With
its domestic rivals fading in the rearview mirror and global
competitors coming into focus, Natarajan Chandrasekaran, chief executive
of Tata Consultancy Services (TCS), in early 2013 went on a quest.
His
target and that of many of his peers was the $100-billion Japanese
outsourcing market. Until very recently, TCS earned barely $100 million
of $12 billion in annual revenues from the Land of The Rising Sun.
Chandrasekaran, 51, was determined to fix this.
On April 22, TCS
jumped-started this business it had painstakingly built since 1987, when
it merged its Japan unit with IT Frontier Corporation (ITF) and a local
joint venture Nippon TCS Solution Center Limited to overnight create a
business with revenues of around $600 million annually.
Japan is
the world's second largest market after the United States. But it's been
a difficult one to crack courtesy of its culturally sensitive clients
chary of outsourcing work to vendors without local language and
knowledge expertise.
Tokyo StoryTCS,
and most rivals, have had to take the long way around. Starting with
work for global multinationals such as GM and American Express in China,
then to work for Japanese giants in North America (Toyota, for
example), then to setting up centres in places like China, which are
close to Japan, before finally opening up local delivery centres in
Japan.
Analysts believe TCS has put in place a strong framework
for future growth. "TCS has a robust business acquisition and execution
engine," says Dipen Shah, an analyst with Kotak Securities. "Right from
recruitment, to planning of projects and executing on time and within
budgets, TCS has built a business which is superior to others."
Having snagged a bigger share in Japan, analysts think this will be a stepping stone for TCS.
The
company, they say, will now focus on similar investments in Latin
America and Continental Europe to further globalize its revenues.
The
protracted negotiations by TCS signal the company's intent not only to
crack the Japanese market but also to be seen in the same bracket as IBM
and Accenture and less as an India-centric outsourcer.
Not only
did it multiply its business in Japan, it has also clambered onto the
top 10 list of global IT services providers, according to HfS Research, a
Cambridge, Massachusetts-based research services firm.
TCS
gained three places in this year's study, according to the report,
putting it in the same league as global giants such as IBM, HP, SAP and
Oracle.
But a No 10 position may not be enough for
Chandrasekaran, and sure enough rival analysts and industry executive
dispute the HfS figures; they reckon TCS may be higher than the No 10
ranking bestowed on them (see The HfS Ranking...).
According to a TCS spokesperson, TCS ranks No 2 in market value, No 7 in revenues, and No 4 in profitability.
Company
officials were not available for comments for this feature. "I think
TCS breaking into the top 5 [in revenues] can only be achieved in the
near future [next three years] through a major acquisition [or a few
sizeable ones].
Even at current growth rates it would be hard for
them to gain the [at least] $6 billion they need to get to a top 5
position [assuming zero growth in the top 5 position]," says Jamie
Snowdon, a vice-president with HfS.
Good GoingIn
the ever-changing world of outsourcing, making long-term bets is risky.
"I expect if they don't make a major acquisition, the highest position
TCS will hit by 2016 is seventh, unless one of the bigger firms make a
big divestment or if there is a major shift in exchange rates and
Japanese firms lose ground," adds Snowdon. Other analysts think it is
only a matter of time before TCS hits the big time. "TCS has a lot of
momentum and today they are able to compete with the largest players in
the market," says Peter Bendor-Samuel, CEO of Everest Group, an offshore
advisory firm. "Their focus on localization of their business and
investment in understanding their customers better is paying off."
TCS'
revenue has doubled to $12 billion in around five years, while IBM
Global Services, its largest global rival, has stalled in the $55-56
billion range. In a difficult market, smaller global rivals have been
growing at a slower pace. Parisbased outsourcer Capgemini, for example,
has seen revenue go up from 8.37 to 10.09 billion in the same timeframe
(1 equals $1.4).
In an industry where its rivals have chosen to
grow either revenues or profitability, TCS has managed to do both. TCS
grew 16.1% year on year in the January-December period; Cognizant grew
faster at 20.3% albeit on a smaller base. TCS' growth is hardly without
challenges.
For example, a couple of quarters ago, the firm found
itself upended in the North America market for IT services, when
Cognizant took top spot. Cognizant has since then proven that its growth
in North America which accounts for two thirds of all IT spending is no
fluke by keeping its top position.
Despite its size, TCS has
also set itself up for future growth by building an efficient business.
It has a lean bench and lower attrition than most India-based
outsourcers. Its utilization, including trainees (a measure of the
number of people on billable projects), was at 77.9% for financial year
2013-14. While HCL Technologies' utlization was higher at 84.2% it lost
more people, with an attrition rate of 16.9% for its IT services
business. TCS' attrition rate at 11% was the lowest amongst its peers.
Riding the WaveAs
TCS closes the gap on its global rivals and stretches the lead from its
domestic competitors, analysts contend that the company needs to look
for multiple growth engines to sustain its growth. Chandrasekaran
indicated during a recent chat with analysts that Latin America and
Europe were priority sectors.
"As a company with [only] a billion
dollars in revenue... you do not have the scale to be able to say that
we are growing in all markets," he told them after the firm announced
results for the fourth quarter and financial year 2013-14. "The company
has the scale, size, the kind of offerings, investment capacity."
He
also added that TCS was not only able to snare new clients in Latin
America but also grow existing customer relationships. "We have built a
solid base in Latin America; we have got credible clients in this
market. So we need to scale up these relationships," he explained. "In
Latin America, our $1 million-plus clients are nicely migrating to $5
million-plus, and $5 million-plus clients are nicely showing signs of
migrating to $10 million-plus and $20 million-plus and so on."
Outsourcing
experts think that TCS needs to not just widen its geographic presence,
but also overhaul the kind of technology services it provides. "When we
look at the market, the future winners will not only focus on the
classic operate, maintain, transfer [of technology and tech assets]
business, but also focus on design and build," says R Ray Wang,
principal and founder of Constellation Research.
"Our clients are
asking for their system integrators to be co-innovation and co-creation
partners." It is this wave that TCS will need to ride to reach the
summit of IT services. "The firm that helps their clients with design
and build will be the winners in this next era of digital transformation
and digital business," Wang concludes.
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