When Tata Consultancy Services (TCS) announced its results for financial year 2009-10, analysts and the markets were pleasantly surprised. India’s largest IT services company had beaten expectations and defied critics to post some of the most encouraging numbers that the Indian IT industry has seen in a couple of years.
Nobody had expected this kind of growth. Consider this:
Put simply, the results emphatically signalled the end of the slowdown. The company followed up the FY10 results with an equally robust performance for the quarter ended June 30, 2010:
Confidence about the much-awaited recovery, tempered with just the right dose of caution — that sums up the mood at TCS right now. There is much to celebrate: new deals already in the bag, including the Telenor project in Norway; a healthy pipeline of projects; and encouraging signs of recovery in its biggest market, the US.
Surya Kant, who heads TCS North America, is upbeat. “For Q1 2011 we had 14 new client wins, such as a leading wholesale provider of technology products and supply chain services and an industrial distribution company,” he says. “The overall pipeline scenario for new business is also showing positive trends, with a couple of large deals in the $100 million-plus category and many deals in the $20-50 million segment in mature sales stages.”
Globally, projections for the IT industry also paint a happy picture. According to a report by the National Association of Software and Services Companies (Nasscom) and International Data Corporation, global technology spends are expected to increase from $1.6 trillion in 2008 to $1.9 trillion in 2013.
The going surely looks good, but that was not the case a few quarters ago. The American sub-prime crisis unfolded in July 2007, bringing with it an extended period of grief for the banking, financial services and insurance (BFSI) sector, traditionally the largest spenders on IT and related services.
As it turned out, there was much more — and worse — to come. The following months saw the giants tumble, one after the other. The unkindest cut was that some of the biggest names were also TCS clients — Lehman Brothers, Washington Mutual, AIG. With the largest growth sector falling into dire straits, it was not long before telecom, retail, manufacturing and other sectors followed suit. “Meanwhile, the UK was also affected at that time. So this contagion was all over the place,” says Mr Mahalingam.
Along with the rest of the Indian IT industry, TCS too began to feel the heat of the meltdown. In December 2008, for the first time in its history, the company reported a quarterly decline, followed by another dip in the quarter ended March 2009. “We have always had an improvement, and a significant improvement, in most cases,” says Mr Mahalingam. “But we had a decline in the quarter ended December 2008 and in the following quarter as well. We were looking at a situation where our clients in North America, one of our biggest markets, and also Europe, were starting to scale down.”
On the high road again
Sounds simplistic, but Mr Chandrasekaran, who took over as CEO and MD last October during the worst phase of the slowdown, explains: “We basically did three-four things right. Of these the most important was our decision to stay close to our customers. In a way, the new structure we had put in place helped because the structure is totally customer-focused. It is not a geography structure or a services structure; it is a vertical structure with customer-centricity at its core.”
In 2008, even as the slowdown was spreading across continents, Mr Chandrasekaran, who was then executive director and CEO, supervised the creation of a new business structure comprising five major groups: industry solution units, major markets, new growth markets, strategic initiatives and organisation infrastructure, each headed by a director. These modules function as separate entities with their own profit-and-loss account. The new structure allowed business units the flexibility and focus required to walk with their customers through the crisis. “We knew exactly what was happening with each account and how each customer was reacting to the situation,” says Mr Chandrasekaran. So we were able to respond to their needs very quickly.”
As companies slashed IT budgets and as discretionary spends started to vanish, TCS worked with its clients to understand their problems and offer solutions, which included increasing the work done offshore to reduce costs. With customers looking to cut costs and build efficiencies, and given the frenetic mergers and acquisitions spurred by the slowdown, companies were increasingly willing to adopt the TCS approach. “Because we developed closer customer relationships, we could come up with alternatives,” says Mr Mahalingam. “We could not obviously afford a 20 per cent decline in prices, but at the same time we had to help customers wherever we could.”
Even at the height of the crisis, TCS refused to go into panic mode. Long-term business decisions and goals were at no point allowed to be compromised for shorter-term results. “We did not cut down our investments; we just continued to invest where necessary,” adds Mr Chandrasekaran. “We did not take the recessionary approach. All our markets and all our customers were important to us and we stayed focused.”
A high-profile acquisition in 2008 is a case in point. Eleven days after Lehmann Brothers collapsed, TCS acquired Citigroup Global, the Indian BPO unit of Citibank, for $500 million. “We bought the unit because we felt the service requirement existed, people were going to need that service, and TCS needed this capability,” says Mr Mahalingam. “So it was not a very conservative or chopping kind of mindset, but a growth-oriented one. Given the kind of business that TCS is in, when you are growing you cannot afford to say you will not grow.”
Keeping costs on a leash
Every item of cost was given a closer look. Selling, general and administrative (SG&A) spends were kept on a tight leash, travel expenses came down as employees were encouraged to use alternatives such as conference calls and videoconferencing, and greater efficiencies were built into projects to improve margins. And although TCS honoured all the employment offers made, it went about the whole hiring process in a planned manner so that people were brought in only when required.
The cost management efforts more than paid off. For the year ended March 2010, TCS saw operating margins improve a commendable 277 basis points to 26.5 per cent. SG&A costs were brought down by more than 230 basis points to 19.3 per cent.
Then there are the people behind these numbers. In times of crisis, managing human capital is as much a challenge as anything else, especially in people-intensive businesses. As the largest employer in the Indian IT sector, TCS had much work to do on the people front. Given the general dip in morale in the industry and the stringent cost-cutting measures being implemented, the company had a huge human resources task at hand.
