Moneycontrol
Feb 12, 2013 08:15 PM IST | Source: CNBC-TV18

Outsourcing to drive IT industry ahead: TCS's Mahalingam

Looking back at an illustrated career in the IT industry, Mahalingam feels there is tremendous scope for outsourcing in the world and India is going to come up as a favoured destination for it.


The journey of Tata Consultancy Services (TCS) to becoming India's largest IT company crossing USD 10 billion of revenues has been an interesting one. Names like that of the current CFO of TCS, S Mahalingam are literally synonymous to the journey itself. Mahalingam will be retiring soon and he will be succeeded by Rajesh Gopinathan as the next CFO of the company.


Looking back at an illustrated career in the IT industry, Mahalingam feels there is tremendous scope for outsourcing in the world and India is going to come up as a favoured destination for it. Therefore, the need of the hour remains adapting to new technologies, he stated.


Here is the edited transcript of the interview on CNBC-TV18.


Q: You have been in the company for over 42 years. You have been serving at the helm, in the position of the CFO since 2003. How has the journey been?


A: Obviously the institution is part of you when you work that long. But, the interesting thing in my journey from 1972-2013 has been that I have done different types of jobs.


Q: From HR, to marketing, you have been based out of New York at one point. It has been a wide gamut of operations.


A: I started life as a programmer, though I had qualified as a Chartered Account and thereafter moved to system design, worked at the initial projects for overseas customers to setting up offices, selling, setting up delivery centres, have been involved in process, education, HR and in the last 10 years, served as the CFO of TCS. It has been a big journey.


TCS itself has changed quite a bit because when I joined in 1970 it was an obscured, unknown kind of organization. Then in 2004 we became a publicly listed company as well and then the last 10 years has been a very interesting growth story for TCS.


Q: You have seen TCS through the ups and downs and the highs and lows and not just that, you have seen the IT industry evolving. As we go ahead, what do you think in the next 10 years, in fact National Association of Software and Services Companies (NASSCOM) has set out a committee which will be looking at the roadmap for India till 2020, your sense about what we are prepared for now considering the kind of waves that Indian IT industry is creating?


A: Outsourcing in the IT field has become a strategic imperative for any company in the world. There are two reasons for that, one is technology keeps changing and therefore their own systems have to undergo a lot of changes which require a lot of work and so on. The second one is that IT budgets had traditionally been going up all the time and therefore, there is a need to look at cost management and that is where outsourcing certainly to a destination like India or to an offshore destination helps the whole process.


I do not think that will get reversed. From my own perspective, I see that the demand for our type of services will continue to go up. The reason I am saying it is because of two reasons. Some of the geographies, for instance North America, UK and some of the English speaking countries were the first one to start off outsourcing and have seen the benefit of it.


There are many other places which are advanced, for instance, Continental Europe where you will find that it is going to go up substantially. In Asia Pacific you have these two large economies like Japan and China other than Australia. Australia is already developed in outsourcing and you also have the emerging area of South America as well as Africa. That is going to come up in the meanwhile. So there is a huge increase that is going to take place.


In industries we have seen computerization. It has been significant in banking, insurance and to some extent, telecom. Now, we are seeing the big revolution that is taking place in retail because of mobile. There are so many other things that are taking place. If you factor these to the unpenetrated industries and unexploited geographies, you have got a huge scope and as of now, there does not seem to be any competitor to India in providing those services.


Therefore, I see that there is definitely going to be continuous growth in the outsourcing market. We will be able to exploit that. We will be able to do very well if we do two things. One is we adapt to newer technologies as we come along.


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Q: For example would this be digitalization, big data?


A: The big move these days is big data because you want the analytics. You want to tap the customer preferences in a nuanced fashion rather than just addressing all needs of customers and so on. There are all kinds of things that are coming out of big data. Reach itself is becoming very important.


How do you reach? Mobility is becoming very, very critical, personalization or improving the customer experience itself is becoming extremely important along with social networking because no longer is advertising the only way to go ahead. Word of mouth is really becoming a very important way and how do you tap into those kinds of opportunities is going to be very critical.
 
