Financial Daily from THE HINDU group of publications
Monday, Jan 17, 2005
Info-Tech - Interview
`Expect more smaller, measurable deals'
Mr. S. Ramadorai, CEO and MD, Tata Consutancy Services
Chennai , Jan. 16
THE CEO and MD of TCS won't skip a trip to Chennai in December or January if he can help it. Sure, Chennai is an important centre for the company. But that's not the only reason he is here at that time. The music season is another attraction.
This year, however, he was in town for a sad reason - his father had passed away. Mr S. Ramadorai still took some time out to meet with Business Line, a day after TCS' December 2004 quarter results were announced.
Excerpts from the conversation:
In the last 10 quarters or so, IT software services companies have seen client additions stand barely above client losses. TCS, for its December '04 quarter, added 72 clients, but the net addition was only 16? Is there a pattern here?
There is no pattern. Certain projects get completed with a client. It might be a one-off project or the customer (wants to) come back later. Or, after N number of years, a particular turnkey project comes to an end. It is the nature of the project and the relationship (that tells on client additions) - there are some volume-based long-term deals that last two, three or four years.
If a project is based on SAP or is an HR implementation - these are time bound, too.
Since the IT spending slump in 2000, has the complexity of projects you execute increased?
Absolutely. Our ability to execute complex projects is a differentiator. The domestic business is important. It teaches you to do systems integration, a nationwide, NSE or SBI type of project. It teaches you important project management skills and gives you the ability to handle multiple technologies. We take these to address complexity in the markets outside.
With increasing complexity, where do you see IT companies in five years? Some companies with manpower already in tens of thousands are predicting to double it soon. Collectively, this could mean a big deal for the country.
Size or scale is one issue. We do want a number of large and formidable companies. But size is not just the only parameter. If you deliver value in terms of verticals or the kind of service you offer, that adds as much to the industry.
TCS has indicated that billing rates have been good and that high-end projects have contributed to the margins. What exactly are high-end projects?
If you purely support some application with some 100 or 300 people, that is one type of project. On the other hand, you could architect a complete solution for a telecom or retail client.
For example, with data management and data warehousing, using customer information, you can forecast end-customer choice (for your client).
Product innovation comes from understanding the end-customer. The ability to dissect data and understand customers, help clients reengineer by incorporating technology, is high-end work.
Designing part of an engine or a semiconductor chip is high-end work. Process consulting also belongs to that end of the spectrum. The ability to measure the level of a client's maturity for a process and taking him to the next level is high-end work.
Are there several such projects on? What is their contribution to revenue?
To start with, they will be very small. The challenge is to bring in a lot of this and drive this - essentially to have a company within the larger company.
The challenge for companies our size is speed and innovation. Today, it is a small percentage of our revenues but the whole direction of the company will be to enhance and create an atmosphere of entrepreneurship inside so that such projects can be pursued.
We also hear now that deals of big sizes from clients are all out. Aren't even $100-million deals to be expected?
I won't agree with that fully. There are still such deals. But the $1-billion and $2-billion deals may not happen. Expect more number of sizeable deals where measurements and delivery are possible in a shorter time frame. Customers want to break down problems into several intermediate steps. Each step must relate to business in some way.
Are you comfortable with only small deals around?
We are. The point is to make a $1-m client into a $5-m client, (and so on). How do you satisfy them so that repeat business comes and they also refer (you) to other customers? How you build people and retain your culture and rise in the value chain is another challenge.
Given that all customers want smaller measurable projects, in future, where will the chunk of revenues come from? From a clutch of big, existing clients or from numerous new clients who come in and exit frequently?
Newer or smaller geographies such as China, Latin America or Europe will see smaller and newer clients. The opposite would happen in mature markets such as the UK and the US. India is a small market and we want to see growth in this market. You have to understand market characteristics... so a combination of both trends is expected.
News of a few prospective deals has been doing the rounds. ABN Amro's is one. We hear that TCS has even sent an HR team to Amsterdam. An update?
We would not like to comment on prospects or proposals underway. We will certainly focus on such opportunities.
