TCS wants to move up the value chain and it's about time it did so. But can it?

By Ashutosh Sinha

If you've gotten this far in the magazine, you must be a serious reader. Ergo, we'll try to avoid telling you things you already know about Tata Consultancy Services. Like the fact that it is bigger than Wipro and will close this year with revenues in excess of Rs 3,000 crore. Or that it employs more people than Infosys technologies; over 15,000, compared to the latter's 8,000-something.

Instead, we will tell you things you didn't know about, arguably, the most interesting it non-company (it is a division of Tata Sons) in India. Like its new objective: to become one of the world's 10 largest it consulting companies by 2010.

Cynics have good reason to chortle to death over that one. When body-shopping was the preferred business model of Indian software companies in the 80s, TCS could have held seminars on how to shop bodies. And when the off-shore services model supplanted that in the nineties, TCS was there, at the vanguard.

Thus, the company clocks an average of Rs 15 lakh a man-year for its work. Infosys, in contrast earned $135,000 (Rs 62.1 lakh) for on-site work and $60,000 (Rs 24 lakh) for off-shore work per man-year respectively. The difference is the strategic chasm TCS must cross before it can reach where it wants to be.

It is going to be long journey, then, for TCS from the lower echelons of the infotech value chain to a pre-eminent position at the apex. It will be a longer journey for S. Ramadorai, the avuncular 56-year-old CEO of TCS-one made no easier by the fact that almost 40 per cent of the software major's employees hadn't been conceived when he went to work for it in 1972. He's had two lengthy meetings to get things moving, the first with senior executives from TCS' Indian ops in December last year, and another with execs from its American operations in January.

In March, Ramadorai will, at the conclusion of yet another meeting with TCS' senior managers, finalise a blueprint that will detail the mechanics of achieving the 'Top 10 By 10' objective.

Strategies to move up the value chain were, understandably, the theme of the discussions that were (as they almost certainly will be of the discussions to be). Recollecting his own presentation at the December meeting, Jayant Pendharkar, a Vice-President of TCS who heads the largest of its vertical business units, the Banking and Financial Services Industries (BFSI) group, says he ''stressed the importance of learning to package the experience we had acquired while working on some complex projects''. That doesn't sound like a quote anyone at the old-TCS would have owned up to.

There's nothing like going up the value chain...

In theory, Pendharkar's suggestion looks great. TCS can convert learnings from the large projects it has worked on in, say, the financial services area, into domain expertise that could, in turn, help it offer it solutions to companies in the sector. Put simply, TCS is striving to be a high-end it services provider, not a sweat shop that crunches code.

Ramadorai already has a structure in place to achieve this: one team that assesses the customer's requirements; another that is responsible for identifying a technology platform and taking care of the system integration by bringing together various technology platforms into one whole thingummy that makes sense; and a third that does the actual programming out of any of TCS' 12 development centres in India.

''The software-writing part of the work accounts for just a small part of the total,'' explains Ramadorai. ''In the past, we were focusing exclusively on that.'' The born-again customer-focus inherent in that approach is manifest in a diktat that TCS has issued: 30 per cent of everyone's time should be billed to clients.

Still, the transition to an it consulting heavyweight won't be easy for TCS: this year, just around 7 per cent its revenues for the year 2001 will come from high-end consulting; the US practice (largely system integration projects), in contrast, will account for 60 per cent. It is the very customer-interaction heavy nature of the latter, that Ramadorai is betting on to generate high-end business for TCS. Arjun Malhotra, the Chairman of the Sunnyvale, California-based Techspan, an it-services company, admits that, ''If a company is present close to its customers, it is only a matter of time before high-end business starts flowing its way.''

But TCS isn't just depending on its customer-relationships-83 of the companies in the Fortune 500 list are its clients-or domain expertise to help it achieve its ten-year objective. It is making strategic investments in companies working in happening tech areas, like the Bangalore-based Jataayu Software (which operates in the Wireless Application Protocol space and is named after a character from the Ramayana) and the US-based Innova TV (which focuses on streaming-video apps).

It is also (surprise, surprise) focusing on creating intellectual property. Since 1999, TCS has patented six applications in the video-compression domain. And, finally, it is adopting the high-risk, high-return product-route, albeit with a minor variation of its own.

Over the last 18 months, TCS has managed to sell 12 copies of its banking product, Quarts, for between $1.5-2 million each. And each sale will generate another $7-8 million in terms of services and solutions built around the product. ''We don't want to sell to millions of customers,'' says Gautam Shroff, head of TCS' tech-consulting practice, '' but get millions in one sale.'' That products-plus approach could also lighten the burden on the marketing function.

....but only if you have the resources to do it

If there's one thing that can (and will) come in the way of Ramadorai's plans, it is people. Not in terms of numbers: this year alone TCS will add another 4,000 employees to its roster taking its total staff-strength close to 20,000 (that's roughly the same number of people Microsoft employs). With the bulk of these recruitments happening at the entry-level, the additional 4,000 will serve little purpose other than bringing down TCS' already low billing rate.

That apart, creating a thriving it-services practice requires senior front-line executives who have domain expertise. Ramadorai has sought to achieve this by staffing vertical units with non-it pros. Thus, the corporate strategy practice has Mahesh Bhandari, a former consultant with Arthur D. Little; the Banking and Financial Services Industry (BSFI); Girija Upadhyay, a banker from the Exim Bank of India; the Wholesale Banking Team, Rangesh Nair, a former merchant banker, and the Manufacturing Practices Group, Kumar Kanitkar, formerly with Tata Honeywell.

Still, TCS' efforts to clamber up the value chain may have come a bit late. India's premier infotech companies like Infosys, Wipro, and Satyam Computer Services started singing this tune some time back. ''We work on established and futuristic technologies, and are increasingly focused on wireless, Internet, and e-commerce,'' says Nandan Nilekani, MD, Infosys Technologies.

Acquisitions, local or international, could be a way out, and a listing (post a spin-off from Tata Sons) could provide TCS with the currency to fund these (See Just When You Thought Software Was A Safe Business..., August 7, 2000, BT).

Ramadorai is open to acquisitions, and doesn't rule out a listing, although he claims it certainly isn't part of the short-term future: ''I meet investment bankers every day and they pester me to go public quoting valuations ranging from $20 billion (Rs 92,000 crore) to $40 billion (184,000 crore), but acquisitions can be funded using the cash from our balance sheet.'' However, that happy valuation scenario could change. ''Unless it firms in India move up the value chain, and position themselves in a manner that reflects the value add in their delivery capability, the premium on their valuations could be affected,'' explains Arjun Sethi, Senior Associate with at Kearney.

That, though, is unlikely to happen in a hurry. Ramadorai, then, could well have the 10 years he wants to get the elephant to dance.

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