Equally, I think knowledge distribution is also going to be a very, very important thing. You take the revolutions in online education and so on, there are different types of new technologies and we have to adapt to them.


Q: We have been waiting for an acquisition from TCS for quite some time. Specifically, will we see something happening in 2013?


A: No, I cannot answer the question. The basic thing which we have always defined is that we need to accelerate. We would like to see accelerated growth and that will come through two things, one is there are certain regions where we are not a significant player and we have talked about places like Germany, Japan, France along with countries which are significant economic powers but, we have not been a significant player there. Therefore, there is a need to expand our reach in those places.


The second one that we have talked about is intellectual property which places us in a different footing. As an organisation, we are a very careful organisation. We try and make sure that anything that we spend on produces value and so on. So, when you look at acquisitions, if it makes sense for a strong organisation like TCS we can always find the money.


Q: Let me talk to you about the deal pipeline. In the last two years, the commentary on deal pipeline has been cautious but, in the last one month we have seen research firms, analysts and a couple of companies indicating that 2013 will see a uptick, if not a significant uptick we could see at least between 2-5 percent or 2-4 percent. What is your sense from the talks you have had with clients?


A: We are interested to the extent of the budget that a customer is allocating for outsourcing. For instance, the budget of the customer could remain the same but he might divert it from hardware or communication devices into software or he might divert it from the normal software to outsourced software.


So, to us, what is important is the outsourced software portion and there we find that customers are thinking of increasing spends.


Q: By how much?


A: The percentage is very difficult to answer because it depends on the stage of the organisation. What is evident now is that people have spent very little in technology introduction, on newer technology post 2008. They were in a cost containment mode, budget containment mode but, they feel that they have to do that.


Secondly, they would also like to use outsourcing as a higher lever for the purpose of extracting advantages and so on. It could be a figure of 2-4 percent. I think it will probably be that or more but, it is not going to be a tight budget environment as far as CY13 is concerned.


Q: Will Europe in 2013 be a driver for the Indian IT industry?


A: Europe itself is made up of different parts, although the European Union would like to call themselves one unit and so on. We deal largely with central and northern Europe. We deal with Benelux countries, Nordic countries, Germany and Switzerland which are the four large markets that we have.


If you really look at them, the companies are extremely strong there and they continue to spend. They are spending a fair amount of money on technology and so on. It is companies in some of the southern pockets that you have issues with.


Q: In US there has been a relative amount of positive commentary after the new government came into place. We heard about the immigration reforms that are expected to come, although it is still in introductory stages. There is a proposal where H1B cap should be increased from USD 65000 to over 1.15 lakh, how are these immigration reforms placed? If they actually do go through, will this bring a positive impact on Indian IT as a whole?


A: From a movement of people which is very critical for companies to get the benefit, these are extremely good steps. What will happen as we go along is that we will establish even larger facilities in the United States and other countries and because there will be a lot of locals, H1B visa relaxation and so on, it gives us the capability to address the immediate needs.


Q: But US clients as a whole, are they now gradually more positive about technology, are you seeing an uptick there?


A: Across sectors, even in the mature sectors like banking there are a lot of things that are driving it including changing the customer experience, the regulatory changes that are coming in and so there are all kinds of drivers which are essentially improving the growth prospects in these mature markets as well.


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Q: Pricing trajectory has been fairly volatile. You have been at the helm of things and when it comes to pricing, maintaining costs, maintaining margins, maintaining client trajectory, you have been talking about pricing remaining steady at the current levels, how is TCS working to maintain pricing and keep pricing for the client steady?


A: You need to have a certain level of pricing as a positional statement. It will differ from country to country and so on. From middle of 2009 we have seen very little price reduction coming in. Though it was a rate lower than what it used to be in 2008, I accept that it will remain at this level. No one will really talk in terms of increasing prices at this point in time.


Q: Last year, considering there was of course a rupee fluctuation owing to the benefit in foreign exchange, some IT vendors gave out discounts to clients. Did TCS also do that and now that rupee is seeing a certain amount of strengthening, will that impact numbers?