On existing clients… what work is TCS actually doing for Ferrari?
We will broadcast (details) at an appropriate stage. Our work is in engineering design and deals with certain aspects of performance characteristics and performance improvement.
When a driver has to respond in real time, certain performance characteristics such as tyre pressure or fuel, our work in embedded soft and in certain aero dynamic aspects (would help him).
We are at an early stage of conceptualising; a team from India is working with Ferrari and scoping out work.
Is there any change in your forward cover policy due to the rupee's rapid appreciation?
We have a strong governance model with regard to hedging. Hedging is only to protect revenues and not a business for us. We keep tracking it regularly. At the end of the day, market forces cannot be played with for too long. If the rupee appreciates to 41 or 42 to the dollar, then so be it. Industry has to accept it.
At what rate has the company taken forward cover?
Rs 45.13 (average) to the dollar.
TCS had indicated that it is comfortable with the status on operating margins. Is this sustainable?
The challenge lies in how long we can sustain it. Three years, five years, or longer? Even in technology forecasting, we have not looked at anything beyond 18 months. Industry dynamics and competency requirements change so rapidly here, it is better to focus on business and create value. Then, we will automatically do well. I shouldn't be worried about whether margin is increasing or decreasing. If you create value or if you can absorb and demonstrate a competency, you can command a price.
IBM has exited the PC business. The rest of the industry expects it to devote freed-up resources to software and services. Particularly in India, the feeling is that we could see some more action from IBM. With the presence of the likes of Accenture, how much of a threat are these players to you?
We have been in this industry for 36 years. It's like we have been playing cricket forever. Take a person good at baseball and ask him to play cricket…. (smiles). Sure, we welcome them and want them here, because growth should be all around. For, India's share of grabbing total IT industry spend is still very small.
Being everything to everybody defined an IT biggie. Now, there is talk about modular outsourcing. What is your view?
Look at TCS and its history of 37 years. We started as a BPO organisation. We called it data centres at the time. We processed data for others, did inter-bank reconciliation, share processing, telephone directory services and the likes.
Then the share market opened, so we managed initial offerings, including manual processes for share transfers, address changes and the likes. We then automated it, so it became BPO.
We trained our people in hardware, operations, software support. Then came opportunities in consulting and IT related services. All this has given us capability in IT services, BPO, infrastructure management, packaged services.
We also brought Oracle as a relational database to India. We still distribute it as we do for Unigraphics and Microsoft products. Widest possible offerings even with partnerships is critical.
TCS has been actively opening development centres in countries such as Uruguay. Will we see a time when a significant portion of manpower will be overseas and Indian centres will have skeletal staff? A case of Indian companies selling outside but also programming code outside…?
Global competency or delivery centres are a must to mitigate risk. Also, some work has to be done in the same time zone as clients are. Uruguary offers that for the American markets. China offers it for parts of Asia. Finally, such centres help bridge language and cultural differences. But there won't be a depletion of resources used in India.
In the last seven years as CEO, has your fundamental challenge changed?
The fundamental challenge when I came in was: in a growing organisation, how do I empower people. How do you create leaders internally? For, all decisions cannot be taken at the highest level. You can never run a company of 40,000 with one person or a set of people. Creating a distributed organisation with necessary infrastructure where real time data and decision making is possible, where people feel they are empowered and take decisions in a completely empowered atmosphere.
If we now run the company the way we did it seven, eight, or 10 years ago, we would have disappeared.
In the last five years, the IT industry has changed significantly, with few being able predict nature or direction of growth. Any predictions for five years from now?
It is important to gauge the impact of Open Source software and Microsoft's impact on the enterprise world. The impact of mobile devices is phenomenal. One billion mobile phones are to be sold globally this year. Indian businesses would miss the bus if they don't start thinking of delivering their services through a new medium.
Then comes the question: Are business processes engineered to support such offerings for a service provider? Then, collaborative industry practices will become common. For instance, the retail industry, for design purposes will use engineering design competency, unlike in the past, when someone else did it. Likewise, the engineering dimension of lean manufacturing is coming into financial services.
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