This recession was anticipated, says TCS MD & CEO Rajesh Gopinathan

TCS MD & CEO says attrition is way beyond the firm's comfort levels

In an uncertain environment, the country’s largest information technology services firm Tata Consultancy Services (TCS) put in a strong performance with total contract value (TCV) of $8.1 billion in the second quarter of financial year 2022-23 (Q2FY23). Moreover, it crossed Rs 10,000 crore in profits. It appears as though Managing Director and Chief Executive Officer Rajesh Gopinathan’s plans to rejig the company to bring more focus on clients are playing out well. In an interview with Shivani Shinde, he talks about the new structure and the continuing problem of attrition. Edited excerpts:

There appears to be a mismatch between management commentary, company performance, and the real macroeconomic environment. What is different this time when compared to previous slowdown cycles?

I don’t think there’s any mismatch between what we are saying and what you’re hearing. We can talk about what we’re seeing inside our client universe. Our clients are dealing with the environment and they will, depending on whether it is an up or down cycle, invest in growth, consolidation, or optimisation. We have the breadth of service portfolio to be able to stay relevant. We hear caution from our customers. Neither are they cancelling any of our current projects, nor are they saying that they will be pulling back massively.

The previous two slowdowns in the last 10 years, the financial crisis and then the pandemic, were both dramatic collapses. They occurred unannounced and very quickly. The difference this time is that the recession is much more heralded. It was predicted and anticipated.

Besides, there is a difference in how it is playing out in the US and in Europe. But one fact is that tech is at the core of both the growth transformation as well as optimisation agenda.

How is the new organisation structure evolving?

It’s too early to quantify but it is a huge help. The reorganisation was about aligning the company to focus on customers at different points of their journey. Sometimes the size of TCS can become a distraction, especially in the initial days as we onboard a new client. One of the ideas behind the reorganisation was to give customers a direct line of sight, irrespective of the deal size. This increases the focus, urgency, and immediacy of that relationship and also gives customers the comfort that we value them for who they potentially can be. The idea is to have a very personalised interaction. Every interaction is not designed to generate a business outcome. It’s new for the industry. Our customers have not seen it. Our employees haven’t seen it. The pieces are slowly starting to fall into place… but it will take time to be able to measure outcomes.

We should see an acceleration of migration of customers up the chain. By that I mean the number of customers we are able to grow from $5 million, $50 million, to $100 million. Traditionally, the number of customers has grown slower than revenue. Our intent is to try and grow that in line with revenue.

What made you look at reorganisation at this time? Was it because deals were getting smaller?

It’s not externally driven. We have been talking about increasing our focus on growth and transformation for quite some time. We took steps internally to align to that. One good thing for us is that our customers like to do business with us. Every time we stand up and we invest in something new, customers are very supportive.

The structure, especially on the business transformation group (BTG) side, is also a reflection of TCS’ journey. The relationship incubation group is modelled on what made TCS successful 20 years ago. We were geographically organised, very close to our customers, with quick turnaround time. The enterprise growth group is modelled on the TCS of today with a full breadth of services focused on cross sell, increasing our engagement with customers, etc. And that is what helped us scale. In many ways, it’s a reflection of the journey we have been on.

Going ahead, how significant will cloud adoption be?

The pandemic shot the cloud straight into the boardroom. Many announcements that happened, it was about the C suite standing up very solidly behind it and saying we are committed to it, we will do whatever it takes. That excitement, however, has died down purely because we now are in the execution phase of that. Rather, a lot of announcements made with huge fanfare still need to get executed. The first 20-30 per cent is easier to execute, but as you start getting closer to the midway point, you start getting into the more difficult aspects of executing it. The value of the cloud transformation is at the tail end. Most transformations with large business programmes begin with a lot of excitement, but the value is in the middle and in the end. Cloud is entering that phase where it is disappearing from the headlines. But it’s actually at a place where those who implement it successfully will realise its value. While it might not have the headline grabbing numbers, it gives you a core engagement model with the client.

Your global peers work with margins in the mid-teens. So why does TCS want to stick to 25-26 per cent margins?

A. It is not a question of what is the right number. Staying focused on numbers keeps you disciplined to make sure that you push your business model. Margin is actually a play of competitive differentiation, because if you have that you will capture the margin and it always builds over time. So by staying focused on the margin band you will ensure that your competitive differentiation is continuously maintained and that is important. You let it slide, it keeps sliding.

At 21.5 per cent, attrition is really high. Is this impacting delivery and do you see this coming down anytime soon?

Attrition at the current level is way above our comfort limits. We will bring it down and while it is way above our level, 20 per cent attrition is the norm for the industry. The long-term average for TCS is 12 per cent, whereas the industry was at 18-20 per cent. But even this high attrition does not completely knock us off our stride.

We expect attrition to go up because first our quarterly annualised attrition, which is still about 21 per cent, needs to come down. What matters is that the marginal number is starting to reduce. For us, fresher hiring is a long cycle investment. Because it is not just about being productive for the project today, but you’re essentially building long-term visibility on demand. Lateral hiring is more about backfilling.

...is this impacting delivery. We have heard several companies have faced issues on delivery as attrition has been going north? Also you may say that adding freshers can be a solution but at the end of the day these managers also had a relationship with that customer. Comments.

It is not a desirable situation. While the customer values the personal relationships they also value the stability of the institutional relationship. The institutional relationship, mostly trumps the personal relationship. What it does, however, is that it introduces a friction point. You need to double down on that to rebuild something. It can introduce a bit of competitive dynamic, as that manager moves to a competitor. Whether that translates into something or not is a different issue. So it does introduce friction, It however is not a breakpoint. Not paying attention to that friction overtime may develop into a breakpoint.

Though fresher hiring is lower than FY22, it still seems to be a parameter for growth. Do we see headcount and revenue growth decoupling anytime soon?

I don’t see a dramatic decoupling of headcount and revenue happening. The industry is still about managing the workforce. There will be a slight drop in numbers, but nothing dramatic. When it comes to headcount growth it’s about managing scale. TCS is structured to keep on decentralising. To be able to manage scale one needs to decentralise and you need to decide how you increase information, transparency, delegate more, etc.

While companies have made their stand very clear on moonlighting, the MoS for Electronics and Information Rajeev Chandrasekhar said it’s time the industry accepts moonlighting and supports the entrepreneurial mindset of employees. Your comments...

When you have a long-term commitment to the employee, it is a given that the commitment is reciprocal. The government’s perspective is much broader than a company’s. The traditional IT services industry has a very strong business model, very tightly run operations, which is valuable for the country. As an industry, we account for $200-250 billion worth of exports. From a national perspective, this industry is of great consequence. We should nurture that and not take it for granted and risk it on experiments. Experimentation can be done in emerging sectors where operating models are still evolving.

During the results you said that the nature of deals is such that it moves to SaaS format. That model is advantageous for customers but also builds vulnerability as clients can easily move the IT usage depending on demand. Your comments on this...

As you move from licence-based revenues to subscriptions, there is a revenue deflation in the short term, but in the medium to long term, actually, it gives you a better revenue profile. I think that’s well understood in the industry. And that is not a major concern. The economic value is greater on the subscription side than on the licensing side.