How TCS scaled the wall

GIRIJA PANDEY CAN NEVER FORGET when he first hosted N. Chandrasekaran, now CEO and managing director of Tata Consultancy Services (TCS), in Shanghai, China. It was on 9/11. Pande was in his second year at TCS, after 20 years at ANZ Grindlays. The banker’s links with the East dated back to 1984. At ANZ, he was executive chairman of its asset management company based in India. Then he met S. Ramadorai, CEO of TCS, in 2000. Pande’s background made him a great fit for the Indian IT services major, whose revenue came predominantly from banking and financial services. Also, he was clued in to the Asia-Pacific region. “I don’t know much about IT,” Pande told Ramadorai, to which the latter replied: “We have lots of people who know IT. We need someone who knows business in the region.” Pande joined TCS that year and is now chairman, TCS Asia-Pacific.

Meanwhile, Chandrasekaran’s own journey at TCS had begun gathering pace when he arrived at Shanghai. At 37, he was on the cusp of becoming TCS’ head of global sales. He and Pande had barely checked into the Grand Hyatt in Shanghai’s Pudong district when the first horrifying images from New York flashed on TV. For a company on the road to clock an annual revenue of a billion dollars for the first time, this was an unexpected wake-up call.

Over the next 18 months, TCS, like every top-tier IT player in India, mulled: What lies beyond North America, the bedrock of topline growth?

The company’s answer: kickstart an emerging markets engine in 2002. TCS took a slew of decisions that would lead to winning new markets. If 9/11 was a signal for Indian IT in 2001 to diversify, the 2008 financial meltdown spelled doom for any business that refused to derisk in North America.

By then though, TCS, ranked 22 on the Fortune India 500 list, had a jewel in its emerging markets crown: a five-year deal with Bank of China (BoC) worth $100 million (Rs 455.6 crore), signed in April 2007, that could transform it.

This is no individual’s legacy. It was started by Ramadorai and is continued by Chandrasekaran. It also shows how the Tata group has pulled its weight in new markets. “All presentations start with the Tata group,” says a former senior TCS manager. “It is less about TCS and more about the group.” That, along with the size of the group—$70 billion—and its global presence never fails to make an impact.

The push has sometimes come right from the top. In 2001, Ratan Tata, no less, hand-picked Gabriel Rozman, an Ernst & Young Consulting veteran in South America, to grow the IT-services business in Uruguay. Rozman is today president of the company’s emerging markets business.

Within TCS, these new markets are today known as ‘Chandra’s G8’—Brazil, France, Germany, Mexico, Japan, South Africa, Canada, besides China. “We have shown a strong focus on building a scalable business in emerging markets for some time,” says Chandrasekaran.

TCS aims to touch $500 million in revenue in five to eight years in each of these. In all they account for a billion dollars now. “While the West is still driving revenue and scale, profits are dipping,” says a former senior manager. TCS doesn’t declare profits by geography; analysts say the margins of India’s top-tier IT firms, such as TCS, in North America have dropped from 25% to 15% in a decade.

Breaking into new markets is Chandrasekaran’s forte. In the early 2000s, he had championed Continental Europe. (Pande was entrusted with the Asia-Pacific region.) “TCS is not known for making large investments in geographies. But where it really scores over the rest is how it invests time in its country leaders,” says the former TCS manager. China gives a rare insight into how Chandrasekaran is going about building businesses in new territories. He has been there twice since taking over as CEO last October. His Mandarin though “is limited to salutations and thank-yous”.

EVEN THREE YEARS AFTER the BoC deal was signed, its significance is not lost on the $8 billion Chinese IT market. First, it raised the bar among Indian IT players: earlier, deals of such size with government-owned outfits were hard to envisage. “The deal was the talk among Indian IT players for the next two years,” says a former TCS executive.

Second, it was a sign of the headway Pande’s team and the locals had made in developing links with the government. The size of the project was unprecedented. BoC has a network of over 22,000 branches. (That TCS had done something similar across State Bank of India’s 14,000 branches helped.)

Third, the contract gave TCS China scale that would justify further growth in the form of delivery centres. It now has five: Shenzhen, Beijing, Shanghai, Hangzhou, and Tianjin. With this deal, TCS made China a robust subset of ‘Chandra’s G8’. Brazil and Mexico have begun responding, and if Chandrasekaran can do that with a couple of the rest, he won’t have to worry about derisking the developed markets.

In China, the delivery centres can focus on offshore work from the East and develop a cluster of units for non-English speaking countries. “Cost advantage doesn’t depend on location anymore,” says Sridhar Vedala, managing director of Quantum Step, a Belgium-based IT advisory.

Large IT-outsourcing deals are hard to come by there. In this context, the BoC deal remains the biggest—easily so among Indian IT players operating there, but not necessarily among the foreign ones. IBM and HP have 11.18% and 4.8% of the Chinese market, respectively. Both made early forays into China and continue to expand.

Chandrasekaran himself is circumspect about the progress in China. During an earnings call earlier this year, he moderated market expectations by stating that it would be a while before China would have quarter-on-quarter impact. “We have been working to build proof-points of success in China,” he told Fortune India. “In the domestic market we have focussed on implementation of financial solutions such as trading platforms and core banking systems. However, the business model needs to scale up significantly.”

