Nov 24, 2012 02:16 PM IST | Source: CNBC-TV18

No acquisition plans in China; positive on Europe ops: TCS

Out performing some of biggest names in IT, Tata Consultancy Services (TCS) has emerged as the poster boy in the country. N Chandrasekaran, CEO, TCS, has been credited for transforming TCS – India’s largest IT services company into an even bigger juggernaut.

Out performing some of biggest names in IT, Tata Consultancy Services (TCS) has emerged as the poster boy in the country. N Chandrasekaran, CEO, TCS, has been credited for transforming TCS – India's largest IT services company into an even bigger juggernaut. CNBC-TV18 chats exclusively with N Chandrasekaran to find out his success formula.

Below is the edited transcript of his interview to CNBC-TV18.

"All our initiatives are coming out of this paradigm," says N Chandrasekaran.

The 48-year old CEO recently won the stations Asia Business Leader Award admits that the turbulent business environment has made the job harder.

"There have been a large number of uncertainties; there have been issues with respect to economy, natural calamities, issues of different kinds, and coping with them is probably one of the biggest challenges," says N Chandrasekaran.

A company man for the past 25 years, Chandra has been known by its employees to streamline TCS into a sleek machine, restructuring this behemoth into 23 vertical-led units, improving decision making down the line and making each unit more accountable.

"In terms of number of people, TCS is a very large company, with about 2,50,000 professionals. I felt the need to have lot of agility. My view was that we can respond to the market better, be agile and grow if we have a mini organization setup with around 5,000 to 8,000 employees, a CEO, CFO and HR officers as a management team that can run the unit efficiently," says Chandrasekaran. 

Chandrasekaran also chased new markets such as small and medium sized enterprises.

Chandrasekaran: But we quite didn’t know how to chase small and medium sized enterprises.

Q: Why was that?

Chandrasekaran: Because our company serves the Fortune 500, Fortune 1000 companies so all our customers are leaders in their respective industry. The deal sizes become very smaller when we go to small and medium business.

Q: You need to come up with different business models?

Chandrasekaran: Yes.

Q: Like what?

Chandrasekaran: There are some problems. Small and medium enterprise doesn't have money to invest - they don't like large capex, they cannot attract people and anyone who serves that market typically has a solution for large enterprises or kind of downsizes those solutions to offer it to small and medium businesses.

Considering all these factors we though if we can come up with the cloud model where we can have a standardised set of solutions for small and medium businesses on an operating cash flow basis then it would be attractive.

Under his leadership TCS' market value has doubled since 2009 and revenue jumped 24 percent in 2011 to USD 10 billion, outperforming its closest rival Wipro and Infosys.

Q: Despite global volatility, TCS has managed to post strong growth and earnings when there are question marks about technology spending coming from the US and Europe. How have you mitigated the headwinds, what are you doing right?

Chandrasekaran: The customer segment that we operate they are going through tough times, but at the same time they are investing in technology primarily due two reasons; first, they are revenue efficiencies and typically driving efficiency involves investing in technology to get better returns. Second, the rate of change in technology is dramatic.

Technologies like cloud paradigm, mobility and big data are fast evolving and it becomes extremely important for companies to re-imagine their businesses, processes in light of these technologies. So we are aligning ourselves with these two requirements and that’s throwing up a lot of opportunities and resulting in growth.

Q: Your rivals have expressed concerns about the outlook. Do you think you can continue to outperform the industry?

Chandrasekaran: I don't like to predict about our out performance but we will do that. The tax spending will continue, the overall pie of the tech industry is increasing. Second, what we do as a company within that market continues to expand because we are investing in new areas and investing innovation or creating new capabilities what we are able to do today is definitely different and these things are driving growth fast.

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Q: Are contracts taking a longer time to materialize? Is the uncertainty forcing a lot of your clients to delay the decision making?

Chandrasekaran: Last year we felt that the contracts were taking longer and the decision making cycles were little longer than usual. Recently, we found that the contracts are getting closed normally and decision making is happening.

Q: How flexible do you have to be in this environment in terms of pricing? How far would you go to retain your customers?

Chandrasekaran: Philosophically, this is an industry which requires you to operate at a high margin primarily because the rate at which the technology is changing is getting faster and faster and faster. If we want to be able to be ahead of the curve and want to have solutions for our customers in a way that we can be proactive, in a way that we can be addressing them we need to. So, it requires us to operate at higher margin.

Q:  With high margins, what kind of margins mean?

Chandrasekaran: We are comfortable operating around 27 percent operating margin. We like to operate around that number and that gives us the ability and flexibility to be able to invest and so margin is important. We need to be very careful on how we play in market which is commoditised and there will be price pressure. There will not price pressure if we operate in area which is value adding.

Q: So, you have been able to increase your prices?

Chandrasekaran: We have been able to maintain prices.

