is the one biggest global competitor that we have, it's ADP.
Aron: Now ADP also resells a private label version of our standard product. So the product they sell to solve this problem is Kronos.
BT: Sorry let me get this correct so that I don't misunderstand what you just stated. You supply a white label product to the payroll processing company ADP, and they in turn re-badge it and sell it to the customers. And the backend support and services are still provided by Kronos.
Aron: No, it's their customer. They've trained themselves to do that. We've had a 25 year old relationship with ADP. They are a small part of our overall business but they're also our biggest competitor globally. Currently, we don't compete with ADP in all parts of the world because they are not in all parts of the world. The toughest competitors for us are companies that you would have never heard of, that are very industry specific, where they have created a workforce management for example just for hospitals, or just for retailers, or for manufacturers. They are different in each country and they tend to be small companies. But they have really very good solutions in this narrow space.
BT: How long have you been here in India? How do you see India, more of a resource base or as a market?
Aron: It's both. Our first employee in India was hired in 2007. Today we have about 100 customers here in India. We have more than 100 companies who have used our product. And some have been sold in other parts of the world. Indian customers include the likes of UltraTech, M&M, GMR, First Source, Bharat Forge, Hindustan Zinc, Times of India and Aircel. As well as multinationals here like Cummins and Toyota and SAB Miller use Kronos for their India operations. So that's one dimension for us that I think we've done a really great job. The other dimension is we made India (started in 2007) a key strategic part of our business where we were going to create a centre of excellence for all parts of our business.
In India today we have about 750 to 800 of our global workforce of 5,000 people. We came to India because of the skill and talent of the people. It is not a cost arbitrage for us. We choose a different way of doing it than most people. It's not an outsource to other parts of the world. Whatever we do in India, the team in India owns. They own what we call, a centre of excellence. So if they are responsible for our analytics products, which they are, they own from the product design to the product development, to the testing, all aspects of it.
Our analytics products were designed from scratch here. So what we sell all over the world started here and is developed here. Our mobile solutions was started here and developed here. As an example we have a whole new next generation platform that we're working on. India has about 40per cent of that team working on that platform within their specific set of expertise.