Crossed wires at Polaris

It was a chance meeting that had far-reaching consequences.

About a year ago, during a trip to Mumbai, Polaris Chairman & CEO Arun Jain bumped into Harpal Dugal, who had just resigned from Standard Chartered Bank. "What are you doing these days," he asked casually. The rest, as they say, is history.

Today Jain is locked in a legal battle with Dugal and Suren Khirwadkar, another high-flying banker who signed on with Polaris a year ago. Both were served termination notices that they are contesting. And Polaris has moved five courts in Karnataka, Tamil Nadu and Maharashtra to prevent the two from speaking to the media or any third party.

Dugal and Khirwadkar's move to Polaris created a stir when it happened in April 2002. Both had impressive track records. Dugal was the former CEO of Standard Chartered Bank, Khirwadkar, the former country marketing director of Citibank.

Besides that, Polaris had also signed Nat Narayanaswamy, another big corporate honcho from Accenture US. Dugal and Khirwadkar were brought into the company to build its business process  outsourcing (BPO) operations and Narayanaswamy was director Polaris Retail Infotech and senior vice president, strategic alliances, directly reporting to Arun Jain.

One year later, Narayanaswamy has resigned. It's said he was upset at not being on the Polaris board. Dugal and Khirwadkar, say insiders, were distressed they did not get an equity stake as they are said to have been promised. They have since signed on leading lawyer Mahesh Jethmalani to fight their case. Although the protagonists are not talking, industry sources say the equity promised was around 5 per cent each, and an additional 2 per cent if any big buyout was made of a BPO company.

Polaris says the two were promised equity in Optimus, the BPO company, but there's a dispute about how much. It says the two wanted a 5 per cent stake after it bought a company named iBackOffice in Bangalore. Sources close to Jain say they were entitled to 5 per cent of the value of Optimus before the buyout. They say shareholder money was used to buy iBackOffice and that Dugal and Khirwadkar had not added value. Therefore, Dugal and Khirwadkar should have received an equity stake in the company as it was valued before the acquisition.

Business Standard has reliably learnt that as per the contract that Polaris signed with both Dugal and Khirwadkar, there was a clause that once the BPO company was formed both would join as managing partners with equity participation. The BPO company was formed on September 25, 2002 so they should have received equity stakes at that time. In fact, they had not been given stakes till December and they had been demanding stakes from September onwards.

Polaris has sent termination notices to both Dugal and Khirwadkar. They have said their association with the business process outsourcing company, Optimus, was entrepreneurial. Since they aren't employees, they can't be sacked.

Rewind to April 10, 2002 when both Dugal and Khirwadkar joined the organisation. Signing the two was a major coup for Polaris, which was looking at growing swiftly in business process outsourcing. Sources in Polaris indicate that Dugal was hired first and he, in turn, suggested that Khirwadkar be brought on board. Polaris' strength has been in banking software and it's looking to strengthen its position by offering BPO services to banks.

Clearly, it hoped Dugal and Khirwadkar would have high-level contacts to rope in business. However, there were murmurs in the business press that Polaris was not big enough an organisation for such high-priced bankers.

By April last year it was also clear Polaris was starting to get left behind in the BPO field. Its competitors like Wipro had invested in Spectramind, Infosys had started 'Progeon', and Mphasis had 'Msource'.

Dugal and Khirwadkar were in favour of an acquisition as they believed it would enable the company to grow quickly. Jain is also said to have agreed that the cost of setting up a greenfield venture might be more than an acquisition. However, sources close to Jain now say he favoured a mix of acquisitions and a greenfields venture.

Optimus zeroed in on Delhi-based First Ring, around last June. By July, a deal was almost sewn up, but it stalled after the Polaris financial controller raised objections. Finally the deal was put on ice.

Sources in Polaris say that Dugal and Khirwadkar were slow to put together a business plan for the BPO operation. But a plan was put together by the duo in July and August. Later, according to sources belonging to the Polaris' business leadership team, consulting firm Ernst & Young was brought in to vet the plan. On August 30, they made a presentation to Jain and other top Polaris officials.

At the same time, Jain had asked for the costing of a pilot 100-seat BPO facility in September. In the same month, Jain's investment banker, Spark Capital, suggested Optimus should consider buying iBackOffice (a BPO facility in Bangalore) which was looking at a distress sale.

In December, Polaris announced a binding arrangement to purchase the assets of iBackoffice, along with one customer. As part of the deal, Subhendu Mitra from iBackoffice joined Optimus as Chief Operating Officer.

Soon after the deal was completed Jain suggested Dugal and Khirwadkar move to Bangalore and look after iBackOffice's operations. They proposed that one of them would be stationed in Bangalore seven days a week overseeing the operations of the company.

This deal is yet to be completed. The entire transaction should have been sealed by February 17. The  delay means Polaris still does not have its own BPO facilities.

So did Polaris conclude too hastily that Dugal and Khirwadkar had failed to get Optimus in high gear? A CEO of a leading Bangalore-based BPO company thinks so.

"BPO companies need time to market themselves and in this case Optimus does not even have any infrastructure to its name, so no client will be willing to give them any business," he notes. For the record, it takes six to nine months now to clinch a BPO contract.

But according to Polaris sources the management was annoyed about a host of other issues. Sources say that Jain was irked the two would not move to Chennai. Instead, they worked five days a week in Chennai and flew back to Mumbai for the weekends. At other times, they operated from the Polaris office in Mumbai. Jain apparently felt it was needlessly costly. "Commitment was an issue. They did not form a team and they did not want to move to Chennai," a top Polaris source said.

However, others defend the two, saying: "From April to December 2002, both of them were in Chennai five days a week and only went to Mumbai post the purchase agreement with iBackOffice as all the bankers were based out of Mumbai," the source adds.

Jain is also said to have been annoyed by the fact both Dugal and Khirwadkar hadn't, in his  view, made enough efforts to  drum up new business. He says they travelled only once to the US for marketing. But sources close to the duo say they travelled twice to the US in July and October 2002 and made in-depth presentations about Optimus to prospective customers.

Events came to a head on March 27 when Khirwadkar was sent a mail by R Shekhar, Polaris HR head, which said that in light of organisational changes he was to take charge as sales controller of Polaris based in Chennai with effect from April 1. Khirwadkar immediately sent a message to Jain saying that he didn't understand how Shekhar could send such a mail when he was in charge of the BPO initiative. After that Polaris served termination notices on both Khirwadkar and Dugal.

The troubled relationship between Jain and his two recruits, Dugal and Khirwadkar, forced Polaris to obtain injunctions preventing the two from talking to any third-party about the company's affairs. For the follow-up to the drama, keep your eyes peeled for the court case.