Q: So, more or less has the price stabilised?

Chandrasekaran: Yes.

Q: Like many of your rivals you are facing of course a problem of rising wage cost and that is putting pressure on your operating margins. What levers can you use to mitigate these rising cost pressures?

Chandrasekaran: That is precisely the point. We are operating in an industry which is knowledge oriented and talent will be single most important factor, so wages will increase. The levers that we have and one is definitely value basis so that we can charge better, second to come out with services based on our own intellectual property. We call it non-linear business model. Basically, we try and develop intellectual property in areas which are differentiating for clients in each of their domains, we operate in and those will definitely help us to offer services at much higher margin and apart from that there are always operations in the US and other things.

Q: How much do you see wages increase from here?

Chandrasekaran: In the current environment and in the next couple of years it may not be much but India is seeing a wage increase of 5-8 percent over the last three-four years.

Q: TCS is now the largest IT services firm in India. The competition is fierce, you are not only facing global rivals like Accenture and IBM, there are Indian rivals like Infosys and HCL, how big do you want to be in history? Do you have any ambitions of being number one?

Chandrasekaran: You can never say that I want to be number one. When one want to say that he is number one then he needs to follow lot of classes. So being number one is not a goal by itself.

Q: The US is your biggest market; it contributes more than half of your overall revenues. With growth in US looking so weak and all concerns about fiscal cliff, what are you doing to wean off your dependence on the US market?

Chandrasekaran: The US is very resilient and they will see recovery. Yes, there is a fiscal cliff and. Technology will remain to be crucial to overcome many challenges.

Q: Getting visa has been a problem for many Indian IT companies; you plan to set up another software centre in the US, what is your recruitment strategy in the US?

Chandrasekaran: We do two types of recruitment for the US. We recruit laterally based on the projects that we win and the contracts we get, in the different parts of the US. We recruit student from campuses and that number is steadily going up.

Q: Are you hiring local nationals for office centre in the US?

Chandrasekaran: Yes.

Q: Is it mostly a PR exercise for you given the backlash you are seeing on jobs?

Chandrasekaran: Not really, I firmly believe that you can never do anything which is not tied to the business. Anything and everything you do, have to be part of holistic business model. You cannot run a business where you do things which are not tied to the business model. We follow same trend in the UK, Europe, Australia and different parts of the world because we are becoming larger. In Latin America we have close to 9000 local recruits, and we need to undertake these exercises to scale up.

Q: There is crisis in the eurozone, any plans to scale back your investments in Europe?

Chandrasekaran: Not really, Europe is doing well for us because European companies are turning to technology to recover.

Q: Do see opportunity in times of crisis?

Chandrasekaran: Yes. We do work with companies to see how they can recover in this market place.

Q: What is outllook in the eurozone in terms of spending?

Chandrasekaran: The overall IT budgets maybe muted but it depends on what you do. If you are looking at financial services firms, it may be in the area of regulatory compliance. If you take utilities, in the financial service industry many companies are trying to go to a cost structure which is very different, which is outcome based. So we are looking at setting up financial service utilities working with the financial institutions. Those are areas we are looking at.

Q: You are trying to get a foothold into China, but it's a hard market. Why is China such a tough market to crack? What are you doing differently in China?

Chandrasekaran: We are finding it difficult in China. We have six centres in China. We are recruiting people, making investments but we still have not cracked the code.

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Q: Are you confident that you could make headway soon?

Chandrasekaran: It is a long-term bet; we are not expecting to grow dramatically in China in next 12 months. So it is very important, both from a talent point and market point of view to be present in a significant way in China. We are committed to the Chinese market and we will be there for the long-term.

Q: Chinese companies have always done things their own way themselves. How do you change that mindset when it comes to IT outsourcing?

Chandrasekaran: Every market is different and they operate differently. We need to do is to understand how the market operates and create a business market that suits that market place. It is easy to say that that market is difficult, different, they don’t do things this way but the harder it gets, the harder you try.

Q: Are you happy with the current business model that you have in China?

Chandrasekaran: I think we are on the right track. In terms of creating localised centres in different provinces but we still need to work with many domestic Chinese institutions. We have good presence in the financial services industry but we need to start engaging and get clients in different industrial segments in China. For me the proof for success in any market is to have presence with the local companies in a material way.

Q: When do you think that happens for you?

Chandrasekaran: Maybe in the next 3-5 years.

Q: In China, as far as technology is concerned, China is gaining traction in terms of IT know-how. To what extent do you outsource to China?

Chandrasekaran: We do global sourcing in China primarily for our multinational companies, for their China operations or Asia operations.

Q: Do you think it is only a matter of time before China overtakes India, when it comes to IT outsourcing?

