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4/27/2019 TCS gets a makeover

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TCS gets a makeover


MARCH ,

TCS gets a makeover

For Rajesh Gopinathan, the CEO and managing director of software


services major Tata Consultancy Services (TCS), it was a baptism by fire. In
his first ever media briefing in April , the CEO, just  days into the
job, had to announce the company’s poor results after TCS’ annual revenue
growth slowed to single digits for the first time in five years and only the
second time since the company listed in . e Mumbai-based
company’s shares dropped soon after the results were announced, which
was a culmination of several quarters of tepid performance, including a rare
negative quarter. e industry was already abuzz with talk about the lack of
capability of Indian information technology (IT) firms to compete in the
new world of digital technology. In February that year, rival Capgemini

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India’s chief executive, Srinivas Kandula (now chairman), went so far as to


say that - of local engineers cannot be trained to adopt new
technologies.

His words rang true as TCS’ oft-compared rival, Dublin-based Accenture,


didn’t show any signs of tiredness. It was posting its best-ever sales and
profits on its fast-growing digital business. But TCS didn’t seem to be seized
of the grave issues it faced: Much like an ostrich with its head in the sand,
the software services company hired , software professionals that year
at a time when its local rivals were laying off employees.

e problem did not end there. Two months after the results,when the
appointment of Gopinathan and new chief operating officer, N.G.
Subramaniam, came up for shareholder approval, a noticeable chunk voted
against the resolution. Institutional investors made known their dissent as
they felt the baton was being passed on to unproven executives, especially
when the company was faced with its biggest challenges. In the next quarter,
TCS again posted negative revenue growth.

Gopinathan, , had big shoes to fill. He took over from N.


Chandrasekaran under whom the ₹,, crore company had posted
spectacular all-around growth and become one of India’s most valuable
companies. Chandra, as he is popularly known, over time had become a
seasoned spokesman that the company’s investors and analysts had grown to
rely upon for consistently delivering on his promises. e TCS quarterly
results conference, usually the first large company result to be announced at
the end of each quarter, had become a bellwether for the direction of the
U.S. market, reflecting the sentiments of its biggest customers there.

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at track record got Chandra his next job: as head of Tata Sons which
controlled the  billion group after its previous chairman, Cyrus Mistry,
was unceremoniously removed from his post. Chandra’s sudden move
created a vacancy in TCS. Did Gopinathan, who until then was the chief
financial officer, have the mettle to lead one of India’s most valuable firms in
difficult times?

Chandra was certainly a hard act to follow. Perhaps it was the pressure to
measure up that forced Gopinathan to step out of the tried and tested line
that its CEOs traditionally followed. Unlike other IT services companies,
TCS never released future expectations, leave alone estimates of revenue
growth. But in a departure from tradition, in the meeting to announce the
second quarter results last year, Gopinathan told a surprised group of
reporters his company would return to double-digit growth in the next
financial year. A year after he took over, revenue growth had declined to its
lowest level ever although thanks to a weak rupee, it had increased strongly
in dollar terms. Asked how he was going to achieve the goal, Gopinathan, a
group veteran who joined TCS in  from Tata Industries, said: “I have
said more than I should have. Am going no further.”

Gopinathan had to get the company back on track soon. In many ways,
TCS has been the jewel in the Tata group’s crown, accounting for two-thirds
of the group’s market valuation and its highest profits in FY. In the past
couple of years, Tata Steel has returned to profit which has reduced the
importance of TCS, though the software firm still remains critical to the
group because as a listed subsidiary of the group’s holding company, Tata
Sons, it funds most of the group’s expansion activities. As the performance
of Indian IT firms came under scrutiny because of a drastic fall in revenues
and margins, TCS’ sales growth also slowed from  in  to . in
 amid accusations that IT firms weren’t in tune with the demands of
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digital business. It was ranked No.  on the Fortune India  list, after
Tata Motors and Tata Steel.

TCS was late to join the digital party and it paid a price for that. Seeing the
writing on the wall, it is undergoing a transformation to meet the needs of
clients looking for digital solutions. It has revved up its digital business
which comprises moving a company’s infrastructure for computing and data
to cloud-based one, helping companies use artificial intelligence in decision-
making, and data analytics to transform businesses of companies so that
they rely more on information technology than a human interface. ere is
no strategic change in direction that is expected, but some interventions
helped TCS, India’s second-most valuable company, arrest the fall in revenue
growth and win bigger digital orders. At the same time, the organisation is
also transforming itself to be more ready to service the digital business:
training its manpower, making investments in marketing and, most
importantly, making digital lines of business more prominent instead of
clubbing them with the rest, and decentralising the company.

