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Dreaming big: What TCS plans to do now
CEO N Chandrasekaran is aiming to double revenues in five years in challenging economic conditions. Can TCS take on the challenge?
N Chandrasekaran and his colleagues at Tata Consultancy Services were in a celebratory mood last month. There were enough reasons for it: The country's largest IT services company touched the magical $10-billion mark in its turnover a little over eight years after it listed in 2004.
But the MD & CEO, a regular marathon runner, now is in a mood to sprint: He wants to achieve "similar milestones" in a much shorter period.
Translated, it means, TCS is aiming to add another $10 billion to its turnover in the next five years or so. Which means, the company has to grow at a compounded annual growth rate of 15 per cent. Can TCS pull it off? The man himself is confident, but analysts are not so sure given the headwinds in the economy, especially in Europe.
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Dreaming big: What TCS plans to do now
"I doubt if TCS can grow so much in the current global environment. I do think that the company can add 50 per cent to its current revenue and be a $15-billion (around Rs 75,000 crore) company in the next three years," said Bhuvnesh Singh, head of India equity research at Barclays Capital.
Singh believes that to reach this target, TCS will have to attempt something that has become one of the greatest challenges for the Indian IT sector: "At $10 billion, the company already has 248,000 employees. To be $20 billion in the next five years, it will need to break the linear business model." What Singh is referring to is a de-linking of growth from a comparable rate of growth in headcount.
Even Chandrasekaran admits as much. "The traditional model will grow but I have to get the non-linear model to grow faster," he says.
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Dreaming big: What TCS plans to do now
Revenues from TCS's non-linear initiative have hit 10 per cent, which means that it is already a $1-billion unit.
This includes cloud-based offerings, targeted at SMEs and priced on a subscription-based model, which provides hardware, networks and software and services; a BPO platform , vertically-focused, with standardised processes; and 'Bank in a box', based on the company's banking product, BaNCS. A closer look reveals that non-linear growth is primarily being driven by the BPO platform.
BPO platform growth has come courtesy of a few acquisitions. Diligenta, its UK subsidiary, was created in 2006 by acquiring the life and pension operations of Phenoix Group (previously known as Pearl Group).
Revenues from TCS's non-linear initiative have hit 10 per cent, which means that it is already a $1-billion unit. This includes cloud-based offerings, targeted at SMEs and priced on a subscription-based model, which provides hardware, networks and software and services; a BPO platform , vertically-focused, with standardised processes; and 'Bank in a box', based on the company's banking product, BaNCS. A closer look reveals that non-linear growth is primarily being driven by the BPO platform. BPO platform growth has come courtesy of a few acquisitions. Diligenta, its UK subsidiary, was created in 2006 by acquiring the life and pension operations of Phenoix Group (previously known as Pearl Group).Click NEXT to read more...
Dreaming big: What TCS plans to do now
It hasn't been easy making it work, though. For more than four years, this unit reported losses, but the company maintained that it (Diligenta) is a long-term investment that will substantially alter the competitive landscape of the life and pensions market in the UK.
The UK has in fact turned out to be a happy hunting ground for TCS. Not only did the company bag one of the largest deals there, from Friends Life worth $2.2 billion, but also snagged one from the Personal Accounts Delivery Authority for its NEST Scheme.
The PADA deal is also based on the intellectual property (IP) of the Diligenta platform, with some level of customisation for the client. Winning the PADA deal worth 𧼐 million was a coup, since TCS managed to best competitors such as Arbejdsmarkedet Tillaegspension (ATP) Group, Great-West Retirement Services (Europe) and Logica UK.
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Dreaming big: What TCS plans to do now
"Many companies have tried to do this but have failed. PADA, while a risk, is based on our intellectual property. We had to modify and customise it, but the core capability is in-house," explained Chandrasekaran.
The domestic market is another story. TCS is the only IT services firm that serves hundreds of millions of citizens as it is a services provider to organisations like the National Securities Depository Ltd, the Passport Seva Project and the NREGA. "It's not about technology," said Chandrasekaran. "We know how to manage a large deal. If we can do it in India we can replicate them," he added.
Yet, despite its triumphs in the UK, dealmaking, in the wake of the 2008 recession, is getting tougher for the industry.
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Dreaming big: What TCS plans to do now
IT spends have taken a hit. For FY13, Nasscom has already envisioned a much lower growth rate of 11-14 per cent for the industry. Then, there's the fact that BFSI, one of the largest verticals for Indian IT players, has been under pressure.
TCS has other challenges. By Chandrasekaran's own admission, emerging markets, which contribute 17-18 per cent of the company's revenue, still do not offer a predictable and annual revenue stream. Hence the business does not have predictability.
China, which is a big market for the company, has been a tough nut to crack. "China is a solutions-oriented market and that will be our strategy too. I think services will remain with some mid-cap to large local companies. But more importantly I need to scale there. We want to have a base of 25,000 employees," said Chandrasekaran.
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Dreaming big: What TCS plans to do now
Therefore, Europe becomes a crucial source of business for TCS, and at a time when the region is going through difficult times. Yet, ironically, this plays to TCS's strengths.
Analyst and industry players all concur that the uncertainty in Europe will drive up offshoring budgets among companies, who so far have had a conservative approach to sending jobs abroad.
"Demand for offshore IT services is healthy in Europe and should increase significantly over the coming years, especially across continental Europe where many large companies need to lower costs, adjust their operating models to new competitive realities, and hedge their talent risks," said Peter Schumacher, CEO of Value Leadership Group, an offshore advisory firm.
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Dreaming big: What TCS plans to do now
Then, there's the fact that TCS simply has the best reputation for being able to get the job done, compared to peers in the Indian IT sector.
"The key new markets here are continental Europe and Germany, in particular. TCS is the first choice amongst the offshore IT services firms and is seen as being easier to engage and work with, when compared with some offshore peers," added Schumacher.
Also, in terms of diversity of offerings, TCS has the reputation of being ahead of its peers. "Cognizant might be growing fast but they do not have the canvas that TCS has in terms of its presence in verticals along with marquis clients, as well as a global delivery footprint," said Sudin Apte, principal analyst and CEO, Offshore Insights.
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Dreaming big: What TCS plans to do now
TCS has also invested in initiatives like automation, productivity efficiency, creating IP and domain capability," he added.
Finally, Chandrasekaran himself has dived into the fray by playing an active role in the client acquisition process. "This is resonating positively with buyers and is seen by them as a powerful differentiator," says Schumacher.
This is exactly what a leader needs to do in order to achieve his outsized ambitions.