Chandrasekaran: I don't see it that way, I see the opportunity for China and India both being very strong. There will be huge demand in the long-term. The number of professionals that will be required with the technology skills will increase. So there is going to be opportunities both for China and India. I don’t think it is one at the cost of the other.

Q: In the last couple of years TCS has embarked on acquisitions at the height of the global financial crisis. TCS acquired the Indian BPO unit of Citibank, followed by USD 2.2 billion Dilligenta. What exactly is your acquisition strategy? What would you like to acquire next?

Chandrasekaran: Acquisition has to be very growth oriented. For TCS it has to add capability in an area where we lack like healthcare or in a market for example in a particular country like Japan or Germany, where our footprint is small, can we do an acquisition to be able to get a size and scale.

Q: What about China is there something you are looking at?

Chandrasekaran: We will grow organically in China, we are not looking at acquisitions.

Q: In Japan and Germany have you found anything that you would be interested to acquire in healthcare?

Chandrasekaran: We keep looking, acquisitions don't happen easily. You need to search for a long time. When you find right target you do it.

Q: You run marathons as you have a family history of diabetes, do you get a lot of your business ideas doing these long runs?

Chandrasekaran: Long distance running has made a huge difference to me as a person. Definitely, I get lots of ideas.

Q: What is your best business idea?

Chandrasekaran: While running, I developed the idea of whole small and medium business, the person running that business was my running partner and we use to talk about the model while running. Running alone gives you a lot of reflective time. Long distance running has been fantastic thing for me.

Q: As CEO your job is to spot future technology trends. What are you betting on as the next big IT adoption?

Chandrasekaran: Analytics – I think the combination of big data, multi channel including mobility, cloud and 4G networks. This combination is just extremely powerful in a way we cannot even imagine. The real-time gathering and analyses of data will throw a lot of insights and you are going to be able to access it or its going to be of any event from occurring.

Q: You are 48 years old and since 1987, TCS has been your first and only job. You started out as a designer, worked your way up towards general management before taking over the CEO job in 2009. How would you describe your leadership and your management style?

Chandrasekaran: I am a team man, develop strong teams, empower people a lot and I am extremely accessible. I am informal in interacting with people; we are on SMS or a phone call anytime. My fundamental philosophy is about helping every employee to realize their potential. I feel that people have huge amount of potential and if the company can be the platform for them to realize their potential and we can do that in a holistic way, not only in terms of the work but also created an environment in which they can holistically have a better experience. I think people will love it and that is what we are trying to do.

Q: Your organization has over 250,000 employees; 23 vertical heads report to you, do you have everything covered to help you stay agile as a company? Is there anything in decision making process that you would like to improve upon?

Chandrasekaran: Every morning I worry about what is it that I have not covered and what is it that I have to worry about and that’s a better way to look at it and there is the list every morning.

Q: What's a list usually like, a long list or a short list?

Chandrasekaran: There are always few items but you never have more than three-four items to look at, and from one-two year perspective I never keep the list more than three or four and from operational perspective you may have a few more but definitely what kind of investments what we want to make both from nonlinear model perspective and from a cloud paradigm perspective.

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Q: You continue to bring in new hire. This year alone you have hired something like 60,000 people and that’s pretty aggressive. How do you make sure given all these global turmoil we are seeing that your hiring strategy will payoff in the long run?

Chandrasekaran: It is important to have right talent and the scale. We do an analysis of the manpower requirement and manage that accordingly.

Q: What is your hiring plan for next year?

Chandrasekaran: We will hire 25,000 fresh graduates from academic institutions. 

Q: 25,000 people from 60,000 this year?

Chandrasekaran: Overall it is 60,000. Of the 60,000, 45,000 were fresh graduates. Next year we will hire 25,000 fresh graduates.

Q: You are scaling that down. Is it because the outlook is looking uncertain, you are cautious?

Chandrasekaran: No, we always start with a particular number and 25,000 is a good number and also because on our scale our utilization can go up. We operate around 81 percent utilization but today we are large enough so we can push our utilization a lot more. So I do not think that we need to keep hiring at the same level.

Q: Looking back any mistakes you have made that you regret it as CEO?

Chandrasekaran: I would have liked the whole nonlinear business to be done much faster. We have been little slower in accelerating. We need to be able to make more investments and better rigor in terms of driving a higher portion of incumbent revenues coming from nonlinear. I am unhappy in this area with what I have done in the last three years.  

Q: You recently won the Asia Business Leader Award presented by CNBC. What advice can you give others on how to drive company successfully?

Chandrasekaran: I think the principles that I have followed are-definitely stay close and stay relevant to customers. That’s where I learned the maximum. Second, build great teams and empower people and be accessible.

Q: In your tenure as CEO of TCS what would you like to achieve, to create a lasting and sustainable company? Do you have a killer strategy?

Chandrasekaran: The strategy is something that will evolve over a period of time. Our goal is to make this company as the best in class company in this industry.

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