Ramco Systems bags big contract from Boeing

The Chennai-based enterprise solutions company, Ramco Systems has entered into a 15-year renewable agreement with the $51 billion-revenue Boeing Company to jointly develop and market Enterprise Management Systems for the aviation industry.

The deal worth anything between $150 million (at a conservative estimate) and $600 million over a five-year period would see Ramco Systems flying out of its current predicaments. As per the agreement with the aviation major, Ramco Systems will supply key modules from its Enterprise Asset Management (EAM) offering and Boeing will market the product amongst its customers under the brand Enterprise One. The benefit of Enterprise One is that, it will provide airlines with a set of business applications that cover the production planning and control of an airlines entire fleet.

The applications supplied by Ramco are built on its component-based software development platform called `RamcoVirtualWorks'.

Taking a leaf out of General Electric, Boeing has decided to enter the aviation services market, especially into the logistic and maintenance software and services segment. The company after evaluating around 50 products offered by companies spread across three continents finally zeroed on Ramco Systems and inked the deal after 16 months of negotiations.

Under the deal Boeing will take care of marketing, sales and product specifications, while Ramco Systems’ responsibility includes pre-sales support, product development, technology platform, implementation and product support.

"The revenue sharing between Ramco Systems and Boeing varies from product-to-product and market-to-market. However Boeing will pay us the development costs,"
remarked Mr. Lakshmi Narasimhan, president, Ramco Systems. According to him Boeing will not restrict Enterprise One to just commercial aviation sector, it will also target the defence and other market segments too.

While Boeing cannot sign with any other software provider for similar product for next five years, Ramco Systems is not precluded from selling its product to other airline manufacturer or its clients. However there is a rider to this facility. Ramco Systems will have to pay Boeing some part of the sales made by it. To the query as to why Ramco Systems have to pay for its market sales whereas for Boeing it will be just captive sales, Mr. Narasimhan reasoned that such give and take attitude has to be there in the larger interest.

According to him, the Boeing contract is expected to contribute 15 per cent of the turnover this fiscal and 25 per cent the next year.

Ramco Systems will be hire additional hands based on the needs. Initially for Enterprise Asset Management business the company will need 150 software professionals. "The number might even go up to 1,000," Mr. Narasimhan remarked. As on date the company has around 1,600 employees.

The Boeing deal and also other new orders have made the company to lease 65,000 sq.ft. additional space in the heart of Chennai to house its development centre. The company is in the process of locating a suitable space for outright purchase.

As a part of its growth strategy, Ramco Systems is looking out for acquisitions in addition to growing organically. The company will most probably pocket one software company at with a turnover of $12 million though Mr. Narasimhan refused to divulge more details. The company is targeting three companies for acquisitions, two based in US and one located here.

In order to raise the needed cash for acquisitions, Ramco Systems, according to Mr. Narasimhan plans to dilute equity to the extent of 20 per cent by going in for private placement. The company is planning to hold discussions with overseas investors on this aspect.

Currently 45 per cent of the Rs.7.73 crore equity is held by the Indian promoter group- Ramco Industries and others- and rest is spread out. It is well known that the Indian promoter group is comfortable with 51 per cent stake in any of their venture. Given this
situation, private placement will in turn reduce the Indian promoters holdings in the company by atleast 6 per cent. It is learnt that, in order to avoid such eventuality, the promoters are resorting to market purchases.

Be that as it may, forty eight year old Mr. Narasimhan - one of the key developers of Unix language while he was at Bell, USA - joining Ramco Systems last May has divided the business into five strategic business units (SBU). According to him, each SBU contributes equally to the total turnover of the company.

According to him in four years time 60 per cent of the revenues will be from rendering software services and 40 per cent from software products and components.