A Hindustan Times exclusive interview with CEO

TCS has a market cap of over $16.5 billion and yet it is acquiring small companies of less than $50 million. Where do these acquisitions fit into your global delivery model?

We are doing this by design. The acquisitions are meant to scale up the global delivery model. Size is not important. The important aspect for an acquisition is what value addition does it bring to the table in terms of domain knowledge, geography or its clientele. We have categorized six verticals or bubbles in TCS — IT services, business process outsourcing (BPO), engineering and industrial solutions, package enabled solutions, consulting and infrastructure services.

Going forward, one has to separate between voice and transaction based services which is why we divested from voice (Intelenet) before the IPO. Using technologically intensive modules, the future is in platform based, domain based, transformational based and transactional based services. The recent multimillion dollar with the Pearl Group is to achieve this end. Pearl has 13 platforms which is a most inefficient way of operating. We will rationalize their systems and create a single platform and take a thousand plus of their people and bring them into our fold. The Pearl Group has four million of the closed books in the insurance and pensions space, worldwide, there are 75 million of these available.

The recent Joint Venture (JV) with SBI and the acquisition of FNS will kick start our product space foray. The deal in Chile is a bolt onto the Pearl deal. It gives us a toehold in the life and pension area and credit cards space in South America.

You mentioned that you are adding 1,100 personnel from Pearl Group, where is TCS headed in terms of employee numbers?

The CMC absorption means an addition of 3,300 employees, the integration of Tata Infotech another 3,200, while FNS has seen us add 190 and the Chile operation will add 1,200 people. This means that very quickly we have added close to 8,000 people and this we have done hitting the road running.

We have seen CMC and Tata Infotech adding mass to TCS in different ways through a collaborative model and a merger, what does it mean for the Tata group?

We are going to leverage Tata group companies' strengths to bring comprehensive solutions for our global customers at competitive prices. In addition, we are in the process of amalgamating all the different platforms into one, which will help us in offering best of breed and best in class services at a comparable price.

TCS is aggressively exploring opportunities in the remote network and infrastructure management domain. For this we are going to use the bandwidth of VSNL or Tyco or Teleglobe. Similarly we are going to use the servers of one of the companies. Depending upon the requirements of global customers, the utilities of these services will help us in bringing down the cost. While at the same time increase the efficiencies and dependability as well as quality of services.

In fact, TCS has put in a lot of effort to bring seamless synergies with various vendors and other group companies like Tata Technologies, Tata Elxsi and others. It is a collaborative model where all the companies will benefit. Our go to market strategy incorporates leveraging all our assets all over the world.

What is the differentiator or USP for TCS? Is it price competitiveness?

Let me make it clear that the labor arbitrage model is history. Indian companies are providing end to end solutions. We are not merely a low cost hub, we are much more starting with research and development to service delivery to product delivery. We compete on the global canvas not because of price alone. Though price is an important ingredient, it is not the sole criteria. There are a host of other reasons that goes in favor of India like credibility of delivery on or before time, offering a comprehensive solution that helps these companies in achieving higher productivity.

Since a reasonable number of Indian IT firms has either crossed the billion dollar mark or is poised to do so, they are being viewed as more credible with long-term longevity. That helps us in partnering with some of the global leaders even for critical operations. Each Indian tech company will evolve in its own way - some will be product facing, some engineering, some BPO facing — we have to make sure that depth and breadth of IT is covered by us.

What about merger with other group firms?

No more mergers. The buck stops here. Basically it is the issue of synergies. All the group companies in the technology space have their own space. It is better to have a collaborative model than to go in for a merger.

Given the kind of growth rate you have registered in the recent past, where do you see TCS in the next three to five years in terms of revenues?

It is difficult to give you a number. But our aspiration is to double the turnover every three years through organic growth. While doing so we would also like to ensure our margins should increase or at least remain protected. In fact each of the six bubbles should give us revenues of half a billion dollars in the next three to five years.

Last year, when TCS was listed on the Indian bourses, we were told that TCS would be listed on the US bourses after one year. When is this going to he happening?

We have planned to list overseas, but as of now there is no dialogue. It is difficult to hazard a guess on a timeline. We will be deliberating on this in our board and let you know.

But what is the purpose of an overseas listing?

