Tata Consultancy Services' CEO steered his company to the top of the pack in India. Now his challenge is to face global majors IBM and Accenture.
If India is the crown jewel of outsourcing destinations, Tata Consultancy Services is the company spearheading this movement. As the largest Indian outsourcing company in terms of revenues and profits, TCS has become a force that is challenging global firms such as IBM, Accenture, and EDS.
In March, TCS became the first of the Indian outsourcers to cross the $2-billion revenue mark. For fiscal year 2004-2005, TCS' revenue reached $2.24 billion and its net income was $512 million. When the Mumbai-based company went public on the Indian stock markets in August 2004, shares were oversubscribed 7.8 times and the $1.2-billion IPO become the second largest in Asia that year.
S. Ramadorai started working in 1971 at the then-fledgling company as a programmer after completing a master's degree in computer science from the University of California, Los Angeles. Despite lucrative opportunities in the United States, Mr. Ramadorai returned to his home country to join what was then just about the only IT company around.
Since taking over as CEO in 1996, Mr. Ramadorai has led TCS through massive changes to become one of the leading IT companies worldwide. TCS is part of one of the largest Indian conglomerates, the TATA Group, which includes markets that cover energy, telecommunications, financial services, chemicals, and engineering and materials.
In September, TCS secured the largest-ever deal by an Indian outsourcer to provide application support and enhancements to Dutch bank ABM Amro; the work will generate $247 million in revenues over five years. In mid-October, TCS made another big move by entering the U.K. life insurance and pensions industry with a 12-year, $847-million contract with the Pearl Group. And in November, TCS bought Chilean outsourcing company Comicrom for $23 million.
Mr. Ramadorai is also extensively involved in the academic world, and is on the corporate advisory boards at the University of Southern California 's Marshall School of Business and several institutions in India. Earlier this year, Mr. Ramadorai was appointed chairman of Nasscom, India 's influential software trade association; his mandate is to drive initiatives to spread technology nationwide.
However, TCS faces challenges in the form of increased competition from smaller Indian players as well as Chinese companies, and still lags behind global players like IBM and Accenture. On a recent visit to the United States, Mr. Ramadorai fielded questions from Red Herring about the Indian IT environment, and how he plans to compete with the global giants.
Q: How does TCS plan to overtake global players such as IBM and Accenture?
A: We build scale.This year we plan to add about 13,000 people and [the total] are going to be 60,000 people by the end of March 2006. One dimension is the number of people, but we need to be very clear what we mean by going forward. Growth without profitability doesn't make sense. Growth with the right margins is very fundamental and we'll be picking the right kind of opportunities for us to grow in the places that will give us margins.
Q: TCS is facing significant competition from smaller, upstart Indian players such as BirlaSoft, Larsen & Toubro, and Bharti Telecom—how do you plan to face them?
A: TCS has been in the business for the last 36 years and has an enormous amount of competencies and client base. The total outsourcing out of India is still less than 3 percent than the total of IT spend in the world, so we still have a lot of upside in the game.
While there may be a number of other players that are emerging—which I believe must be necessary as the chairman of Nasscom, because we want to build an industry rather than one company—I think each of these smaller ones must find their own niche and find their opportunities for growth.
Q: How do you intend to grab the best talent in India, where there is a huge entrepreneurial wave catching on with all the startups and VC funding?
A: The TCS brand and the TATA brand, how it builds excellence in people and the kind of opportunity we give, is a very natural attraction. Secondly, we also have an enormous amount of innovation in the company where entrepreneurial culture and spirit is encouraged, a lot like idea generation and building a small niche product or service.
Thirdly, we have participated in funding some of the startup initiatives within the company and we ourselves act as a VC at times. Finally, we partner with some of these VC companies extensively because today startup companies with core technology will not see the market unless it is part of a solution. So some of these startups see us as a great system integrator to take them to market.
Q: The top management owns about 80 percent of TCS and employees hold very little. Is that likely to change?
A: The change came about when we went public in August 2004 and we gave stock grants to a number of people as well as cash for people to buy the stocks that were allocated to employees. Going forward, we still continue to give cash rewards but we will look at various ways as we see it necessary. If that is an option program that needs to be put in place, we will, so we are completely open and flexible.
Q: How do you see consolidation playing out in India 's IT industry?
A: Consolidation will always happen and inorganic growth can always happen. TCS acquired CMC about four years ago, now we are integrating and merging Tata InfoTech, and we entered joint ventures with airline companies like Singapore Airlines and Swissair. Finally, we bought a captive entity of insurance company back office called Phoenix Global in Bangalore, which brought in about 500 people. When you add up all of these we have almost added up 7,000 people inorganically, plus the Pearl initiative is going to bring another 950 people. We are talking about almost about 8,000 people coming into [the company] in an inorganic manner. It's a big deal—few companies have done these kinds of things out of India.
Q: TCS has been rooted in a family-owned environment—is there rigidity in the company that could impede its ability to become a big global player?
A: The Tatas were never family-owned because if you look at the historical significance of the group itself, it is completely professionally managed and the family holding is not even 2 percent of the total.
Family ownership is disappearing in India, not just in the IT services but in any part, because the next generations of the work force who want to run these companies are spreading, the companies and professional management is coming into place, and that's what we are witnessing in India. Changes are happening faster than we all believe.
Q: When is TCS planning to float American depository receipts in the stock market, if at all?
A: I can't make any prediction on when it will happen, how it will happen, and whether it will happen. But we always said on the IPO road shows that it was the beginning of a journey by the first dilution, by the listing in the Indian stock exchanges, so we will view this in the right context and the right opportunities and certainly consider it.
Q: So sometime soon
A: We don't rule out anything. We don't have any plans, or any decision on what we are going to do.
Q: What are some of the trends in the software and services space in India?
A: Open source is getting a lot of traction and attention. The second one is clearly the distributed computing and distributed infrastructure because of the communications link availability and its usage beyond urban areas in rural areas through a kiosk and a service-based model. Some states like Andhra Pradesh have partnered with TCS to create a portal to provide citizen services as a joint venture.
Q: Where do you think India stands against China?
A: China is absolutely clear that they want to grow in the globalization of IT services and software. They have a fairly long way to go, not only because of the language skills but also to migrate from a hardware mindset to a software mindset. India has a natural advantage where they have been in the software game for a long time. So the potential innovation that we can do in software is our biggest opportunity, and we will still focus on the commoditized types of services like [business process outsourcing]. So China will find its own position in the world, but at the end of the day it will not be at the cost of India or vice versa.
If we want to participate in the Chinese domestic market, we have to build local competencies. We view China as a market, as a competitor, as a source of talent to address external markets, and to service multinational companies. That's the way India will have to play in the Chinese markets.
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