Good volume growth coupled with improved efficiencies has helped TCS master challenging economic conditions to show good results. In an interview with Tata.com, CEO and managing director N Chandrasekaran talks about how TCS’s focus on pricing models and margins eased its way through the downturn
In spite of tough conditions in the developed market, Tata Consultancy Services has managed to show good volume growth. What were the factors that contributed to this? Were there any big contracts that helped ease the way?
Our financial results for 2009-10 underscore the fact that our services are very much part of the global business recovery process and our customers see TCS as part of the overall solution.
For us, FY10 has been an exceptional year. We have delivered volume growth every quarter to end the year with revenues of $6.34 billion; our profit margins have continued to improve through all four successive quarters to end the year at a historic high. We have been able to reward our shareholders with a dividend of Rs20 per share including Rs10 per share as special dividend.
Growth has been led by sectors such as banking and financial services (one of our traditional strengths), as well as emerging sectors like retail, life sciences and energy. By the end of the financial year, we began to see growth across all verticals, which showed that business recovery was well underway. In terms of markets, we have seen all our markets grow, though Europe as a whole has lagged behind the US and the emerging markets including India.
One factor that helped was that we have been very disciplined in operational execution and very pragmatic in our cost management. We have taken the time to get our cost structures right, and continued to invest in growth wherever opportunities arise.
While no one can predict with certainty how soon countries will recover across the globe, from the business point of view, we see the recovery. Our clients are consolidating and want to become more efficient. As they do so, they are asking us to better their IT systems to deal with more data and analyse it more efficiently. They are also asking us to help them deliver better business models by getting more customer insights. Thus, we get increased opportunities to add value to our offerings.
The slowdown seems to have even helped TCS to some extent by improving efficiencies; margins are at 23 per cent. How was this accomplished? What were the challenges?
In terms of margins across the board, it has been a satisfying year. On an annual basis, we have delivered 277 basis points improvement in operating margins to 26.5 per cent (as per US GAAP) and 429 basis points in terms of net margins to 22.88 per cent. Even in the fourth quarter, we delivered another sequential rise in OPM despite strong currency headwinds.
We used multiple levers to look at margin improvement — from offshore shift and productivity improvement, to excellent execution at the project level, building efficiencies in selling, general and administrative expenses (SG&A), and managing currency volatility.
We managed to bring down SG&A relative to sales by over 230 basis points to 19.3 per cent, which has helped in improving our margins over the past four quarters.
Simultaneously, we continued investing in our business by maintaining pricing discipline and improving internal efficiency. And now, as growth returns to the industry, the cost discipline will give us an operating leverage.
We remain focused on margins; we need to do business at the right margins and exercise extreme caution in pricing.
In the changing economic scenario, did TCS find that it needed to work on new capabilities beyond IT-related expertise? For instance, was it found necessary to focus more on sales and marketing strengths, currency expertise, contract and pricing models, etc?
The key area for us was to remain very close to the customer during this period and think of their customers with the same passion as we think about ours. We also had to sharpen our ability to present and articulate our value proposition in a compelling manner.
In terms of new solutions and business models, these are capabilities we have been building and investing in for some time now, and making these investments ahead of the curve helped us meet the dynamic needs of the market.
As long as we continue to change and add new solutions and services, there will be opportunities and we will continue to do well. We need to look at the next change where we can bring compelling solutions.
Most Indian IT firms are declaring good results. Is this also true for your counterparts in Europe and US? Or is business shifting to the Indian market?
There is little doubt that the global sourcing model TCS pioneered in the 1970s has now become the mainstream and primary business model for the global IT services industry. During the recent global recession, we clearly demonstrated our value proposition and our ability to be part of the overall solution.
I believe that the Indian IT industry is poised for sustained growth. Our addressable market is increasing as we scale up our newer service offerings and expand into new markets and industries. And because technology life cycles are much shorter today, what gets done outside the corporation, ie global sourcing, will only grow. At a macro level, technology is increasingly becoming core to the success of any business and hence the current global tech spend of $1.6 trillion is also forecast to grow annually. This puts TCS in a sweet spot for growth.
TCS seems to be hiring. What’s the outlook for the current year — are you expecting higher growth rates or has some level of stability been reached?
In the January-March quarter, we had our highest ever organic addition of 16,851 professionals and a net addition of 10,775 employees. For 2010-11 our gross hiring target is 30,000. We have already made 20,000 campus offers; these employees will join us from July onwards.
Looking ahead, we believe that we have laid a solid platform for growth. There is significant traction for our strategy of full services which, together with our global engagement model, positions us well for accelerated growth. We will ensure that investments continue to be aligned to capture growth opportunities that emerge across the spectrum.