Let me clarify that an overseas listing would not be for the purpose of raising funds. TCS is a global company. The intent of listing on the overseas market is to create visibility in that local market, which in turn helps in building new businesses. Secondly, it helps the company in hiring and retaining locals as it is easier to give Employee Stock Options (ESOP) to them once you are listed there.

Source: Hindustan Times 29 Nov 2005

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TCS Awake and hungry

Savour a few contradictions. Tata Consultancy Services (TCS) is slow. TCS is old-fashioned. And TCS will have $3-billion revenues by March 2006 - a full $1 billion more than that of nearest Indian rival, Infosys Technologies.

Over the last seven months, the Tata group's flagship IT company has bagged global outsourcing contracts worth $1,457 million and pushed through acquisitions valued at $50 million. When it closes its accounts for the financial year, these moves will have translated to a $600-million rise in the company's top line, propelling revenues to the $3-billion mark. That's barely three years after it hit $1 billion. Clearly, the company that pioneered the factory model of Indian IT services nearly two decades back is in a hurry to go somewhere. CEO S. Ramadorai quantifies the goal: $10 billion by 2010.

This week, the TCS deal run continued with the acquisition of Chilean BPO firm Comicrom for $26 million. Though a small acquisition, the deal will give the company's BPO business a foothold in the Latin American pensions processing market and add to the critical pensions and insurance BPO skills that TCS has started building. [The $847-million Pearl deal was the first step towards that.] The Comicrom deal comes just two weeks after the $23-million acquisition of Australian banking solutions firm FNS in late October, which TCS bought to augment its products business. Ramadorai intends to maintain the deal momentum. "Over the next two years, growth through acquisitions will become very important for TCS," he says.
TCS's recent moves have certainly perked up the markets. As the stock charts show, the TCS share price has gained significantly over the last nine months. As on October 2005, while its earnings per share (EPS) was trailing Infosys by a fair margin at Rs 59.1 per share (Infosys is at Rs 92.2 per share), in terms of P-E (price-to-earning) ratio, the gap in valuations is quite small. Infosys is trading at a P-E of 29.1, while TCS is at 24.8.

Acquisitions, though critical, is just one component of the 2010 growth strategy being spearheaded by TCS's core think tank - N. Chandrasekaran, executive vice-president (global operations), S. Mahalingam, executive vice- president & CFO and S. Padmanabhan, executive vice-president (HR) at the company's corporate headquarters in Mumbai. The plan to reach $10 billion assumes a complete overhaul of the company's internal processes and businesses, and big jumps in organic growth. Much of the overhaul process has been under way since 2000, and the job is about half done. "In three years, TCS will look like a very different company," says Chandrasekaran, second-in-command to Ramadorai and dubbed internally as CEO-in-waiting.

If TCS does get to $10 billion by 2010 - and that is still a huge stretch target - it will redefine the global pecking order of IT services players (see 'Sizing up the Competition'). It will place TCS at the same high table that is today occupied by IBM Global Services, HP Services, EDS and Accenture. It would make TCS a prime contender in the $1billion-plus order game. It would, in effect, make TCS the first Indian global IT superpower. But for that to happen, it needs to clock growth rates of over 40 per cent year-on-year for the next five years, while the global Top 10 are averaging at 8-10 per cent a year today. The TC Strategy Think Tank.
Can TCS really reach that exalted status? A couple of years ago, the answer would have been no. After two decades in the business, TCS seemed to have lost its growth momentum. Younger rivals like Infosys and Wipro were growing much faster and had almost caught up with TCS in terms of revenues. Worse, both Infosys and Wipro had spotted new growth avenues, while TCS was still stuck with its old legacy businesses.

Making Up For Lost Time

In March 2003, TCS revenues scaled $1 billion. It was a notable milestone no doubt, but the sheen wore off in no time. A year later, Infosys also crossed $1 billion in revenues. The Bangalore-headquartered company had taken much lesser time to scale the heights that had taken TCS over 20 years to climb. Infosys was joined by Wipro and Satyam Computer the same year.

