TCS Growth Strategy: 6 Things To Know
Between a bicycle and a Lamborghini, the Tata Consultancy Services Ltd. chief picked the two wheeler to describe his company's growth strategy.
"...think about TCS as somebody riding a cycle - you’ve got to keep on moving and you’ve got to make sure that your balance is there. Then you can enjoy the ride and go a long distance, and that's what we're trying to structure ourselves for," said Rajesh Gopinathan, managing director and chief executive officer, in an interview with BloombergQuint.
The conversation on growth strategy at India's largest IT services company was prompted by the recently announced second quarter earnings.
There were a few surprises. While close to consensus estimates, topline growth at 4% constant currency disappointed the top end forecasts. And attrition jumped by over 300 basis points to 11.9%, a big spike, though also an industry trend. Some analysts complained about the lack of any mega deals in Q2. That said, the company has won $15.7 billion in deals in the first half this year or half of what it did in all of FY21. So, it's broadly on track to repeat last year's performance, if not better it, in the second half.
"The structural elements of our business model are only getting stronger," says Gopinathan as he discusses some key elements of the company's growth strategy.
1. Conviction Stronger
Menaka Doshi: Did you think the performance in Q2 was somewhat subpar, or is this what we can expect over the course of the next two quarters?
Rajesh Gopinathan: As it is always said, beauty always lies in the eyes of the beholder and from our perspective, it's been a very strong quarter. When there was significant pessimism out in the market, we were among the first to say that we see demand visibility and we are seeing very strong medium-term growth. It is coming, not just because of a bounce back from the Covid but because it is coming from new investments getting driven by a significantly different technology agenda, which is getting integrated with business model changes.
That trajectory has remained true and it has taken some time for the markets to actually take cognisance of it and to buy into that.
We believe that the trajectory that we are on is the same that we have called out. Our confidence in it and our conviction in it has only become stronger in this quarter.
Coming to the quarter numbers itself - the way to look at it is that if you look at the segmental performance, there is very broad-based growth. The trifecta - BFSI, retail, North America - they are all at multi-year highs in terms of the momentum that we are seeing, and that's a strong one that will sustain. If you look at North America coming back, which is 52% of our revenue, that is also a very big one. The deal wins itself is very healthy because it does not have a single mega deal in there. To put it in perspective, compared on a year-on-year basis, it's up 25% and this will be the nature of the deals. These mega deals, by definition, will be sporadic.
If you look at it from a profitability perspective—the margin—if you look at where the drivers are, our employee costs are reflecting that the forward investments were made in retraining and campus hiring, the employee cost has actually significantly improved. We have some challenges from the attrition that you spoke about which is an industry wide phenomenon. Continuing travel restrictions are increasing our short-term leverage of subcontractor resources.
Those are tactical things that we need to deal with. The structural elements of our business model are only getting stronger.
Menaka Doshi: Europe was not performing at its best this last quarter. You've articulated a bunch of reasons. A large project came to an end. There was enhanced offshoring out of Europe. When does that fix itself?
Rajesh Gopinathan: It will probably be two, three quarters forward. We have got very strong new customer additions and new deal wins this quarter which will take time to play out in the next quarter or two quarters. But getting into Q4 and Q1, Europe should be back to where it was as far as the growth momentum is concerned.
2. Mega Deals Will Be Sporadic
Menaka Doshi: You made a virtue out of not having a mega deal in Q2. But, if you look at the competitive environment, do you think you're doing the big deals as best as you can?
Rajesh Gopinathan: In mega deals, both our appetite and our competitiveness is undiminished.
We are very particular about the nature of that deal. If you look at even the ones that we did over two quarters back, there has to be a strong transformative component into which it is not just the volume. It is the nature of what that scope is that we are focused on and we continue to remain extremely strong in that environment and we are a preferred go-to partner when it comes to large scale, transformative projects.
Menaka Doshi: Accenture has 72 clients of over $100 million each. At TCS there are 50? How do you close that gap?
