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BENGALURU : In mid-August, Tata Sons chairman Natarajan ‘Chandra’ Chandrasekaran chaired the annual strategic review of Tata Consultancy Services Ltd (TCS) over a two-day stay in Geneva, Switzerland. In attendance were the top brass of TCS; about 20 of the senior-most leaders, according to an executive privy to the developments.

During the review meetings, Chandra expressed his disappointment at the slow growth at TCS, especially with regard to the company’s underperformance versus Infosys Ltd. Bengaluru-based Infosys, which is about half the size of TCS, has seen its revenue grow faster than its Mumbai-based rival in six of the last eight quarters.

TCS maintains that this interpretation of the Tata Sons chairman’s comment expressing unhappiness over the unit’s performance is incorrect. Less than two months after the review, in October, the board of TCS re-appointed chief executive Rajesh Gopinathan for a second five-year term, validating that the company continues to be pleased with the performance of Gopinathan, who succeeded Chandra in February 2017.

Also Read | TCS hasn’t shied away from tough calls: COO

To be sure, analysts and investors won’t have much to quibble with TCS, which ended the previous fiscal in March 2021with $22.17 billion in revenue. The firm has managed to grow its quarterly revenue from $4.45 billion at the end of March 2017 to $6.33 billion at the end of the September quarter, translating into a growth of 42.25%.

Significantly, India’s largest information technology (IT) services company has also managed to retain its industry-leading profitability, from 25.7% in March 2017 to 25.6% in the latest quarter. During this time, TCS has managed to retain employees with relatively low attrition rates, especially when compared to some of its peers. All of this has helped investors earn good returns, as TCS shares were up 184% between 1 March 2017 and 15 September 2021.

However, these headline numbers mask three significant challenges that TCS faces. Firstly, a decline in the profit per employee metric raises questions about whether TCS is indeed winning high-margin business or much of the growth is actually coming from the commoditized legacy business. Secondly, the management’s unique and conservative approach of building everything in-house instead of buying firms or technologies is making a few of the firm’s senior leaders queasy. This ‘build rather than buy’ strategy is somewhat of an outlier in the prevailing Indian tech ecosystem, and can even place natural limits on the pace of growth—which, as it turns out, was a point of concern at the Geneva meeting.

Finally, TCS’ respectable overall performance pales in comparison to its larger rival, Accenture Plc., and again raises doubts about the company’s road ahead. Unsurprisingly, even as Accenture has started to disclose business from verticals that are currently growing rapidly—such as data analytics, cloud computing and the firm’s largest new business, Accenture Interactive, TCS continues to be reticent when it comes to disclosing how it is scaling businesses from these segments.

In effect, while things may be looking up for the IT sector in general, TCS has its task cut out on several fronts.

“(For much of the last decade), TCS managed to grow faster than all its rivals," said a Mumbai-based analyst at a foreign brokerage. “When all the companies are doubling down on their investments in cloud and acquisitions, it is time that TCS does a re-look at (its) approach of building everything (from scratch)."

Profit per employee

Unlike other IT service companies such as Accenture or Infosys, TCS does not split its revenue share from digital or other fast-growing new-age technology businesses and the legacy business. Still, one way to evaluate if TCS is indeed winning more of the high-value work is to examine its profit per employee. An IT services firm that offers “high-end" or “transformational" work for the Fortune 1000 clients across the world stands to earn more money for a project, and so, consequently, this would reflect in the profit per employee. On this important metric, TCS’ profit per employee has declined 4.01%, from $2,562 at the end of March 2017 to $2,458.6 at the end of the September quarter, according to a Mint analysis.

During this period, Accenture has managed to improve its net income per employee from $2,212.5 to $2,243, an 1.4% improvement. Accenture, which ended with $50.5 billion in revenue in the year ended 31 August 2021, claims that over 60% of its business is digital.

While refusing to comment about rival businesses, TCS’s chief operating officer N.G. Subramaniam insisted that, given the rapidity at which technology is changing today, revenue per employee is likely to be a highly volatile metric. “I’ve always felt that per capita value creation or net income per employee in the long term is a metric I certainly like."

Interestingly, Accenture built Accenture Interactive, the digital ad agency, by primarily acquiring companies, and it accounted for $12.5 billion in revenue last year. This model—acquiring firms in new domains in order to grow quickly—is contrary to TCS’ current strategy.

“I continue to have endless discussions to get approvals for setting up a $50 million cloud centre because the leadership remains far too focused on how any new investment is translating into incremental revenue growth," said an executive, who works at TCS’ cloud computing business. “(The) TCS Cloud business offers a complete set of customized cloud computing services to clients instead of just migrating applications to hyperscalers like Amazon or Microsoft."

Subramaniam maintains that the firm’s cloud computing business is a decently sized business and the company continues to remain disciplined with regard to whatever investments it makes.

Nonetheless, at least another three senior leaders from the internet of things and cybersecurity business divisions echo a similar sentiment—that the company’s focus on building everything instead of buying technologies or companies is frustrating at times.

“(Because of) our deep relationships with clients over the years, we can always sell more solutions and scale up business from domain areas like cybersecurity or build something like Accenture Interactive," said one of the three senior executives while requesting anonymity. “But we continue to focus on building all of this within the company. It is frustrating to see what can be described as leaving easy money on the table. But this is the strategic direction of the company."

Large contracts

One other wrinkle in TCS’s performance, especially over the past two years, is the company’s inability to win a single mega-deal (a project valued at more than $1 billion). TCS last won a large IT project when it bagged a contract from Deutsche Bank in September 2020. Some analysts and a few executives within the company maintain that TCS continues to prioritize profitability over revenue. And that is a key reason for its failure to win large contracts.

Sample this: TCS was in the running when American investment firm Vanguard was in the process of awarding a multi-year $1.5 billion project but the company backed out towards the end, as it was not happy about the profitability. Infosys bagged the project in July last year.

“We remain focused that we will not participate in RFP-based (request for proposal) large deals because that leads us into price competition," said the first executive cited at the beginning. “We evaluated the Vanguard deal and decided that we could not service it at the price at which it was awarded to another company. We have the highest respect for all our competitors and we wish them all the luck but we realized we could not service the contract at our profitability."

But with the race for big contracts heating up as many large global companies push ahead with their digital transformation strategies, TCS will have to make some hard choices sooner or later. 

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