Tata Consultancy Services office in Pune


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It’s a big ship to turn, but it is surely turn-ing. Gopinathan’s double-digit


growth is well within sight. A year after announcing his first results in April
, the TCS stock gained nearly , making it the second-best
performing large-cap stock in . It ended FY with revenues of .
billion, up . in dollar terms, and an operating income of . billion.
It expects revenues to cross  billion this year. e company declared a :
bonus issue of shares in its th year in business. Its market capitalisation
touched  billion, the first Indian company to achieve that distinction,
only to be quickly followed by Reliance which in recent weeks has firmly
replaced TCS as India’s most valuable company.It’s the biggest IT firm in
India: Its revenues are  more than Infosys and almost twice the size of
Wipro, the other big players in the Indian market. TCS is present in all
geographies and is already an outsourcer to most Fortune  companies. It
has over  clients who give it an annual business of  million, and it
adds - clients every year which give it business of at least  million
each.

Dramatic changes in fortunes, especially for companies entwined with


global economies, are par for the course and these effects only escalate with
size. Another Tata group company, Jaguar Land Rover, for instance, went
from being a lean cash machine to look like a rudderless ship after Britain
announced Brexit, creating uncertainty over import taxes the company
would have to pay in the European region. Likewise, starting August ,
large institutional investors deserted Infosys when its CEO Vishal Sikka
stepped down after differences with the company’s founders about strategy;
some migrated to TCS as evident from the increase in FII ownership of its
stock. e rupee also started weakening, making business more lucrative for
software companies which billed clients in dollars. For the latest quarter
ended December , TCS’ domestic competitor Infosys, which also had a
new CEO, Salil Parekh, under not-so-normal circumstances, posted robust
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sales growth after several quarters of uncertainty. An Observer can dismiss


the recent change in fortunes of the IT firms as nothing fundamental and
may well question their sustainability. “Our growth is organic. We are not
buying growth like some of our competition,” says Gopinathan. “In the last
two-three years, we have fundamentally changed ourselves. Increasingly in
the last year, nearly all the CEOs we spoke to have bought into the new
propositions we have to offer.”

TCS obviously can’t insulate itself from global winds, though Gopinathan
says their outsourcing business is growing ahead of its global competition. In
September, KLM Royal Dutch Airlines CEO Pieter Elbers flew down to
Chennai to spenda day at TCS to celebrate  years of doing business with
the outsourcer. Elbers was also the keynote speaker at the two-day TCS
Summit Europe in Budapest last year. Gopinathan says U.K. retailer Marks
& Spencer CEO Steve Rowe spent a day in a quarter in steering committee
meetings to assess a business transformation being executed with TCS.Both
Elbers and Rowe have roped in TCS as their partners for their digital
transformation.

TCS will completely overhaul the IT infrastructure of both companies so


they can take on new online competitors disrupting both the airline and
retail industries. For another large contract with insurance major
Transamerica, Gopinathan spent several hours with its CEO in sewing up a
. billion deal, its biggest ever, in January . “e Aviation industry is
going through significant change as a result of digital technology and we
need to be constantly developing the ways in which we improve our services.
Working with TCS for the past  years we’ve been able to ensure that we
are set up to deliver the best possible customer service now, and in the
future,” says Elbers. To understand the significance of Gopinathan’s plans,
an overview of what companies like TCS do is in order. When TCS began
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more than  years ago, its biggest business was bureau services, when is
provided its computing services to customers like banks and gave them
printouts for their account reconciliation. In those days, only large
corporations in the U.S. boasted of computers, which were sold by the likes
of IBM and Burroughs. Lines of code or software programs to run these
machines were customised and written either by an equipment vendor or
small, boutique outfits linked to universities. Computers only became
ubiquitous when minicomputers and later the first desktop computers were
launched which led to the popularity of programming. “Bureau services
remained a big business for a fairly long time,” says Subramaniam, who
joined the company in .

As the business grew, the old audit firms expanded their services to consult
clients on their computing needs as did IBM to suit themachines it was
selling. An entire ecosystem of services exploded and the tech world was
dominated by U.S. companies with theodd European company like SAP, a
German firm that brought the country’s skill in being systematic to its
popular ERP (enterprise resource planning) software that came with an
industrial feel.

In all this time, the Indian software industry grew by grabbing whatever
projects were thrown at it. It had an edge because it supplied manpower by
the hour and was relatively inexpensive compared to U.S.-based services.
en General Electric (GE)started “outsourcing” to reduce costs and at one
point GE’s business accounted for as much as - of allbusiness for the
likes of TCS and Wipro. e “IT Outsourcing” tag stuck to these firms.

