Has Tata Sons just strangled the goose that laid the golden egg with TCS CEO shift?

It’s quite evident that Tata Consultancy Services Ltd (TCS) has been the best performing company within the Tata group for many years now. Soon after N. Chandrasekaran took over as chief executive officer in end-2009, the company extended its lead over rivals, while at the same time improving profit margins and cash flow.

By picking Chandrasekaran as its executive chairman, Tata Sons Ltd has essentially picked up the top performing executive from among all its group firms. A moot question is if he will have similar success managing the unwieldy conglomerate, with a number of large firms that face a diverse set of challenges. But that would be a challenge for any person, and Chandra looks better placed than other rumoured contenders for the role.

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A bigger worry is how TCS manages the transition in leadership. In the past seven years, the company contributed over 90% of Tata Sons’ total dividend income. TCS is effectively the goose that lays the golden egg for the Tata group. If growth stutters at the company as a result of the leadership transition, the entire group will be affected adversely.

Chandrasekaran developed relationships with large clients, oversaw operations and held myriad things together simultaneously. To say that he will be missed is an understatement. What’s more, unlike the time when he himself took over as CEO from S. Ramadorai, there has been no clear succession planning.

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Rajesh Gopinathan’s appointment as the new CEO comes across more as a sudden response to the evolving situation at Tata Sons, rather than a planned move. According to an analyst with a multinational brokerage firm, while Gopinathan is sharp and intelligent, his elevation as CEO is likely to irk more senior colleagues who headed business for large geographies and verticals.

What makes things look disconcerting is the current backdrop of demand for IT outsourcing. The shift in customers’ spending patterns from traditional services to digital services has hurt companies such as TCS.

Besides, the election of Donald Trump is likely to increase visa and other costs for outsourcing companies. So while Chandrasekaran took over at a time when things were beginning to turn around for the industry (in end 2009), Gopinathan is taking over when things are looking increasingly precarious.

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TCS sounded gung-ho about its performance in the December quarter, where revenues grew 2% in constant currency terms and margins were stable. But note that this included a large chunk of so-called pass-through revenues in the form of sale of equipment and software. In constant currency terms, revenues rose by around $85 million, while sale of equipment rose by about $65 million. In short, there is nothing much to get excited about in the results. Year-on-year growth continues to be poor and in single-digits.

While Chandrasekaran will soon busy himself turning around the Tata group’s troubled companies, Gopinathan too has little time to lose. TCS has lagged peers such as Accenture Plc. lately. He needs to work on a quick turnaround himself.