Our assessment earlier was more optimistic, now we are paring it: TCS CEO

External factors and client-specific issues are not very different, says the TCS CEO and MD

Tata Consultancy Services (TCS) just emerged from a not-so-good second quarter in 2019-20, when its margins dipped and revenue failed to meet expectations, despite record deal wins. But Chief Executive Officer and Managing Director Rajesh Gopinathan is sufficiently confident, though with some degree of caution. In an interview to Bibhu Ranjan Mishra and Romita Majumdar, Gopinathan says the idea is to capture demand first and optimise delivery later. Edited excerpts:

For a change, the TCS leadership seems to be on the defensive. What went wrong?

When the ball exhibits reverse swing, you have to be careful. It’s been a moderate quarter, but we have the capabilities, the people, and the numbers. We (just) need to align ourselves for a slightly different set-up. We called it wrong because we expected faster growth. In terms of key verticals, banking and financial services are not incrementally different. The momentum has changed. Retail is where we got it slightly wrong. 

Experts say the twin factors of a challenging macro environment and client-specific issues triggered the miss. Do you agree?

The external (factors) and client-specific issues are not very different. The only difference is that our assessment earlier was more optimistic, now we are paring it. 
 

But your hiring numbers and outlook have been quite bullish, while deal closures have been robust. Are the projects taking more time?

Not really. There was a general commentary in the market that client deals are getting fewer and for a shorter duration. Many of the deals we have announced (lately) are account transformation ones that are large in size, scope, and duration. When we say we have confidence in the medium- to long-term perspective, that’s where it is coming from. The order book is there and it needs to play out. Our hiring is also a reflection of that. We have always said we will first capture demand and we will use short-term measures for it. 

But (at the same time), we will structurally create capacity to service the demand.

Last year, we hired some 30,000 freshers. This year, we’ll hire similar numbers or more. That’s why we have pulled in people in the first half of the year itself. This has given us the capacity to do more off-campus (hiring). We have invested in platforms to do that through the national qualifier (test). It can be used on demand. We have started what is called ProCert to help people improve and test them through learning tools. All these are capabilities we have systematically invested in. Fresher hiring is also part of our organic talent development strategy for the long term. That is a range of up to three years.

Margin concerns remain. Did these massive hiring and onboarding of talent impact margins? Can it affect TCS’ industry-leading margin profile?

We continue to be the margin leader and there is no getting away from it. If you look at the commentary around margins over the past three years, there were concerns that digital will bring down margins but we still did it. Margin is about a combination of demand, delivery, currency, etc. The margin band we have indicated is doable, as we have proven it four quarters ago. However, multiple environmental levers have to play on our side. Margin leadership is a matter of competitive strength.

What are the levers you are using to plug further (margin) erosion?

Can we get the talent structured correctly? Can we get better deal structure to give more demand visibility and deploy teams appropriately? How much capability can be generated in-house? How dependent are you (we) on short-term market-based hiring, compared to organic talent development? What is the size of customer relationships and are you (we) able to scale them up? These are perennial levers and we will continue to optimise them. Then, external factors like currency and demand volatility, which can create short-term margin impact. We have always insulated our employees from external volatilities.

We don’t hire and fire. Our salary increases and promotions depend on internal factors. Those scenarios also have an impact. (Our) salary hikes are benchmarked to local inflation. Pricing is benchmarked to market inflation. In the markets where we are serving, inflation is zero to negative. When people look at the pricing decline at TCS, it is not a reflection of capability or demand. Inflation will flow into everything. Wage inflation is a reality in India. Also, currency depreciation is a critical component of our model. But currency moves in lumpy jumps and that is causing volatility.

Is there any pricing pressure from the client’s side?

Pricing pressure is always there. (But) I would say our service portfolio is diversified enough to be able to absorb the pressure. Price resilience for our products is very high. That’s the beauty of the quality of work and the service business that we have built.

With the huge fresher intake, are we going to see the employee pyramid (mix) getting changed? 

The model is not moving away from what it was earlier. When projects require skills in new technologies, and project sizes are relatively smaller, you need experienced people to step up and capture demand. But as you get larger projects and greater visibility, you can structure your team better. Once you get the training aligned to the immediate demand, you structure the team better and leverage experienced people better. Essentially, we have increased capacity at the bottom of the pyramid to increase the leverage of the experienced people. That has been the strategy for the past few years. We will capture demand first and (will then) optimise delivery.

The holiday season (in the second half of the year) will keep growth on track?

I don’t know (yet). We’ll have to wait and see. But we are well-positioned to capture it. Let’s give it a few months to play out.

The growth on the digital side seems to be moderating. What’s happening there?

Growth rates will moderate. The fact is, the differentiation between digital and non-digital is disappearing. Large deals have the full spectrum of it now. Earlier, there was a doubt about whether we were participating enough in (grabbing) the opportunities. Technology integration in an organisation happens through infusion rather than just a bolt-in approach.

There’s no sign of sub-contracting cost coming down, despite your efforts to enhance employee localisation in the US?

The US is a supply-constrained market with a fair amount of local contract pool. Even our customers rely on it (sub-contracting). Whenever the market is supply constrained, you will see this kind of freelancing market developing. We are structurally trying to fix it by increasing our own hiring and internal training. What is important is to capture demand when it comes and then optimisation can be done internally.