Source: BSE

In early 2004, TCS was beginning to look like a has-been. With 24,168 people on its rolls, close to 20 global development centres, and multiple service capabilities, TCS could still boast of being a more complete company in terms of services and geographical depth than any of its peers. But it had some glaring weaknesses. To begin with, the company's topline growth rates were barely at 20-22 per cent year-on-year, while Infosys and Wipro were clocking steady 35-40 per cent per annum growth rates. TCS's offshore-onsite revenues were also lopsided in favour of onsite 40:60, which meant lower margins. Despite an impressive breadth of service capabilities, it did not have a presence of note in new growth areas like remote infrastructure services, BPO and consulting. Traditional application and maintenance work accounted for over 70 per cent of its revenues. All these factors began to gain prominence as TCS edged closer to its public listing.
Meanwhile, Infosys had chalked out a very clear model for chasing growth. It had a five-year plan to look at the big targets, a three-year model to set strategic targets for each business division, and a one-year goal to address immediate revenue and profit targets. It was looking at $2 billion by 2005-06, and seemed well on its way to achieve that goal. It had kicked off a complete overhaul of its businesses that saw it re-organising along verticals. And it had taken the lead among Indian players in building up the consulting business.

Meanwhile, Wipro was moving equally fast to grab two very different growth opportunities - infrastructure management and BPO. In BPO, Wipro had taken a head start with the acquisition of Spectramind in 2002. It was among the first Indian firms to bag some of the bigger outsourcing contracts, the $80-million Lattice contract.

Though TCS seemed to have fallen asleep, it was actually preparing the base for the spectacular acquisitions and deals that have started rolling this year. In fact, the agenda to propel TCS into the global big league by 2010 was being formulated in April 2000.

Perhaps it was the top management's preoccupation with its impending IPO in 2004 that was slowing the company down. The TCS management is still highly centralised and the strategic decisions are still taken by just four men at the headquarters. Analysts point out that the Tata company will have to address this issue if it wants to become a global company.

At any rate, things speeded up dramatically after the IPO, and the TCS team went on an acquisition and deal- closing spree. One analyst points out that after the IPO, TCS was also under much more public scrutiny than it was as a private company. And that added its own pressure for the team to roll out the ambitious growth plan quickly.

At the core of TCS's Vision 2010 is, what it calls, its 'five-bubble' strategy. It has identified five strategic growth areas - consulting, BPO, infrastructure management, products, and engineering services - which will play a key role in powering its growth to $10 billion. "Each of these businesses will have revenues of $50 million-$200 million by the end of this fiscal. This excludes growth by acquisitions. We see each of these businesses growing to $500 million-$1billion over the next 3-4 years," says Chandrasekaran.

At present, engineering services and infrastructure are its fastest growing areas and will be closer to $200 million in revenues each by the end of this fiscal. In fact, engineering design and services is one of the areas where TCS has a big edge over its domestic rivals. Wipro and Infosys do some work in product and chip design in areas like mobile interfaces, but TCS has the widest breadth of services and a big team of 2,000. It does high-end work in aerospace design and has a large presence in industrial design because of its strong domain focus on the manufacturing sector. Manufacturing accounts for 20 per cent of TCS's revenues and engineering design accounts for 30 per cent of that. An industry veteran points out that these will be critical growth areas for IT service companies in the next few years. Apart from TCS, no Indian firm has any competency in these fields.In infrastructure management though, TCS is still lagging behind Wipro. Globally, infrastructure outsourcing is the space in which most big-ticket deals happen. Companies like IBM and EDS dominate the infrastructure space which also brings in the multi-billion dollar deals. Here, TCS realises it has a huge gap to cover.

Till the beginning of the year, TCS seemed to lack focus in the BPO segment. Wipro and Infosys had taken big strides already. But the recent Pearl outsourcing deal and the Comicrom deal have changed that picture. The Pearl deal was important in terms of the revenues it would add to the BPO business - £60 million (over $100 million) by the end of the year. But it was more than just a big deal for boosting the topline. The real importance of the deal lay in the fact that the Pearl group had built up 13 process platforms to manage its pensions, life and administration services. This was what TCS really wanted - and the reason why it agreed to absorb the 950 Pearl employees. Similarly, Comicrom was attractive to TCS not just because it gave a toehold in the Latin American market but also because it operated in the pensions space - an area TCS hopes to dominate.In consulting though, TCS has not done anything spectacular so far. Unlike Infosys, TCS has not yet carved out the consulting practice as a separate company. That's because Ramadorai says consulting has been embedded into TCS' services all along.

--Sources : Businessworld

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