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 2017, the CEO, just 50 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 2004. The Mumbai-based company’s shares dropped 6%soon after the results were announced, which was a culmination of several quarters of tepid performance, including a rare negative quarter. The 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 India’s chief executive, Srinivas Kandula (now chairman), went so far as to say that 60-65% 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 78,912 software professionals that year at a time when its local rivals were laying off employees.
The 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, 48, had big shoes to fill. He took over from N. Chandrasekaran under whom the ₹1,23,104 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. The 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.
That track record got Chandra his next job: as head of Tata Sons which controlled the $100 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 2001 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 FY18. 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 31% in 2012 to 4.4% in 2018 amid accusations that IT firms weren’t in tune with the demands of digital business. It was ranked No. 11 on the Fortune India 500 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. There 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.
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 2018, the TCS stock gained nearly 40%, making it the second-best performing large-cap stock in 2018. It ended FY18 with revenues of $19.09 billion, up 8.6% in dollar terms, and an operating income of $4.73 billion. It expects revenues to cross $20 billion this year. The company declared a 1:1 bonus issue of shares in its 50th year in business. Its market capitalisation touched $100 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 60% 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 500 companies. It has over 45 clients who give it an annual business of $100 million, and it adds 50-60 clients every year which give it business of at least $1 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 2017, 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. The rupee also started weakening, making business more lucrative for software companies which billed clients in dollars. For the latest quarter ended December 2018, TCS’ domestic competitor Infosys, which also had a new CEO, Salil Parekh, under not-so-normal circumstances, posted robust 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 25 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 $2.5 billion deal, its biggest ever, in January 2018. “The 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 25 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 more than 50 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 1982.
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. Then General Electric (GE)started “outsourcing” to reduce costs and at one point GE’s business accounted for as much as 30-50% of allbusiness for the likes of TCS and Wipro. The “IT Outsourcing” tag stuck to these firms.
But Y2K 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. The event had two 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 Y2K problem could well be their doomsday. TCS’ salestouched $1 billion only in 2003, 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.Though Indian firms serviced most Fortune 500 firms, they failed to keep pace with the digital transformation in business. That started changing in 2012-13 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. They're writing lines of code nevertheless, though in newer languages and styles.
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 2014-end, Accenture’s consulting business began growing fast again. Around the same time, it made over 70 acquisitions for $3.5 billion in the IT and business consultancy space. In the third quarter of FY16, Accenture first reported its digital income under a separate head, to showcase the fast-growing new segment. In FY16,Accenture’s digital business accounted for 40% 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 5% in FY16; today, it accounts for 30% of revenues compared with 60% for Accenture.
“The 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 1990s in the enterprise 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 1.3 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 3.5-4% 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 30% of the business, is growing upwards of 50% 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.
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 2017, 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. The early seeds were sowed when a prescient Chandrasekaran decided to invest in a massive training programme for 200,000 employees to be digital ready. But it was only in FY17 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 $690 million deal with insurer Prudential, the $2.5 billion deal with Transamerica, and a $2.25 billion deal with research agency Nielsen. TCS took some time thinking about the Transamerica Deal as it would have added 2,000 people from Transamerica to its rolls, but eventually the decision was based on the company’s larger business interests. “TCS was carefully selected in 2018 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.
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. The plan is to propel its revenues from new-age technologies like automation, cloud, and the Internet of Things (IoT)to over $5 billion this year. Envisioned in 2017 and called the Business 4.0 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 4.0 is meant to showcase all this expertise to a customer in one place,” says Gopinathan. “In 2018, TCS retained the No. 1 spot for customer satisfaction in Europe for the fifth consecutive year. By applying the principles of Business 4.0, the company has earned a satisfaction score of 80%,” adds Jef Loos,head of sourcing, Whitelane Research. Whitelane researched 1,600 leading companies in 13 European countries.
In October 2017, Gopinathan announced some fundamental changes. He split TCS into smaller entities, creating more managers with smaller and more defined businesses to run. Earlier, about 20 business headshad their own little companies with attendant profit and loss (P&L) ac-counts. These accounts were worth nearly a billion dollars each. Gopi-nathan pushed that accountability one level down, creating 10 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 20 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. “The portfolio effect usually hides non-performers. This move will push the envelope further,” says Subramaniam. “The 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.The decision again comes from organisational memory. Around the Y2K years, dotcoms also gained popularity and TCS couldn’t keep pace with small companies creating new technologies. The then CEO, S. Ramadorai, entrusted the task to Chandrasekaran, who ramped up the new businesses related to online technologies to$300 million in less than four years. That run also set him up for the top job.
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 51 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. The 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. The fact that he knows the innards of the company certainly gives him an edge.
(The story was originally published in the Feb, 2019 issue of the magazine)