The Hindu Business Line : ‘Delays in client decisions a challenge but pipeline looks good’

Chennai, July 20 Minutes before Business Line’s video conference with Tata Consultancy Services CEO & Managing Director, Mr S. Ramadorai, last week in his corner office at TCS House in Mumbai, we were informed that a client was huddled with the CEO, and that only after the former made his exit would the camera zoom in on the IT major’s chief.

Given the economic turmoil in the West, we would have given a few right arms and legs to know what was going on between client and vendor! But we need not have been that desperate. Mr Ramadorai was his candid self when he began talking. The message from clients is clear: technology, which helped business carry on as usual, was in; anything else had to wait. Mr Ramadorai shared these and other insights with Business Line soon after TCS announced its June 2008 quarter results.

How badly is the delay, in decision making among clients, affecting you?

They aren’t taking immediate decisions on any new transformation projects. New initiatives that could come out of discretionary budgets are taking a back-seat. In many instances, even where they have the opportunity to consolidate on the number of technology vendors, decisions are delayed: not because they do not want to take a decision because the positions may be vacant. For instance, the CIO may be on his way out, the CEO could be under threat of losing his position, or their results may be around the corner, so they may be devoting time to the business problem of fixing the organisation, which would be taking predominance over IT spending...

In February, during the annual Nasscom meet, some Indian IT CEOs seemed optimistic that the turmoil should end by September 2008. Your take on this.

The best prediction we can give is, if the situation does not worsen further, as we look at results of global corporations, then there could be an uptick going into Q3 (beginning October 2008) and Q4. But we are looking at the situation on the ground, such as issues related to Fannie Mae and Freddie Mac, results from the Citigroups of the world, to check if there are any more situations that will have an impact. It is critical to see how this plays out. That is what the caution is all about.

You had indicated that pricing is stable, while your competition has talked of a few clients looking for lesser prices, especially in the banking and financial sector.

We did face such issues in Q4 (ended March 2008), where we were asked for some discounts, but not so during the renewals now (in the quarter ended June 2008). If clients are consolidating the number of vendors that they work with, from three to two, then volume discounts come into play, but we have not seen anything else.

Your active client status has fallen from 904 in March to 885 now, even though you added 35 new clients. It means 54 have walked away…

I am not worried about 54 or 35. Are the 35 the right kind where there is potential for volume growth for us; and are we making a difference to them? Second, if projects are getting delayed, they will come back up the next quarter or the subsequent quarter. To me, the environment is driving these things. Fundamentally, IT and ITeS services will see increased demand in future. Whether that will happen in Q3 or Q4 is to be seen.

We understand that three of your clients have been ramping down recently. Any details of the fourth client you referred to, as ramping down, on TV?

That is an insurance client that had reduced work. This client may continue to reduce work this quarter. (Two other clients in financial services started ramping down during the March quarter, through the June quarter and may begin ramping up during the September quarter. Another client — a bank — is going through a demerger process that affected TCS’ Latin American revenues in the June quarter).

A $70-million order you had from an arm of the Chilean was cancelled due to alleged irregularities. What progress on that front?

It is like any other order. When you get a deal, competition complains to the government. Then there is an investigation to see if the tendering was done right. That experience is behind us. We are in the clear.

We are open to helping the government there in ensuring compliance. Revenues will not flow from this order, and our guidance has factored this in.

Last fiscal, about 500 people left due to performance-related issues. You also did not pay employees a part of their variable pay since your targets for economic value-add had not been met. How is it this year?

The last quarter, we met our Economic Value Added targets and paid out the variable part of pay fully. As to performance-related attrition, our evaluation of performance will continue.

Five hundred people leaving involuntarily should be seen in the context of an employee base of over one lakh.

Your ‘asset leveraged solutions’ business, under which product licence revenues come, is seeing a slowdown.

March quarter saw some major deal closures that resulted in higher licence revenues. Pipeline looks good for Q3 and Q4. Delays in decision-making is a challenge. The products business is cyclical.

You talked of orders obtained from hi-tech clients. Where are they from?

Silicon Valley in the US and Germany are at least two places where our new orders came from.

Your initiatives with China (TCS won orders from Bank of China) and with Ferrari as a client generated interest last fiscal. Is the slowdown affecting them too?

Client ramp ups and renewals on these fronts are proceeding as expected.