Zoho to take profit hit to manage macro slowdown, has a no-layoff policy: Sridhar Vembu

Amid tight macroeconomic conditions, which forced SaaS companies in India and in the US into mass layoffs to cut costs, Zoho cofounder and CEO Sridhar Vembu said that the company has adopted a no-layoff policy and will take a margin cut on profits.

The company is expanding its Tenkasi rural tech hub and is taking the model to other parts of Tamil Nadu, including Tirunelveli and Madurai, and exploring setting up a facility in Uttar Pradesh.

In a wide-ranging interview, the Zoho chief spoke to Moneycontrol’s Bhavya Dilipkumar in Tenkasi. Responses have been edited for length and clarity.

Can the Tenkasi model be replicated across India and what does it take to do that?

When it comes to the Tenkasi model (setting up a tech hub in a rural area), I believe that this model can be replicated once you find leadership that is committed, passionate, and determined to make this work. And I believe we can do this in any year for 800-plus districts all over India, and our citizens in all those districts deserve this. A lot of other companies can do this as well.

Can you tell us more about what’s happening within the existing Tenkasi facility? Will you be expanding it further?

The office itself now has around 800 people. We are building a bigger one that will host another 1,000 people. So, in maybe three or four years, we could have more than 2,000 people.

We have about four spokes with a hub. The hub is what provides a centralised service. For example, if the network is down in one spoke, the hub office has the expertise to solve those problems. This allows us to keep people closer to the roots working in the spoke offices, and also enjoy the services that the bigger hub offices provide. That’s the model that we will replicate in other districts in Tamil Nadu and also the North.

How has the local ecosystem developed since Zoho stepped up its presence in the region?

In Tenkasi itself, as compared to 10 years ago, economic conditions have improved. And from what I can compare, my native district Thanjavur and Tenkasi are very similar towns. Both are very fertile districts where agriculture is the predominant profession for most people. We expanded in Tenkasi and we have not yet expanded in Thanjavur. You can visibly see the difference in terms of what Zoho has done. So, it’s very important that this type of model is spread across every one of our rural districts. That’s what we are hoping for.

Zoho is also setting up a new hub in Uttar Pradesh similar to the one in Tenkasi. Why Uttar Pradesh and what are some timelines here?

A few months ago, I travelled to Central and Eastern Uttar Pradesh, I saw firsthand that no one is there. These are some of the most demographically rich regions of our nation — demographics is destiny. And where young people are, we can actually nurture and create talent. We are confident that we can take kids from the school steps and train them in our work. And that is why, given the demographic dividend these places have, we thought it would be a good place to find ourselves in.

How much are you planning to invest in Uttar Pradesh?

It is too soon to share. I’m travelling to Uttar Pradesh to finalise the location and everything. We will have to decide after that.

Tell us about the Madurai facility that is coming up.

It’s a 35-acre campus in Kapalur, very close to the Madurai airport. It also is in a smart rural area near Madurai. This will allow us to put smaller spoke offices there. It will grow like our Tenkasi facility. We would immediately expect about 250 to 400 people. And then, long-term, will grow into 1,000. It will grow like our Tenkasi operation. And we also have smaller spoke offices in and around the region. All of them can now enjoy better services thanks to this hub. And a similar one is coming up near Taruvai in Tirunelveli.

What kind of employment will you generate in Uttar Pradesh and Madurai?

That’s the big unknown at this point. We have global economic uncertainty, AI-related uncertainty. All of it means that we cannot really forecast. But our business is solid, we have no debt, we are cash-flow positive, and we’ll be profitable. And so, we think we can power through this downturn. That’s what the hope is. So, we can only tell you over the next 3-5 years how things come up.

Vembu apart from being the techie that you are, you also have passion projects from skill development to rural school education. You are also now interested in making EVs for the rural market. Tell us more about this.

My passion is, of course, you have to grow better food, because we eat and we have to go more local so that we can eat fresher food. That’s why we are farming, and closer to nature, closer to food… all of that. That’s one of my passions. And I also want to create a balanced digital economy, not just dependent on farming, but also on manufacturing, all that. So, we’re trying to create skills and expertise through our schools. And third, of course, we need better healthcare. So, we created a clinic in Mathalampari and we are also trying to replicate it here in Govindaperi in Tenkasi, as a branch of the clinic. So, all of those projects are going on. I’m personally working on some new technology projects, some related to AI, programming languages, those areas. Those we will hope to launch in the next year or two.

