Interview - S Ramadorai - CEO Tata Consultancy Services

(DNA 27/05/2006) Mumbai - Information technology is one industry where Indian companies are giving global majors an exhausting run for their money — and even pipping them at their game. However, the hurdles are likely to mount. Tata Consultancy Services (TCS) chief executive officer S Ramadorai speaks to Praveena Sharma on the changing scenario

With the imminent shortage of skills and rising salaries eroding the cost-advantage for Indian IT companies, how are they coping?

Any business model which is based purely on cost-arbitrage is not sustainable. Hence companies such as TCS have to engage with the clients at a strategic level, use our vast domain and technology knowledge to address the pain points of the customer, thereby enhance the business value for them. As an integrated full-services player in the global IT space, TCS is looking at developing its business around five growth engines — engineering services, infrastructure services, asset leveraging, platform-based business process outsourcing (BPO) and consulting, in addition to traditional IT services. These growth engines have the potential to grow and help align TCS strategically to cater to the business needs of the clients.

As IT-spend around the world rises, and the size of the addressable pie gets larger, TCS’ strategic moves on mergers and acquisition (M&A) front is filling key gaps in our portfolio of offering, adding muscle to our global capabilities and strengthening our ability to seize new opportunities in the marketplace - at home and abroad.

With rising operational costs, how are companies sustaining their margins in fixed-price deals?
Indian companies are making a shift to the higher end of the value chain through a host of services like consultancy. Moreover, we are building our own intellectual property (IP) constantly and creating re-usable frameworks, tool-sets and methodologies, which l help TCS maintain its margins in fixed price deals.

Besides, there is a tremendous potential to cross-sell higher value services to these customers. Indian IT services firms will have to slowly build a variant of the hybrid business model mindset to leverage existing potential. The hybrid model includes value offering elements in the services landscape which go beyond cost.

How competitive are they in the high-end segment?
The ABN Amro deal which was won predominantly by TCS positioned the Indian IT sector in the global play. Today, Indian companies are part of the boardroom discussion on mega deals that are coming to the market.

Are Indian companies enhancing their presence in the over $10 million deal market? How competitive are the Indian companies in this segment?
As a strategy, we want to go after larger deals. Nobody can afford to throw away an ABN Amro kind of contract, which gives us a sustained revenue stream, even if, for argument’s sake, it drops the margins by one percentage point. Since the revenue stream is guaranteed, we can make up by operational efficiencies.

Finally, using this volume contract as a base, we can sell the client a differentiated range of services like assurance and consulting that come under a different rate structure.

Aren’t multinationals ramping up operations a threat?
We welcome any type of competition and given our track record with clients (more than 95% of our business is repeat business from customers), we are more than capable of managing any tightness in the labour market. Besides, it is important to remember that our deep academic relationships in India and abroad give us the ability to attract and retain the best talent, evident from our less than 10% attrition rate, compared with an industry average of about 15%.

But MNCs are moving most of their work offshore with Indian delivery centres?
Competition has definitely increased in the last few years. However, most of the MNCs are still scaling up, and the India delivery is not the dominant story for most of them. Besides, having invented the off-shore model, we are always a step ahead of competition.

Will India be able to produce the huge people requirement in the IT industry in the next five years? Or would you have to look outwards to meet your workforce needs?
The Nasscom-McKinsey report released last year envisages that the IT/BPO sector will create 1.6 million knowledge professionals and give indirect employment to another 6.5 million people by 2010. The IT services sector will require 1,50,000 employees while the BPO sector will require 3,50,000 trained personnel.

Industry players are already recognising this challenge and working with increasing number of universities to enhance their quality and make their students aligned to the industry needs. Nasscom’s IT workforce development programme initiated in early 2004, endeavours to bridge the demand-supply gap of knowledge workers by encouraging industry-academia partnerships. Nasscom is focussing on training students and faculty members of tier II colleges and universities as well as students from cities like Lucknow, Guwahati and Bhubaneshwar.

What is your outlook for the IT industry over the next five years? What new trends are likely to set in?
Technology usage is slowly moving from being pre-dominantly PC-based to newer outlets like a cell phone or a personal digital assistant (PDA). Faster and cheaper telecommunications will only accelerate this trend and lead to quicker adoption of the “software-as-a-service” model. Widespread wireline and wireless telecom connectivity and simple devices, have a big role to play in increasing the penetration of technology in the semi-urban and rural areas, and touching the lives of more people.

IT services will grow slower because the base is high, but BPO, consulting, engineering and infrastructure services will grow faster. Engineering and industrial solutions are other opportunities. These are all at various stages of maturity from the customers’ perspective and also reflect what is possible from an offsite/offshore location. According to Nasscom, the offshore IT and BPO industries are expected to grow at a CAGR of 28% over the next five years, with IT growing at 25% CAGR and BPO at 37%.