But YK suddenly changed all that. At the turn of the century, the U.S. was
teaming up with Indians doing the mundane job of converting the year
format in software programs to four digits from two. e event had two

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important effects: It largely re-emphasised the fact that India was a “body
shop” but, more importantly, it suddenly showed the world India’s capability
with computers as U.S. businesses grappled with fears that the YK problem
could well be their doomsday. TCS’ salestouched  billion only in , a
quarter century after it started the business.

To the credit of Indian firms like TCS and Infosys, which even listed on the
Nasdaq, they garnered more and more deals from U.S. firms and, more
importantly, created a system that organised hundreds of thousands of
software programmers into what is now called a “global delivery model”.

IBM and Accenture, the two big IT consultants on both hardware and
software, were forced to build similar “outsourcing” businesses around the
world as they felt that Indians Were beginning to steal their thunder.

But Indian IT firms made headlines for the wrong reasons like taking away
jobs and not for big transformative billion-dollar deals that went to global
majors like IBM, Oracle, and SAP.ough Indian firms serviced most
Fortune  firms, they failed to keep pace with the digital transformation
in business. at started changing in - when “digital” became the
new flavour. To be sure, “digital” entailed writing code just like companies
did for developing applications for mainframe computers and servers. So, in
the early days, there was also a lot of confusion about what constituted
digital. Today,adopting cloud-based services, using artificial intelligence,
cybersecurity, and creating mobile interfaces for, say, banking software
largely comes under what is called digital businesses. ey're writing lines of
code nevertheless, though in newer languages and styles.

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N. G. Subramaniam, chief operating officer, Tata Consultancy Services

As the wave picked up, with Amazon cloud services demonstrating the
ability to run businesses virtually, everybody clambered aboard the digital
bandwagon. Consultants like Accenture and McKinsey started selling the
idea of adopting digital technologies to companies. By -end,
Accenture’s consulting business began growing fast again. Around the same
time, it made over  acquisitions for . billion in the IT and business
consultancy space. In the third quarter of FY, Accenture first reported its
digital income under a separate head, to showcase the fast-growing new
segment. In FY,Accenture’s digital business accounted for  of its
revenue and logged high double-digit growth. TCS entered the business a
bit late but its digital revenues starting growing quickly after it moved in. Its
Digital share was less than  in FY; today, it accounts for  of
revenues compared with  for Accenture.

“e big changes in IT technology are driven down by consultants like


Accenture, and there is usually a time lag of a few years before Indian firms
latch on to the new business. It happened in the late s in the enterprise
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software era and it is happening now again,”says Budhaditya Banerjee, an


independent management consultant for IT strategy. “In the initial years,
there is noise about new technologies. We took time but doubled down our
investment in training people, building capacity, and choosing the service
lines we wanted to play [in],” adds Gopinathan.

Today, many new TCS projects increasingly sound similar to what


Accenture does for its clients. For example, if Accenture is executing a
corporate and management transformation for French pharmaceutical
company Pierre Fabre, where it is integrating existing technology into an
artificial intelligence-based platform, TCS has become the principal partner
of Marks & Spencer to make it a digital-first organisation. If Accenture talks
of increasing sales through data-driven customer segmentation for
hospitality chain Melia, TCS talks of an e-commerce app it has created for
an unnamed customer in the Boston area, which has already seen .
million downloads. “Wesee this sort of digital business to be worth several
hundreds of billion dollars in market opportunity for us,” says Krishnan
Ramanujam, head of the newly-created digital business unit at TCS. Today,
TCS revenue accounts for just .- of the global IT outsourcing market,
about the same as Accenture.

Analysts are also recognising the need to track the changes closely. Now if
digital,which accounts for  of the business, is growing upwards of 
while total revenues are growing in low single digits, something must be
tanking badly. In fact, the TCS legacy business has seen a consistent drop
over several quarters, one of the reasons for poor sales growth over the last
several years. It’s difficult to quantify how much the legacy business has
dropped as the company has stopped reporting on some of its old service
lines.

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Analysts say the fast growth of digital has masked the decay of the legacy
business as it has brought backgrowth to TCS. Abhiram Eleswarapu, head of
India equity research, BNP Paribas , in his report titled “Two-Speed World”
in July , saidhow a company manages its fast-growing“new” businesses
and arrests the slowdown in its legacy business could eventually determine
its valuation. “It is increasingly evident that Indian IT firms are managing to
grow their new business as their overall revenue growth has begun to pick
up,” says Eleswarapu. Of course, the transformation of TCS is a work in
progress. e early seeds were sowed when a prescient Chandrasekaran
decided to invest in a massive training programme for , employees to
be digital ready. But it was only in FY that the company realised that the
legacy business was rapidly slowing down and employee morale was at a
low.“Our first effort was to address the morale and tell people that nobody
in the company was redundant,” says Subramaniam.