Rajesh Gopinathan: Our number is 54.
If you compare that on a revenue to revenue and client to client perspective, you will find that we are actually better placed than anybody else in the industry. That actually is a testament to our strategy to invest as a full services provider and having the broadest profile of services, and you will find that it is not just at the 100 million range. At every range of that customer metric, our numbers are steadily increasing.
3. Reimagining The Consulting Business
Menaka Doshi: Consulting is such a big contributor to your larger global peers. But not yours. There was only some improvement over the last couple of years in the contribution to revenue. Then how do you get to that level of pricing or margin?
Rajesh Gopinathan: I would definitely want to build something that is far superior to what the legacy consulting model is.
So, if you look at it, the total value addition—as reflected in the profit that we're able to generate—clearly points out that the legacy consulting business is not a very attractive one. What is required is a complete re-imagination of how we go about it and that is what we are trying to achieve by what we call our ‘Inside-Out Transformative Approach’, where we are expanding from the contextual knowledge that we have and going into the adjacencies of the transformation agenda and participating and co-innovating along with our customers rather than coming in on a top down transformation agenda - which is to try and disrupt the existing setup.
It is a philosophical thought but we are very clear that what we are seeking to achieve is an extension of our business model which has been industry-leading in the past and I believe that there is an opportunity to build out something like that in the future.
Menaka Doshi: That gives you a better entry point maybe into the consulting business, but does that give you scale over a period of time?
Rajesh Gopinathan: It will be a slow build out, absolutely, because it is a step-by-step, salami slicing kind of approach. It is structurally more robust, and much more integrated to our business model. What we are currently seeking more than scale, is breadth of participation.
We are trying to build it out and we are doing these engagements with as many of our customers as possible. Because as we get that breadth of engagement going, it will get deeper into our service portfolio and into our larger account teams and it will give that runway for growth. So, we are in that investment phase where we are seeking greater participation of breadth than the size of scale of digital engagements.
Menaka Doshi: How long will it take to become a significant size? If you can’t give me a number then give me a timeline?
Rajesh Gopinathan: More than the number, see the kinds of examples we are putting with the names of customers in the world, the work we are doing for Openreach, NXP Semiconductors. For each of these we are giving specifics of what we're doing, and the clients are endorsing what we are doing. That is the bigger one, as I said, in seeking participation, that will be seen through a number of customers that we're talking about, rather than this individual size.
4. Talent Crunch: Challenge And Opportunity
Menaka Doshi: Your overall hiring for the full year will be more than earlier estimated. At maybe 78,000 in FY22, versus an earlier estimation of what between 40 to 45,000. Talk me through the talent crunch. Is there an opportunity to it? And how does it play into your costs and margins? When do you think it might resolve itself?
Rajesh Gopinathan: When we started speaking about this demand environment about a year back—and we were a counter industry narrative with that—we called out the strong demand environment that we're seeing in the future. We backed it up by increasing our campus hiring. So what we've done is, we had said 45,000 for the year but we on-boarded those 45,000 people in the first half itself which gives us the space to onboard more in the second half of the year.
We have taken a very structured approach to that capacity addition in line with our own expectation of demand. We also significantly increased our internal training, and we were the ones who went out and said in the pandemic that we are not going to retrench anybody because we believe that this is a passing phase and these are the people that need to be trained and retained as we go forward.
So, a very strong doubling down on our internal talent, retention of the talent, investment into it and then a very strong hiring on campus, these are all in anticipation of the demand.
Now, parts of the industry did not participate in that and therefore there is the significant crunch that you're currently seeing - that everybody is trying to scramble to meet the demand that is there.
Coming to your point as to how long this will last, probably it'll last a few more quarters till the individual supply chains at each of these levels stabilise with the more longer-term hiring. Till then, this extreme movement will continue.
I would think that by the time we get into the middle of next year, that is Q1 and Q2, a bulk of this would be behind us and we will be in a more stable but elevated attrition.
