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The Indian IT model needs some tweaking to adapt to new market

The Indian IT model needs some tweaking to adapt to new market
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First Published: Mon, May 04 2009. 11 07 PM IST

 Long way: Mahalingam says the firm needs to enhance domain expertise, invest in IP and create frameworks. Scott Eells / Bloomberg
Long way: Mahalingam says the firm needs to enhance domain expertise, invest in IP and create frameworks. Scott Eells / Bloomberg
Updated: Mon, May 04 2009. 11 07 PM IST
Bangalore: India’s largest software services firm Tata Consultancy Services Ltd (TCS) has around 143,000 employees. S. Mahalingam, an executive director and chief financial officer of the company, was among its first 25 employees and has helped steer the company to a revenue of $6 billion (Rs29,820) in the fiscal year ended March.
Long way: Mahalingam says the firm needs to enhance domain expertise, invest in IP and create frameworks. Scott Eells / Bloomberg
Mahalingam admits that the current slowdown is the worst he has witnessed in his four-decade career in the industry but adds that “nothing is fundamentally flawed with Indian software export services information technology (IT) model; it just needs some tweaking to adapt to the realities of the newer market conditions”.
In an extensive interview, soft-spoken Mahalingam talked about the strategies being pursued both by TCS and the Indian IT industry to do the same. Edited excerpts:
Has the IT industry here bottomed out—at least in terms of bad news?
This phase of customers either cutting back in spending or in postponing projects got really accentuated since mid-September. The last quarter was tough for everybody. Recovery, I see, is only part of the issue.
If you have gone down from 100 to say 94, even if you do 95, one is improving. But more than recovery my aim is: Can we go beyond 100? We expect (the) recovery to be back-ended.
We are sitting on a decent pipeline. Even the qualified pipeline is pretty healthy. But customers need to get back to discretionary spending to improve processes. That we see as being at least two quarters away.
Is the current Indian software services export model broken? Does it need a drastic overhaul?
No…(shakes his head)… nothing is fundamentally flawed with the (Indian software export services IT) model, it just needs some tweaking to adapt to the realities of the newer market conditions. Who does this better will help separate the winners from the losers.
We need to do incremental things to improve the model rather than some (dramatic) breakthrough.
The current model has a lot of resilience. Business cycles happen all the time as it did, say, in 2001-02. I have never seen tougher times than the current period in my four decades in the industry but then, we were also not this large and didn’t get this kind of attention.
Remember, this industry has made a lot of profits and more importantly, has constantly reinvested in itself. While we have been generous with shareholders we have reinvested in improving our capabilities… What we need to do now is enhance domain expertise, invest in IP (intellectual property), create frameworks…
…Sorry, but haven’t we been hearing the same thing for years now ?
Yes, but we need to move away from just talking to executing. TCS, for instance, started research and development way back in 1981. Whatever profit we made, we started investing a portion of it in creating innovation capability.
Is it worrisome that in the current environment protectionism is on the rise?
Many US companies are doing extremely well in India, both in hardware and software. Trade is a good thing and (there is) no point in placing restrictions but (trade) should also be a two-way street. So, one way of (tweaking the) model is adding people there (onsite) and creating bigger centres. All of us will have to examine that.
Can tier I Indian IT companies hang on to their 20%-plus net profit margins? Eventually, will you trade off some margins for revenue growth?
This is not just about margins. Indian companies are also said to be reluctant to take on (existing) assets (of customers). But my question is, do you really want to leverage your balance sheet for the purpose of taking on assets? For instance, TCS did about $450 million in the infrastructure management services (IMS) space. Some (analysts) say we could have done $2-3 billion if we had (taken on assets). But the profits I make currently from my IMS business is the same (as the profits we would have got by taking on assets), as I would have had to hire and deploy people onsite instead of doing remote infrastructure.
From a TCS perspective at least, we are long way (from the asset-heavy model).
At 143,000 people and adding another 25-30,000 this year, aren’t you getting too unwieldy?
I joined when we were less than 25 people. When we went to 140 in a short time, I used to worry (laughs). Not anymore.
Yes, managing scale is an issue but as long as (people) are not treated as an inventory, it is okay. But we are not unduly worried even if it doubles from here. However, we are trying to break the linearity (between revenues and people).
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First Published: Mon, May 04 2009. 11 07 PM IST