The Hindu Business Line : `We want to go after the large deals'

What will an overseas listing give us? Unless we want to create a float or a set of retail investors in the overseas markets, we see no reason. Today, offloading more in India is as good as anywhere else. — Mr. S. Ramadorai, Chief Executive Officer, TCS.

Tata Consultancy Services (TCS), the biggie of the Indian software services sector, ended the year 2006 with revenues just short of $3 billion. In the first six to nine months since listing in August 2004, the company struggled to articulate its core strategy and handle investor relations. Since then, however, TCS has not only got its act together, it has turned pretty aggressive on the large deals and acquisitions front.

Last August, TCS walked away with a substantial chunk of the offshoring contract from the Dutch financial powerhouse ABN Amro. And it followed that up with a flurry of acquisitions to address key gaps in its services portfolio: Having bagged a $847-million, 12-year contract from Pearl Insurance, UK, to enter platform-based BPO, it acquired Australia-based FNS to strengthen its core banking portfolio and Comicrom, Chile, to foray into banking BPO. The TCS CEO and MD, Mr S. Ramadorai, who was in Chennai recently, had a wide-ranging interaction with Business Line on its large deal strategy, onsite-offshore mix, upside in billing rates and its overseas listing plans.

You have stated that the target for TCS is to reach an onsite-offshore ratio of 55:45, from the current levels of 62:37. How do you plan to go about it?

There are couple of ways in which we are looking at it. For existing large accounts, what kind of an onsite-offshore mix is possible? Ideally, somewhere around 50:50. For some of them it will be higher and, for some, lower.

For systems integration kind of projects, or even large deals, we are talking about doing work out of global delivery centres (GDC) in different parts of the world. What is a GDC, is it offshore or onsite?

When we work out of Hungary or Brazil, it is offshore because the client is in the Netherlands. Some 5,000 people are working out of these centres. On all mature projects, a higher level of offshore is possible. It depends on the culture of the organisation (at the customers' end) and we are pushing in that direction.

Do you think it will take you two to three years to reach 55:45 level?

One percentage point change every quarter is something we are looking at. This is an internal parameter or benchmark that we are tracking.

Are there projects within TCS that are heading towards 90 per cent offshore? If so, are these in respect of mature relationships?

Yes, we are moving towards this level in some of them. We are putting this kind of challenge in some of our newer accounts also, where we are aiming at 70 per cent offshore. The newer accounts are much easier than the existing contracts struck several years ago. The mindset is now changing. These new accounts are aligned with us to say that offshore is the best model.

To address the issue of offshore-onsite split, our fundamental question is how do they (TCS' peers) count? Since our margins are more or less similar, where is the difference in percentage count? That is why, for GDCs, we have started reporting them separately.

Second, the kind of levers we have in different kinds of engagements. If we have a turnkey project, we are generally allowed to manage it in whatever way we can. The other option is to have a blended rate for different contracts. The third is to have a higher onsite rate to get a better margin. And improving utilisation can also give us a better margin. We are firing on all cylinders to achieve it.

Will you continue to aggressively pursue the large deal strategy?

As a strategy, we want to go after larger deals. Nobody can afford to throw away an ABN Amro kind of contract, which gives us a sustained revenue stream, even if, for argument's sake, it drops the margins by one percentage point. Since the revenue stream is guaranteed, we can make up the one percentage point by operational efficiencies and other such levers.

The reference possibility of using an account like this is a lot more than anything else. Finally, using this volume contract, we can sell the client a differentiated range of services that come under a different rate structure.

There are projects in Chile, or projects in ABN Amro, which will not come under the total outsourced contracts.

These will be discretionary spends for which we bid separately. An SAP or Oracle implementation will not come under the original contract, but will be negotiated separately.

We will ensure that we have a different rate structure for a commodity kind of service versus a value-added service. Otherwise, we always have the option to reject the request. Just making a blanket statement that large deals do not make sense to us is a view that we do not subscribe to.

The second is specialised services, or new growth areas, that will be applicable to large accounts as well as to new accounts. Third, our client accounts from $1 million and above, going up in different client buckets, present a good market for growth. Large deals and a sustained revenue stream are critical to guarantee predictability and growth.

According to the outsourcing advisory, TPI, the Big-Six vendors have been steadily losing market share in large offshoring deals. What deal sizes will Indian frontline companies participate in?

I do not think we will do deals for more than $500 million. And these deals, typically, will be for 5 to 7 years. Most deals will be in the $100-200 million range.

If we look at the past eight quarters, there has been hardly any upside in billing for all the top companies? What will be the triggers for this change?

The question is, can you produce 50,000 SAP professionals. The demand is very much there, but the servicing capabilities are missing.

Why does attrition occur? In certain areas, the attrition is as high as 15-25 per cent. It is just shortage.

The only way to attract a person is to double or treble his salary. The question you need to ask is whether you want to be in that game? You are in a game where you are going to continuously lose people and you are not going to be doubling salaries.

This means, unless the client can guarantee a certain level of margins, it will be hard to service these contracts.

Is the presence of multinationals putting further pressure on the billing rate front?

As Accenture and IBM are building their offshore models; they have been putting pricing pressure. The customers have also become pretty savvy in terms of getting the best deal.

There are certain skills where we can still charge a premium. The problem is not in terms of charging more, but building scale is just not possible in the short term. It will take several years to reach that level. There are no short cuts.

What are the key trends to track in the software marketplace?

If you ask me about changes that are happening in the marketplace, I would say IT services will grow slower, but BPO and infrastructure services will grow faster.

That is because IT services has matured substantially and the other two are where people will look at the next wave.

Engineering and industrial solutions is another opportunity. These are all at various stages of maturity from the customers' perspective and also reflect what is possible from an offsite/offshore location.

Even in TCS, when we talked about platform BPO, we wanted to get a lead. So we went ahead and acquired Pearl Insurance, as we could not have built ground up.

There has been talk about a possible overseas listing by TCS for some time now. Are you beginning to think of a timeline for this?

What will an overseas listing give us? Unless we want to create a float or a set of retail investors in the overseas markets, we do not see any reason.

Today, offloading more in India is as good as anywhere else. India is a lot more attractive to institutional investors than an overseas listing. SOX (Sarbanes Oxley) compliance is highly expensive stuff.

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