We are currently at about 11.5% on an LTM basis. We have been at 12-13% and we have had a peak of 16% in the past. So, in a high demand environment, 12-13% is something that we have seen in the past. But, this significant increase quarter on quarter will start tapering off in a couple of quarters.
Menaka Doshi: You're preparing us for maybe a worse attrition number, but you're hopeful that it will ease in Q1, Q2 of FY23. How does this hurt your ability to maybe achieve the growth that you want?
Rajesh Gopinathan: Again as I said, having spotted the demand opportunity earlier, having invested in that capacity side, currently, the capacity crunch is not yet impacting our growth momentum.
But our bench is getting squeezed with the kind of attrition that we are seeing and it is not a stable one. So, we are offsetting that by more campus hiring and more tactical, lateral hiring that we are doing. So, currently it is not impacting our ability to meet the demand that is immediately with us. But this is something that we need to be very vigilant on and stay on top of it and that's why the 78,000 comes in.
Menaka Doshi: If you wanted to hire more than let's say 78,000 people is there talent available?
Rajesh Gopinathan: Oh absolutely, we're in a good position to hire. 70% of what we are currently hiring, in fact, more than 70%, is coming to us directly.
And, the investments that we have made in the TCS National Qualifier Test and the platform that we have created, more than 3-3.5 lakh people participate in each of our hiring waves. So, we are still hiring only 1 out of 5, or less, people intending to apply to us.
We have done this in a very digitally transformative way. Even the ones who are near but did not qualify, we go back to them and share with them the areas where they were short on because they are interested in working for us, we're interested in them and then they use the opportunity to skill themselves. We are very interested in bringing them on. So, the digital platform that we’ve created, that's a hugely powerful data set that we have which we are constantly mining. That’s why we are able to, midway through the year, go from 45,000 to 75,000 - because we have the pool available with us.
Menaka Doshi: I'm looking at revenue per employee. Accenture has 6,24,000 employees and a total revenue of $50 billion in FY21. You're at 5,28,748 employees with an estimated total revenue of around $25-26 billion this year. Does that ratio change anytime in the near term, over the next three to five years?
Rajesh Gopinathan: That is not a metric that we target per se. As I said, in most areas you will think of value addition per employee. And, the economic value addition per employee that we have is actually much higher or almost, I would say 70-80% higher than the next largest competitor. That's a more important metric because the key resource for us is the employee and for each employee, are we able to create that economic value? That is the key question for us, and we have built our model to maximise that.
Menaka Doshi: Doesn’t that have a direct linkage to costs - wages or remuneration per employee?
Rajesh Gopinathan: It is a free market. Everybody is in the same space, in the same operating model.
Our focus is to be in the business spaces where the value addition is the most and that's the metric that we are tracking and within that spectrum, we believe that the adjacencies that we're seeking, on the growth and transformation front, will actually continue to help us deliver on that. That's the investment that we are making. So, the metric that we're chasing is a different point.
5. No Aggressive M&A Strategy
Menaka Doshi: How many businesses have you acquired in the last 12 months?
Rajesh Gopinathan: In the last 12 months? None.
Menaka Doshi: Do you think you might be missing out on the growth opportunity by choosing not to have an aggressive inorganic strategy?
Rajesh Gopinathan: Our company has been characterised by building out a strategy that is unique in the industry and executing diligently on it. So, there will be different strategies and different philosophies that different people will follow. I don't see us significantly going away from our strategy and our philosophy, considering the success and value creation that we have actually enjoyed.
Having said that, ours is not 100% organic strategy. We are very selective but we are very successful in our inorganic strategies. We are careful about what asset we want and what price we're ready to pay for it. As long as it meets those two criteria, we are very keen to pick it up. Our strategies are very deliberate, very disciplined, inorganic strategies - it is different than others, and we are quite happy with where we are, and I'm sure others are too.
Menaka Doshi: I don't mean to make this an onerous comparison but how else can one benchmark a company of your size, except to look at a global player that's substantially larger but is still using M&A strategy in an aggressive fashion?