A: No. We did not give any price reduction because of currency. Currency is a very volatile issue. Essentially, who is going to take the risk, is it the customer or is it TCS? And we have traditionally taken that risk. We did not pass on anything.


Q: TCS is well placed in terms of hedging as far as the volatility is concerned?


A: We always hedge.


Q: What would your advice be to Rajesh as he takes over in terms of maintaining margins, handling the cost pressures, handling the global economic scenario which still is turbulent to an extent?


A: Rajesh has been an integral part of the whole team. Certainly, if you take the last seven, eight years he has been a very important part and in the last three years he has directly been working with me. So, much of what we have done from a pricing volume, looking at the portfolio, determining which are healthy which are not healthy, what do we have to do and so on will be a continuity. All of us have been working together on that.


The challenge is really going to be in terms of how we leverage a lot of investments that we have made. There are two types of investments that we have made. One is the non-linear initiatives. We have made a lot of investments. The second one is there are certain geographies where we are not a significant player but we have created an office, we have created facilities.


Therefore, how do we increase margin and so on. What kind of help do we need to give to each of these to ensure that they realise their potential is going to be the critical factor. The resource allocation with regards to looking at the drivers, seeing whether they are going in the right direction, working with N Chandrasekaran in terms of ensuring that we are able to allocate the right resources for some of these critical ones are going to be his issues.


Q: Was Rajesh your first choice when choosing your successor?


A: We went through a detailed process. Obviously, you look at candidates. He was very good and he is an extraordinarily capable person.


Q: TCS is well placed to beat National Association of Software and Services Companies (NASSCOMs) forecast of 11 percent in FY13?


A: If you just take the first nine months and do the arithmetic, you would find that we have done better than that. There is no question on that as far as FY13 is concerned. I think in FY14 as well TCS needs to do better than the NASSCOM estimates because NASSCOM estimates are based on different players and the average of the industry. Therefore, large companies such as TCS will have to do better.


Q: Any issues that you think TCS will face as far as the global environment is concerned, competition from larger players which have a software and hardware presence?


A: These competitions have always been there. I think they are getting more intense. Earlier, our business model was not being used by them. They had a different business model. We had a different business model and therefore, the competition territory was different.


If a person thought that they ought to do outsourcing with India, they were Indian companies. Otherwise, they were larger global companies and so on. Now everything has converged. It is a competition because some of these companies have upwards of 100,000 people in India itself. They are very significant players and they have a lot of technology as well which they use for the purpose of providing their services. That competition is something which TCS has faced exceedingly well, but it cannot be complacent. Obviously, when you have different margin orientation you are going to invite competition.


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Q: Your last words to the TCS management for the next five years?


A: TCS has been a journey. It has been a pioneer. It has been a technology leader. It has set many of the examples for this industry itself and it has continued to be a leader. That has come about as a result of a lot of technology orientation, phenomenal amount of geographical dispersal that we have had and looking after people exceedingly well.


If you take the leadership of TCS, they are all people who have been with us for 20 years and above, are very talented and exceedingly technology oriented. I think if we continue to essentially focus on technology, if we continue to serve customers as well as we are doing now and look after our employees extremely well, as a person who has been involved in it for 42 years, I see the amount of passion that has gone into each of this.
 
All of us have felt very passionately for that. I think that has really marked a difference between TCS and many other organizations. That passion is the one that is critical. Chandra is an extremely energetic leader with a phenomenal amount of technological capability and customer contact and employee closeness. The leadership will ensure that it gets taken care of, but we cannot be complacent.


Q: Your plan now going forward, would you be moving to Chennai? You are away from the rat race, what is the plan? Your family must be very happy.


A: I will reflect for a period of time. There are a lot of things that are there. These years had given me a phenomenal amount of experience. There will obviously be a lot of sharing that one can do.


Q: Would you stick around, from an advisory point of view with TCS with Tata Group?


A: There will definitely be a relationship with TCS in some form. It will not be an executive relationship because I think I have done that for quite a long period of time. But, obviously there are lots of areas that I have been involved in. So we will see how that goes.


Q: But, it is going to be more reflective and finally you can get some time to yourself. Get some time to relax.

A: Correct. I hopefully do some writing. Let us see what happens.

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