Indian IT will continue to grow

By Chiyo Horikoshi : Reporter of Toyokeizai
March 23,2009
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IT, a major driving behind the Indian economy, has recently been confronted with an unavoidable deceleration in light of the global financial crisis. India’s largest IT firm Tata Consultancy Services (TCS), with clientele in the U.S., Europe and over 140 countries worldwide, is no exception to the rule. The company recorded a 33% year on year increase in profits for the financial year to March 31, 2008, but the most recent quarter (Oct~Dec) has seen revenues plateau on a year to year basis. This trend is bound to continue.I talked with Mr. Ramadorai, TCS’ CEO since 1996, about how the company plans to overcome the current situation.

--The global financial crisis is taking a significant toll on the Indian IT industry. How do you view this?

IT is one of the few industries that continue to grow. However, in light of current economic conditions and confusion in the market, a decline in demand cannot be helped. In regards to the quarter for Oct~Dec 2008, drastic fluctuations in foreign exchange rates played a big part. When you look at things on an operating profit base, we are in good shape. Cash flows are also healthy.

It is a fact though that we have seen a reduction in procurement from specific sectors. Financial and automotive sectors have been particularly severe. These two industries are themselves amidst difficult times. Additionally there is the telecommunications industry as is illustrated by the collapse of leading Canadian firm, Nortel Networks. There is a great deal of change occurring globally and nobody can quite say when or how things will recover. It goes without saying that Japan too is faced with challenging times. It isn’t so bad that we are having trouble collecting receivables, but we are certainly seeing a decline in demand from customers in the financial and automotive sectors.

--In light of the current challenges facing you, what measures are you taking to combat them?

I believe it is essential to raise operating efficiency. As such we are assessing all operations to ascertain whether there is any waste that can be eliminated. Travel expense waste, communications costs waste, maintenance cost waste, there is a myriad of waste to be addressed. We are replacing in person business trips with video conferencing, and where the need for business travel remains we are negotiating more intensely than before for reduced airfares. We are also reassessing the necessity and urgency of equipment investment, postponing initiatives where appropriate. Management of receivables is being carried out more stringently, too. We have quarterly checks in place to ensure that receivables are collected according to contract.

Furthermore, it is in times like this that talent utilization is of great importance. We are looking at whether we have the right people in the right place, and whether each employee is equipped with the right set of skills. When we talk about necessary skills we don’t merely mean those that are needed to the work we do today, but also the skills one will need tomorrow for proactive business development in a new industry or region.

--Up until now you have focused growth strategies on Europe and the U.S., but in light of recent difficulties in these markets do you see the need to enhance your efforts in developing markets?

You’re absolutely right. We are looking at markets that show promise of growing, markets the likes of South America, India, China, Thailand and Australia. Of course, this is not to say that we will forget about mature markets all of a sudden. We have some of our longest and most important customers in western markets. Currently our revenue structure is 50% U.S. based, 24~25% Europe (incl. U.K.), 11% India, with the remainder coming from South America, APAC, the Middle East and Africa. While these figures are not likely to change drastically overnight, we do foresee the Indian and APAC markets increasing a few percent.

--Do you foresee an increase in demand for the domestic Indian market?

India is of course feeling the effects of the global financial crisis, but is comparatively better off than other countries. The Indian Software Service Association (NASSCOM) predicts India’s domestic IT sector to grow by up to 20% in 2009.

We are the only of the domestic IT firms to have placed sufficient focus on the Indian market. We have taken on procurement contracts for many arterial projects such as the government’s tax collection system and the system for the stock exchange. Additionally, the IT firm CMC, the former state run company which we acquired in 2001, has undertaken handling many domestic IT solutions (for the government).

We can proudly say that TCS has been responsible for nurturing the domestic IT industry up until now. It is only since the market has shown promise of growth that other domestic and multinational competitors have begun to show any interest.

Looking back on developments, it has more often than not been the cast that TCS takes the initiative only to be followed by the competition. We established our first overseas operations back in 1974, pioneering ground not trodden by other Indian IT firms.

--January of this year saw fellow Indian IT firm and industry #4 Satyam in hot water over fraudulent financial reports and the arrest of its founder. Industry #3 Wipro Technologies was also handed down a suspension of trading by the World Bank over the illegal transfer of stock. With the stream of recent incidents, do you feel that confidence in the Indian IT industry has been affected?

No, I don’t think so at all. These are isolated incidents occurring at specific companies and are not an issue facing the entire Indian IT industry. TCS’ customers understand that these cases are in no way related to us. However, we have taken care to communicate our position on corporate compliance internally, reaffirming employee understanding or our policies.
TCS makes concerted efforts to prevent fraudulent acts by its employees. I would like to point out that we have strong corporate governance functions in place that hold with the 140 year long ethical values of the Tata Group. From new employees to senior executives and even external board members all staff sign the Tata Group’s code of conduct indicating their agreement. Each group company has an Ethics Counselor who reports directly to the respective CEO, with a Principal Ethics Officer working under the group’s chairman to overlook the group as a whole. From information security and HR to procurement, each facet of the business is governed by specifically determined compliance policy. You could say that the Tata Group has its own, very thorough, compliance structure in place.

--The misfortune of your competitors could be seen as an opportunity for TCS. What do you think of this?

We would not proactively approach our competitors’ clients. Should they wish to conduct business with us and we can reach agreement over the conditions we may provide services to them. That’s all.

The current economic situation is very challenging, but it is at times like this that business opportunities show themselves. Many companies are looking to cut costs and this is precisely where TCS can lend its expertise, offering strategic advice from a mid-term perspective. Once we have evaluated the company’s operations, its position in the industry, strengths and weaknesses we assess whether there is any waste in their IT systems and infrastructure. Through these evaluations we sometimes arrive at the conclusion that it would be beneficial to move operations offshore or to carry out R&D on a global scale.

That is to say, we don’t just stop at a single cost cutting project but rather are competent at assessing things from a management perspective and improving both work efficiencies and those for the company as a whole. We help achieve cost reductions in the realm of millions, even hundreds of millions (billions). In addition to traditional fixed fee base contracts, we also negotiate result based fee structures that fluctuate with the savings garnered through IT initiatives.

--India’s IT industry is seeing fierce competition between the top 4. Do you foresee further alignment for the industry?

There will certainly be further realignment within the industry, but it is not about to happen overnight. We bought CitiGroup’s back office operations on December 31st last year, acquiring some 12,500 employees. This is becoming an everyday thing (within the industry).

--We have heard that you are due to retire in October later this year. Can you tell us about this?

It is a rule within the Tata Group that one retires at 65. However, I have spent the greater part of my life with Tata and plan to continue being involved with the group in one form or another. A former senior colleague of mine once said; “One doesn’t die from hard work, but one may die from hardly any work.” People want to keep busy by nature.