As the man who controls the purse strings of India’s largest IT services company, Tata Consultancy Services’ S. Mahalingam has an arduous job—one that has got tougher in the last couple of months. A look at the first quarter revenues of the banking, financial services & insurance (BFSI) vertical, which accounts for 44 per cent of TCS’s overall revenues, is reason enough to worry. Revenues from the segment fell by 11 basis points and, inevitably, a slowdown in IT spending in the US is being spoken of. But the mild mannered CFO is holding his verdict for now.“In the BFSI segment, there are clients who have cut or delayed their IT spends, but there are also clients who have started spending more. It’s more of a client-specific phenomenon rather than an industry-specific one,” says Mahalingam who adds that clients have been ramping up in sectors like utilities, energy and retail.
As TCS COO N. Chandrasekaran recently told analysts: “Our performance in the manufacturing and retail sectors has been very satisfying. We have grown significantly during Q1 and we continue to see growth in manufacturing, retail, and utilities and high-tech sectors in the coming quarters. There are a large number of opportunities in these sectors with regard to bringing in sourcing optimization and transformation.” Along with emerging verticals, the focus will also be on new geographies, and deepening relationships with existing clients. “We are still planning for a growth market,” says Mahalingam.
He gives the example of branding, where the company has no plans of going slow. “You don’t slash expenses on your branding strategy just because there is a downturn. Because better branding might get you better pricing,” he adds. “So the question to ask at a macro level is…how do I ensure that margins in each business unit get better?”
The TCS way
It is feeling the heat...
• In the fourth quarter of last year, two of its top 10 clients had delayed budget spends. They remained sluggish in the current year's first quarter
• The banking, financial services & insurance vertical grew by a mere 2.9 per cent in the first quarter vis-a-vis the previous year's corresponding period
• Decision-making in transformational projects in the banking products space got delayed
…but it has a counter-plan in place.
• No let-up in recruitment: Still plans to hire 30,000-35,000 employees in the first quarter (TCS had a headcount of 1,11,407 in 2007-08)
• Going for the big deals: Has a pipeline of 20 large deals, including in BFSI
• Focussing on higher growth verticals: Sees great opportunities in telecom equipment manufacturing, healthcare & life sciences, energy & utilities and transportation
• Improving employee utilisation: Ensure the mean time for an employee to move from one project to another is reduced
When industry body NASSCOM projected a below average growth of 21-24 per cent for software exports for the current year, not too many people raised eyebrows. Reason? The gloomy economic environment in key markets like the US and the UK, coupled with poor growth prospects for the flagship BFSI vertical. But industry captains are not pushing the panic buttons yet. Infosys Technologies is still planning to hire 25,000 employees this year, which might be still less than the 33,000 it added last year, but is still a substantial number. Companies like Satyam Computer Services and TCS also plan to hire in large numbers during the current financial year. As Hari T, Head Global Marketing & Communications, Satyam Computer Services, says: “We are on track with the guidance given for the year—both in people and revenue terms—and have no plans to either cut down or defer campus offers."
V. Balakrishnan, CFO, Infosys, feels the global slowdown could work in India’s favour. “In difficult times, when customers are more focussed on efficiency, offshoring will be a winner.”
Along with growth, TCS is also taking a hard look at costs. Mahalingam roughly divides TCS cost structure into three portions: manpower, which accounts for 60 per cent, project-specific costs like software (10-15 per cent) and other costs like travel and communication, which account for a fourth. On the manpower front, TCS hopes to improve employee utilisations, which is at 77-79 per cent currently.
Just one way of doing this is to ensure that the mean time for an employee to move from one project to another is reduced. “As for our expenses like travel and communication, we realise that we have over 100,000 employees. Our bulk buying power needs to be used to our advantage,” says Mahalingam. Such measures helped TCS reduce its first quarter selling, general & administrative (SG&A) expenses by 217 basis points as a percentage of revenues over the previous quarter (the fourth quarter of 2007-08).