Accenture did 46 acquisitions worth over 4 billion in FY21. If the largest player in the business is doing this, isn't there more growth available through a more inorganic strategy.
Rajesh Gopinathan: Let's put it this way - that's not the only way in which we are different from the others, right? As I said, it's a different strategy and a different philosophy and it, I think, does not make sense to unbundle individual elements of it and compare it.
We definitely are not seeking growth through the inorganic route. We are looking at capability enhancement, market access which in turn can lead to growth. That conservativeness on the inorganic path is likely to continue, because we are building the entire organisation around that structure.
Menaka Doshi: I'm sure you agree with me that this is a one-time reset for a large part of the business world, as they pivot towards a more digital strategy. At a time when demand is so high and supply is difficult would not an aggressive inorganic strategy allow you to capture more growth in these early years of that demand? This is finite, five, seven years...and therefore, maybe it is the best way to do it now?
Rajesh Gopinathan: Probably you put it best. Because that's the difference in the way we're looking at it versus the way you're characterising it. We are looking at it as a once-in-a-decade opportunity, you're looking at it as a one-time reset. It's not a one-time reset, a similar situation will come after some time.
What's important is that our growth strategy should be internally consistent and sustainable. That is why the strategic coherence, and the strategic discipline is important. And, it is not that this strategy is superior or that strategy is superior. What matters is, are you staying true to your strategy. Are you building your structures and processes on that strategy rather than vacillating between one or the other.
So, we do believe in the strength of the demand environment. We do believe that this is a cycle which will keep repeating. What is important for us is to build out this on a consistent and a disciplined manner and the opportunity universe is almost infinite.
6. Bicycle, Not Lamborghini
Menaka Doshi: You are much bigger than your Indian peers now but global leaders are twice your size. How should we be seeing TCS over the next five to 10 years - in terms of its ability to scale, grow faster? Where do you see the competitive threats? Today, when I look at IT services, not just outsourced, there are many large players that are doing faster growth. What would be your way of looking at this?
Rajesh Gopinathan: That is a lot of questions bundled into one so let me answer the last one first.
The way we are going to see it is that growth is important to us. We have an internal saying that "growth is the source of our energy".
Growth and momentum is important to us and our strategy is to ensure that we maintain growth momentum so that we can constantly transform to stay relevant and keep this as a sustainable model.
There is no absolute growth threshold that we are seeking nor are we seeking to be the highest growth by X numbers or an X market.
What is important is that, as an organisation, can we have healthy growth?
And, for better or for worse, we kind of define that by saying, can we get to a double digit growth? That is just a number in the sand, a line in the sand. But the important thing is can we continuously grow?
Because that will show us that we are relevant to our customer universe and we are positioned in the right places and it will give us the momentum to continue investing to keep ourselves relevant to customers and that will maintain the sustainability of our business model. That is the medium to long term perspective at which we are going.
Think about TCS as somebody riding a cycle, you’ve got to keep on moving and you’ve got to make sure that your balance is there. Then you can enjoy the ride and go a long distance, and that's what we're trying to structure ourselves for.
Menaka Doshi: That's a very conservative answer. Isn't this an industry that's going to grow anyways? You'd have to do something very wrong to not be able to get growth right? Given what a well-oiled machine you are, you'd have to make some really big strategic errors to not get growth.
So, is it just enough to be a person on a cycle? You don't want to be the guy driving a Lamborghini?
Rajesh Gopinathan: I think we are set up for being a person on the cycle and drive the cycle well.
It is not an industry where growth or sustainability is a given. It's a very unforgiving industry, you get off the line you get thrown off. Not that you cannot recover but then it takes a lot to recover. So getting overexcited is not necessarily a great thing. Staying conservative, staying true to who you are, and playing for the long haul, that has its own merits, and that's where we are positioned.
I think we are fairly transparent about it to all of our stakeholders, whether it be employees, customers or investors.
So, we must be doing something right and we'll continue doing that.