Since 2006, the Asia-Pacific revenue of TCS has grown from $153 million to $332 million. And China has begun making profits. The trick, TCS discovered, lay in guanxi.

CULTURALLY, CHINA DIFFERS VASTLY from the West, maybe even India. “China has a Confucian approach, with great respect for authority and culture, as well as a certain restraint on leadership,” says Pande. “When I am with my China team, I have to constantly urge them to challenge my idea, as the local knowledge resides with them. Contrast this with India, where if one is in a room with young professionals, there wouldn’t be a chance to get a word in—everyone wants to present before others do.”

Guanxi is a classic cultural tool in China that highlights the importance of personal networks built on trust. Guanxi is essential to be on the government’s radar. “Entertaining, meeting people, spending a lot of time with them before any business takes place. That’s how you build trust, and it calls for a lot of perseverance and patience,” says Virender Aggarwal, executive vice president and head for HCL Technologies, Asia, Australia, the Middle East, and Africa regions.

TCS figured this out early. In April 2005, Ramadorai hosted Chinese prime minister Wen Jiabao in Bangalore during his visit to India. Back in Beijing, Pande’s team was also closely associated with forums such as the Sino-India Cooperative Office, and what he calls the “super-Planning Commission of China”—the National Development and Reform Commission. This paved the way for a joint venture (JV) later that year between TCS, the government, and Microsoft—the first breakthrough with the Chinese state. More than business from the resulting subsidiary, the JV showed China’s willingness to engage deeply with TCS. This relationship now gave TCS a view of China that, say, Suzuki got after its partnership with the Indian government in the early 1980s.

What TCS has done is sense a need. The Chinese don’t want lessons in low-cost operations. The government and the enterprises look up to their Indian counterparts to understand the global best practices in IT. According to brokerage firm CLSA, China’s IT services exports were worth just $9.6 billion in 2009, while India’s were $49.7 billion.

It is still a fragmented IT market, so it is easier for the Chinese players to relate to the Indian IT journey, compared with an HP or IBM that have roots in mature economies. Also, this is an area of exports in which the Chinese have not grown in size.

TCS has also taken care to maintain a local workforce of more than 90%, now around 1,200 employees. “Guanxi is about trust. You need to build that before anything else happens. You cannot take shortcuts,” Pande says.

In its localisation drive, TCS has consciously sought to send out the right signals. First, the board of its China subsidiary is one of the most high-profile among TCS subsidiaries. Two, its leadership in China is local, led by Brent Zhu, head of TCS Financial Solutions in China. This ties in with the approach of TCS around the world. “As a company with over 10,000 non-Indians, we have learnt how to create multi-cultural teams,” says Chandrasekaran.

So when TCS bagged three more core banking projects in China, and a trading platform implementation deal with the China Foreign Exchange Trade System in the past two years, it was guanxi paying back.

In a sense, its efforts in China are a throwback to the early projects it pursued in the U.S. in the late ’70s. It had to build a track record and get references for multi-year projects. But, if technology spends in the U.S. took off from the mid-’80s onwards, in China, this wait will be longer.

The real struggle for TCS and its closest Indian competitor in China, Infosys Technologies, is to create a stable pattern of growth, based on annuity. This entails multiyear projects that create scale, which leads to cost efficiencies.

For now, they are better off taking positions in the market. For Infosys, local business accruing from projects in tier II and tier III banks account for a little more than a quarter of its China revenues. Most of it comes from foreign multinationals in China and local firms going global. “Our strategy has been simple: first, to use China as a delivery centre,” says Rangarajan Vellamore, COO of Infosys China. “Second, with its GDP growth, there is potential for a lot of business and technology solutions to be delivered locally.”

“A lot of time needs to be spent in developing this market, because clients in China are yet to realise that IT-outsourcing can be a business tool,” says Sid Pai, managing director, TPI India, an IT advisory. “The penny has to drop. China has local needs, language is paramount, and the ability to manage local workforce is imperative.”

Personal computer maker Lenovo is a classic example of a globalising Chinese enterprise that has Indian IT players interested. American Rory Read is president and chief operating officer of Lenovo. Formerly an IBM employee for 23 years, his father worked with Big Blue for 38 years. Still, he calls Lenovo the second-best decision of his life, after his marriage. “This is going to be a global economy. We are part of a trend,” he says. “Look at our leadership team: Yang Yuanqing is our CEO who runs our executive committee. There are eight or so senior executives from Europe, the U.S., China, India, Russia, and Brazil.” When the Lenovos and Huaweis of the world expand, they throw up offshoring prospects for service providers.

But even offshoring is futile, says Vedala of Quantum Step, who was a consultant in China in 2003. It makes more sense, he explains, to use China to deliver non-English languages in the East. He is referring to Macau, Taiwan, Hong Kong, Korea, and Japan. As such, the cost differential for English-language offshoring between India and China is marginal. The Chinese locals’ cultural affinity to the East can become a competitive advantage in the years ahead.

Pande says it has to be a bit of both. “China has the unique advantage of being able to focus on Asian business offshore, and Asian language business. So if a global company in the U.S. wants to offshore across the world in a global contract, we tend to do English language in India and the Philippines. China is better equipped to handle Asian languages—Korean, Japanese, Cantonese, Mandarin, and Thai.”

The challenge for TCS will be to apply what it learnt in China to the other markets. That will also help write the next chapter of Chandra’s G8 gameplan.