You have been talking about AI and how it is a threat to many jobs in India. Why do you think so?

AI technology creates immense opportunities, but it also poses a lot of challenges. I will like to compare it to how handloom weavers face problems due to power looms, Revenue is not going up, demand is not growing at the same rate as productivity and employment gets affected. Software programmers are like weavers; they are weaving together the codes. And now this power loom is coming in the form of AI and other technologies, some of which we have also been working on, which promises to unleash productivity. When that happens, can demand for software keep up with this productivity? If we are able to produce 10 times the software, will there be demand for 10 times the software? If not, employment will take a hit; those are the open questions.

You are also a member of the National Security Advisory Board. What are some of the developments there?

I’m on the board and I participate in deliberations and presentations. But since that work is confidential, I cannot really talk much about it. But all of it touches on topics similar to what I talk about in my public engagements, particularly all the critical technologies are to be brought to India — we have to work on those technologies.

One of the major costs for SaaS companies is the cost of talent acquisition. For Zoho, would that come down given that you have a presence in rural parts?

We invest in talent. So, it’s not talent acquisition. It’s also talent creation for us. So, we are investing in creating talent and that takes more effort in rural areas. But investment is always better when you’re creating the talent, because people are more passionate, and more committed. So, that’s why we like to invest in talent. It is also good for our society — we are broadbasing for our society.

Talking about the overall SaaS ecosystem, one of the recent issues is the Silicon Valley Bank collapse. What would be your lessons from that?

For this, the causes have to be understood. It’s not like suddenly the bank collapsed. The central bank policy created those bubbles — the zero interest rate policy, the QE (quantitative easing) policies, which are basically money printing by a different name, and proper money printing. All of this very bad economics was practiced for a long period. And then suddenly, when inflation rose, they had to tighten the policy. And Silicon Valley Bank is one of the early victims of that. Unfortunately, I don’t believe they’ll be the only victims.

The above-mentioned reasons are the primary reasons. If there is any kind of justice, they should face accountability for the bad positions that were taken in the past.

Is the environment good enough for SaaS companies to bank in India or at least keep their deposits here? What would you advise young startups?

Our banking system is safe and effective because our government regulations are much more stringent, and more conservative. So, we will not allow ourselves to be in a similar situation as the West. We should learn our lessons here, and be much more prudent and conservative in our economic and monetary policy. And we have been that way; our banking system is much more solid.

But how is the overall SaaS ecosystem? Things have not been good. And you’ve also been talking about it… how hiring has slowed... How is it now? Do you have a clearer vision of things settling down?

We will suffer a bust in proportion to the boom. The bigger the boom, unfortunately, the bigger the bust, particularly when it’s fuelled by monetary policy. And that’s what we are suffering right now. I believe we are still in the early stages, we still have more things to come.

Good companies will stay prudent and try to stay cashflow positive, and cut back on unnecessary spending, particularly marketing spending. And those are all the things that we have done to be proactive.

SaaS companies such as FreshWorks and Chargebee have announced layoffs because of the macroeconomic situation. How are you managing all this? You’ve always said that layoffs are not on the cards. So, how are you managing costs?

We will take a reduction in profit. We have been profitable and focused on cost also because we spend less on marketing. We would have suffered more two-three years back but because we are now profitable, we can take a reduction in profit margin. And in that way, we don’t have to affect employees, particularly when the job market is not well. So, we would like to offer a safe environment to our employees. And that’s the only way that our employees also can focus long-term. So, we have taken a no-layoff policy at Zoho.

You’ve already reached a billion dollars in revenue. So, what’s ahead for Zoho? Is an IPO on the cards?

Definitely no IPO. I want to put this billion-dollar revenue in perspective. Yes, we are fully happy that we are the first Indian product company to reach that milestone. But companies like Microsoft are at $200 billion revenue; Apple is at $400 billion plus. We are still a long way behind. We are still a relatively young company with revenue that is half a percent of Microsoft. We still have a long way to go.