N. Chandrasekaran | Business model first, metrics next

N. Chandrasekaran | Business model first, metrics next

Mumbai: In his 14 months as chief executive officer of India’s largest information technology (IT) exporter Tata Consultancy Services Ltd (TCS), 46-year-old N. Chandrasekaran has strengthened the company’s leadership and helped it pull ahead of domestic rivals such as Infosys Technologies Ltd and Wipro Ltd.

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While TCS has always been the leader by revenue, Infosys enjoys the highest operating margin among leading Indian IT players, as reflected in its higher market capitalization.

Under Chandra, as he’s universally known, TCS has been able to narrow the margin gap and get almost on par with Infosys. This he has been able to do by deftly managing costs, boosting volumes and increasing prices in a tough environment.

Traditionally, Infosys has been known for its strength in the BFSI (banking, financial services and insurance) segment, Wipro for its telecom and outsourced research and development (R&D) prowess. However, among Indian players, TCS is probably the one with the widest portfolio of offerings and the biggest geographical footprint in terms of delivery centres across the globe.

With a revenue run-rate of $8.6 billion (Rs39,156 crore) per annum and 186,000 employees, running TCS is not for the faint of heart. For instance, in the first nine months of the current fiscal year, the company added a gross 50,000 employees. A marathon enthusiast who has run in eight countries, including the half marathon in Mumbai on 16 January, the CEO will need all the stamina he can summon to sustain growth in revenue and, more importantly, in margins.

A day after announcing better-than-expected results, he spoke in an interview on Tuesday about the company’s December quarter results, the slow growth in the telecom vertical, the relatively poor performance in the India geography, the quest for acquisitions in Europe, some emerging verticals and challenges facing the company. Edited excerpts:

Last four-five quarters you have managed to consistently increase your margins. TCS has a small “quality of earnings" discount to one of your peers (Infosys), but the gap is being narrowed. What have you been doing right?

While I wouldn’t comment on what my competitors are doing, I believe we can do profitable growth. Size has certain advantages. The market opportunity is so large that we can continue to grow profitably. Last two years we have structured ourselves in a manner such that while individual units have the agility, and yet anything that brings efficiency is shared in a collaborative way. We have a strong qualification process; we have been disciplined in pricing and made investments ahead of the curve. All that has helped shore up the margins; but there are areas for even further improvement. For instance, in the Diligenta business, it has taken us five years. We have made the investments in the delivery platform, which is now robust and solid. As we add more policies, we will increase both the volume and the margins. We are focused on growth, but with the right discipline of margins. We have been able to demonstrate a price-productivity improvement. These improvements are structural, and not one-offs.

When you went public in 2004, there were certain internal stretch goals which weren’t publicly promised, but privately articulated—reaching 10 by 10 ($10 billion in revenue by 2010). You are close enough, ending the calendar year with a run rate of $8.6 billion. Are there other such stretch targets?

We do have pretty ambitious goals but these are internal targets. I believe that tech spending of $1-1.5 trillion, depending on what you include in that bucket, is going to only increase; in that, the extent of outsourcing will also increase. Technology will be the change agent for every business. We will keep increasing the markets we can address.

You have clearly articulated that you are looking at acquisitions in Europe, as well as emerging verticals. Can you elaborate?

Outside of BFSI, where we are very large, we are looking for the right target, right fit, right price in every other segment. It has to meet all these criteria. We will take a business, rather than portfolio, approach to this. An acquisition could be to even reach a certain critical mass. In certain markets, we are not at an optimal size.

In emerging verticals like healthcare and government, there are so many opportunities. Opportunities might be there in buying solution companies, product companies, which could act as a differentiator for us in the marketplace. We continue to explore.

You have around 12,000 employees of your total 186,000 outside India. If you want to address markets such as the government sector, which are politically sensitive, would you move more to a nearshore/bestshore model rather than the current one for most Indian IT companies, which is India being the default outsourced location?

We have a fantastic footprint across the globe. Our scale, number of customers, and the kind of services we are doing, is growing in each of our centres. We have a very holistic approach to the issue. We are focused on getting local customers, attracting and retaining local talent. However, I don’t want to be defensive about the fact that India will continue to play a very major role in our delivery capability. The demography is in India’s favour. Whether it is for TCS, or others, India is going to provide the talent for the world.

For us, business model (comes) first and metrics next. We don’t want the metrics to get ahead of the business model. We will deliver from wherever the customer wants us to. So, we will add people in the US as we have done in the past. Whether it is Europe, Latin America or China, our growth (in people) there would depend on the market opportunity. We continue to advance our goal of having a global delivery network.

Three-four years back, most Indian companies, including TCS, consciously tried to expand their consulting business, with some players even setting up separate entities. How far have you progressed?

It depends on how consulting is measured. Partly, it is a branding and positioning issue which we are working on. It is like saying: “Tell me how you are going to complete a marathon?" We have to do so many things. First, you need size. Five years back, we were partners to several companies.

Today, for a good number of our customers, we have become a strategic partner, and in some cases—only partner. That gives us certain domain expertise and insight into those industries. Consulting will never be a growth engine in the sense of revenue, but will be an important element of capability, solutioning, brand and ability to drive downstream revenue. As a percentage of revenue, pure-play consulting’s contribution will always be small. Here I am not considering the consulting which is embedded in all our practices.

What are the key blue sky challenges, apart from threats like a slowdown in Europe and/or the US, or other hygiene factors like ensuring growth?

The question of non-linearity (ability to increase revenue without a direct correlation to headcount).

But we have been talking about this for at least a decade now.

I never said that this is going to happen overnight. This is a long-term game. Whether it is cloud (computing), investments being made in platforms, we are making those investments. I have stated that 10% of incremental revenue will come from non-linear growth by the fourth quarter of FY12. We are on track to deliver. Remember, it is change from customer point of view also. So there has to be buy-in.

The second is the people challenge. Remember we have added a gross of 50,000 people in the first nine months. Even I wouldn’t have believed if somebody told me we would add 20,000 gross in the third quarter of this fiscal. The focus is to ensure that attrition is low, empower our people, and drive a culture of belonging. We need to communicate more and better. You can’t take your eyes off the ball. We are now more global.

Another area of concern is the yo-yoing of the India revenue.

Look at our business model in India. We are focused on certain areas and are choosy about what discretionary business we want to go after. Some of the opportunities might be margin negative. So we are trying to strike a right balance between annuity and discretionary business. We have largely come out of that yo-yoing, which you pointed out, but it is still there. Hopefully, over the next few quarters we will fix that.

Graphic by Paras Jain / Mint