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IT Is The Only Sector With Multi-Decadal Growth Visibility: TCS CEO

Tata Consultancy Services Ltd (TCS) does business without much fanfare and is set to record $20 billion in revenue in the year ending 31 March. Yet, few people outside the company understand the secret sauce of India’s largest information technology (IT) services company.

Unlike what most management gurus will prescribe, TCS believes in building tech and grooming talent in-house rather than acquiring firms or hiring people from outside for senior roles. Gopinathan, who took over as chief executive in February 2017, lacks many traits of what is expected from a leader of a large firm. Unlike most CEOs, Gopinathan is shy and soft-spoken, and his conversation is not laden with declarative statements.

Gopinathan credits the company’s fastest growth (TCS will grow more than 11% in constant currency terms in the current fiscal year) in four years to his team for helping him execute the strategy fashioned by his predecessor (and current boss of Tata Sons Ltd, Natarajan Chandrasekaran).

Last month, Gopinathan, in an interview in Mumbai, argued why talk of the death of IT outsourcing is gibberish and shared the road ahead for his company. Edited excerpts:

Nasscom has done away with the practice of giving a forecast and rather shared a CEO survey. Do you agree with Nasscom’s commentary for FY20?

I haven’t gone through it. It is too early for us to comment on how the next year will look like. There is no negative overhang. Neither is there any gung-ho spirit. All the negatives are known. The reality is that macro is very difficult to call. We are no longer considering macro as an input to make decisions. There is nothing, for now, that tells me that we have to re-prioritize. I don’t think that we will get into the scenario, where we have years which are very positive or years which are very negative. This kind of environment will continue for the foreseeable future.

Are we at the cusp of the golden age of tech spending, with digital becoming mainstream?

I don’t know if I should characterize it as the golden age but definitely we are well into a period where technology will be a primary component of the value chain in multiple industries. Let me explain. If you take a longer-term horizon, say over 25-30 years, tech spending has consistently been faster than the economic growth.

Now, about 10-15 years back, technology spend of a client was part of the Selling, General and Administrative Expenses (SG&A). SG&A is traditionally about 15% of the revenue of a company in most industries. And depending on the industry, tech spend was some percentage of this 15%. Over the last five years, technology spend is part of the cost of revenue. For any company, the cost of revenue is 50-60% of the total revenue. So that is an upside.

Does this shift mean tech spending for most companies, across industries, on a blended basis doubled?

The real world is more complex. If you take banking and retail, then these industries have shrunk over the last few years. However, their technology spends over long term has been outstripping their growth or even GDP growth over a long-term duration. Now, overall retail spend has been negative over 10 years. But overall technology spends in retail has been growing. So it should not surprise you that business from retail used to be about 3-4% of our overall revenue 15 years back. Now, retail accounts for about 12-15% of our total revenue.

Does this shift in tech spending offer an opportunity for firms like yours?

Huge addressable opportunity for firms like us. This is because of the contextual knowledge that TCS brings. I’ll explain.

When it was about creating a web front or creating an app or creating a social media strategy, that initial spend may very well go to a digital or new age firm. But once you have 50 apps, and then you need to connect them with the supply chain or stock-keeping systems in the back-end, then you need to make sure the apps are built in a manner in which they can handle the supply chain systems. It should not be just the cool feature of the app alone. That is where competency shifts to a firm like us which can understand the functionality aspect.

A great example is in banking. Core banking systems are huge systems. So, for example, you create an app, and in the app, there is a feature of instant balance look up. Earlier, people used to look up their instant balance once a month. Now, people use this feature 10 times a day. The load on the back-end is going to be such that it doesn’t matter how good your app design alone is, the app will crash if you can’t fix it as a joint solution between the back-end and front-end.

So does this mean that a client’s tech spending has become de-linked or decoupled from economic growth?

Yes and no. At one end, you have an example like retail, where because of the industry is in a difficult situation, the technology spend has been definitely decoupled from economic growth. Then there are other industries like utilities. Here, because of the inherent resilience in their business models, because of their natural monopolies, although the regulators have been trying to break these monopolies, the tech spending is still tied to economic growth.

Let me ask you about your two-year stint. What are your thoughts?

The magnitude of transition at a personal level was much higher than the transition of an organization. This was because the team at the organization remained constant and the strategy remained the same. For me, it was more of a personal transition as there was a sudden change in my role.

What was the toughest thing about this job?

Chandra told us long back that the toughest thing of any job is to make sure that you leave your last job behind and don’t do it. Because the natural tendency for you is to do your previous job, and the toughest thing is to have the discipline not to do that previous job. The temptation to continue doing your earlier job is the toughest thing to let go. And the success for me personally has been that I have been able to make that transition.

This year, TCS will be ending with over $20 billion in revenue. At this size, if you don’t have an aggressive acquisition approach or unless you enter new service lines, how do you expect to grow at double-digit and incrementally add over $1 billion every year?

In 2012, we crossed $10 billion in revenue. Eight years later, we have crossed $20 billion. For years now, the narrative still continues, that we are nearing saturation, our largest industry segment banking industry is doing badly, our core verticals are seeing a slowdown, technology is changing, and our competitors are acquiring. But we have grown and transformed through this period by staying focused on staying and staying close to our customers and relentlessly investing in retraining our people. So just because we are now $20 billion, I don’t see a need to suddenly adopt an “aggressive acquisition approach”.

What according to you is the future of the IT industry?

As long as you are disciplined, you’ll keep on growing. It’s a beautiful industry. There is no other industry that has multi-decadal growth visibility. All we have to do is execute well and to make sure our capabilities are in tune with where the opportunity lies. And we cannot be complacent. The thing that can derail us is complacency.—Livemint

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