Soon after he took over, Gopinathan and Subramaniam together spent the
first two months assuring employees of the continuity at TCS and drew up a
checklist of their weaknesses. And to get back on the growth track and
reassure investors, the duo aggressively went after large deals such as a 
million deal with insurer Prudential, the . billion deal with
Transamerica, and a . billion deal with research agency Nielsen. TCS
took some time thinking about the Transamerica Deal as it would have
added , people from Transamerica to its rolls, but eventually the
decision was based on the company’s larger business interests. “TCS was
carefully selected in  because of their significant,ongoing investments in
technology and their expertise in the insurance and annuity industry,” says
Mark Mullin, president and chief executive officer, Transamerica.

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Natarajan Chandrasekaran, chairman ofTata Sons.

To take on the likes of Accenture, Gopi-nathan is also pushing a new


business framework that they can effectively use to convince more C-suite
members. e plan is to propel its revenues from new-age technologies like
automation, cloud, and the Internet of ings (IoT)to over  billion this
year. Envisioned in  and called the Business . thought leadership
framework, under it TCS revamped its entire services portfolio to help
customers leverage their digital technologies. So, with its Rolls-Royce deal,
for instance, TCS will be deploying the IoT platform in manufacturing.
“Over the years,we have built serious contextual knowledge from working
closely with clients. Business . is meant to showcase all this expertise to a
customer in one place,” says Gopinathan. “In , TCS retained the No. 
spot for customer satisfaction in Europe for the fifth consecutive year. By
applying the principles of Business ., the company has earned a
satisfaction score of ,” adds Jef Loos,head of sourcing, Whitelane
Research. Whitelane researched , leading companies in  European
countries.

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In October , Gopinathan announced some fundamental changes. He


split TCS into smaller entities, creating more managers with smaller and
more defined businesses to run. Earlier, about  business headshad their
own little companies with attendant profit and loss (P&L) ac-counts. ese
accounts were worth nearly a billion dollars each. Gopi-nathan pushed that
accountability one level down, creating  times more leaders who were now
accountable for their businesses. So, for instance, earlier the banking and
financial services group had five-eight people managing verticals like
insurance and capital market, now it's nearly  reporting to the business
unit’s head.

Subramaniam says the shakeup was inevitable as the company had grown
much larger. He said a similar re-organisation under Chandra nearly a
decade ago yielded good results as the move was akin to distributing a large
portfolio among a bunch of managers who could pay more attention to the
parts. “e portfolio effect usually hides non-performers. is move will
push the envelope further,” says Subramaniam. “e energy is very high and
people want to show their ability to perform,” adds Gopinathan.

To focus on the new business groups further,Gopinathan has also carved out
the digital businesses and brought them under veterans with a track record
of performance. Unlike the businesses in the re-organised verticals,
digital,artificial intelligence, and analytics are new fledgling verticals that
need to be driven hard.e decision again comes from organisational
memory. Around the YK years, dotcoms also gained popularity and TCS
couldn’t keep pace with small companies creating new technologies. e
then CEO, S. Ramadorai, entrusted the task to Chandrasekaran, who
ramped up the new businesses related to online technologies to million
in less than four years. at run also set him up for the top job.

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Here are other overt movies Gopinathan is making. Being a services-


oriented company that took pride in working closely with clients, TCS did
not advertise itself visibly in big markets. Over the years, under Chandra,
TCS established itself as the sponsor for marathons—be it New York,
Amsterdam, orMumbai. He wanted to convey the message subliminally to
clients. TCS insiders, who did not wish to be identified, say Gopinathan’s
style is much more aggressive than any other CEO inthe firm so far. In the
firm’s  years, he is the fourth and there are several staffers who have even
worked with F.C. Kohli, the first CEO whowas considered a tough
taskmaster and anall-controlling person. His successor, Ramadorai,was quiet
and reticent but extremely process-driven to achieve his targets. During his
tenure, TCS was considered a laggard to Infosys, which became the choice
of investors and the benchmark for the IT sector. Chandra was the opposite
of Ramadorai, extremely gregarious and affable.

Gopinathan’s moves will be closely watched. e earlier CEOs reported to


the Tata Sons Board chairman, Ratan Tata, or briefly Cyrus Mistry, whose
oversight on the firm was negligible. He reports to Chandra, who doesn’t
just understand the company but will also want Gopinathan to continue to
increase his profits to improve Tata Sons’ performance. Gopinathan Really is
walking a tightrope at the moment. e fact that he knows the innards of
the company certainly gives him an edge.

(e story was originally published in the Feb,  issue of the magazine)

Artificial Intelligence N. Chandrasekaran TCS Information Technology Tata


Consultancy Services IT Act Digitalisation

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