Open communication lines between employees and management, and town-hall sessions that kept employees updated on developments within the company and offered them a chance to discuss their concerns, enabled TCS to address the human resources situation to a large extent. And as soon as things started looking up, increments and higher variable payouts were back at the company, as were new recruits.
Managing a growing family
With the signs of recovery getting stronger, employee retention is set to be a major concern for Indian IT companies. Nasscom expects attrition rates to pose a problem for the Indian IT industry this year as companies go back into hiring mode. At the end of Q1 FY11, TCS reported an attrition rate of 13.1 per cent, up from 11.8 per cent in the previous quarter.
“Like excellence, employee retention is also a journey,” notes Mr Chandrasekaran. “You have to be always worried about retention; you have to continuously work on the various aspects of employee engagement, training and retention. Even if 10 per cent of our employees leave, we are looking at a figure of 15,000 people. I would be happy to see the attrition rate down by a few percentage points, ideally to a single digit.”
The TCS family of employees is spread across 62 countries. Reflecting the global expansion and ambitions of the company, for the year ended March 31, 2010, as many as 10,475 of its workforce were foreign nationals; 80 different nationalities today work for TCS, bringing a unique richness and complexity to the company, not to mention a totally unprecedented set of challenges.
As well as building its offshore capabilities, TCS has also been investing in a wide network of Global Delivery Centres (GDCs) to allow its teams to service clients from various locations across the globe and fulfil the promise of the Global Delivery Network Model™. With companies looking for ways to cut costs during the slowdown, TCS saw its offsite contribution rise to 56.7 per cent of its revenue during FY10 compared with 48.8 per cent in the previous year.
The meltdown notwithstanding, North America continues to be the largest revenue earner for TCS, contributing 52.8 per cent of revenues in FY10, up from 51.38 per cent in FY09.
A slower-than-expected economic recovery process and continued currency fluctuations have had an impact on performance in Europe. UK contributed 16.18 per cent of revenues in FY10 (18.99 per cent in FY09); and Europe brought in 10.49 per cent in FY10 (10.53 per cent in FY09).
The Indian market has grown steadily and now contributes 8.65 per cent to TCS’s revenues, up from 7.85 per cent last year. “The maturity of the domestic market is beginning to improve,” says Mr Chandrasekaran. “Tech spending on IT services, which was not much in the past, has started to happen over the last couple of years. We have now achieved a critical mass in this market and I am hopeful that we will grow faster.”
The growth in Latin America has been heartening, too. TCS has more than 6,500 employees in its offices in Brazil, Chile, Mexico, Argentina, Colombia and Ecuador. The emerging markets, including Latin America, China, the Middle East and Africa, already contribute revenues in excess of $1 billion, though their potential remains to be fully tapped.
With its current geographical spread and focus going to planning, TCS does not envisage a significant shift in strategy. The company does admit, though, that much more work needs to be done in markets such as France, Germany and Japan, which have proved to be tougher than the rest, owing largely to their demand for higher levels of localisation.
Focus on BFSI
Retail and consumer packaged goods, which saw its share in revenues grow from 8.91 per cent in FY09 to 10.59 per cent in the year ended March 2010, is the second-largest vertical at TCS after BFSI. “There are many reasons for this growth,” points out Pratik Pal, head of the retail solutions unit. “One is our full services portfolio. Our service lines have also matured, and most of the client acquisitions in recent times, including existing large clients, are for the full range of services, including IT services, IT infrastructure and BPO.”
A critical part of the growth strategy involves enhancing the value proposition to the customer, who has emerged far more discerning and cost-conscious from the slowdown. Offering a full suite of end-to-end IT services — from consulting and application development and maintenance (ADM) to BPO and infrastructure services — seems to be the way to go at TCS.
Mr Kant, the TCS North America head, explains why: “TCS is able to win large, multi-tower deals by leveraging its full services capabilities, including BPO, ADM and infrastructure services. Deals are going to get increasingly complex and clients are going to demand from the service provider the ability to leverage synergies from the bundling of services to deliver business value. Additionally, TCS is increasingly playing the role of thought leader and value-added service provider by taking consulting and managed services engagements.”
Already, this strategy of positioning itself as a fully integrated service provider has seen revenues from new services such as BPO and IT infrastructure services rise to 25 per cent in FY10.
Non-linear growth, where growth in revenue is not directly proportionate to an increase in headcount, is another strategic priority at TCS. That, coupled with the realisation that close to 57 per cent of the world’s IT spends are made by organisations other than the Global 2000 companies, had TCS looking at non-linear models that would help it tap the huge opportunity that lay beyond the obvious big companies.
New areas of growth, new products and the encouraging performance of the past two quarters are just some of the factors that have infused fresh energy into TCS. The worst is over and exciting times are certainly ahead. The company is aware that, as the industry learns to live with a changed world post-recession, business is going to be about speed, innovation and agility.
Says Mr Chandrasekaran: “Companies will evolve faster over the next couple of years than they have in the past five-ten years.” And the evolution plan at TCS, put simply, involves closer customer interaction, managing scale and inventing new business models. “The reason we have been successful is because we have always been ahead in creating the next model,” he adds. “What is now known as off-shoring was pioneered by TCS in the 1970s and we were the first to adopt capability maturity model integration (CMMI). Be it non-linear or cloud, we have always taken the lead.”
Mr Chandrasekaran sees a huge opportunity for TCS, given the nature of the industry and the growing spends on technology: “The total global market is worth $1.6 trillion and TCS is not even 1 per cent of that, so there is no issue about opportunities as long as we prepare ourselves. Preparing ourselves is a challenge — and there we cannot afford to become complacent just because the current model works. The model works because we have constantly changed. We have got to keep that going; not only keep it going but keep doing it better and faster.”