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TCS stands tall

The long distance runner

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Competitive pricing and aggressive cost-cutting have helped TCS stay ahead of its more glamorous rival.

On May 27, Indian and international runners will participate in a 10-km run in Bangalore. The event is sponsored by TCS. "The 10-km race is very special because it represents the perfect blend of speed and endurance, " says company CEO & MD N Chandrasekaran.

It's a description that seems to apply as much to the sponsor as to the event. TCS - founded in 1968, a good 13 years before Infosys - looked as if it would cede the numero uno status to its more glamorous rival in the early 2000s. That did not happen, and does not look likely in the near term with the street today celebrating the tortoise that seems to have managed to always stay ahead of the hare. The numbers speak for themselves: The difference in their revenues has widened dramatically in the last three years from Rs 7, 000 crore in 2009-10 to Rs 15, 000 crore in 2011-12 ( See table). Infosys margins, are, of course, higher.

NICE PRICE

TCS' success, industry observers say, has been built by consistently and ferociously focusing on the bread and butter business - application development, maintenance, BPO, testing etc. While it has a valuable portfolio of high-end business, it isn't the least shy about bottom fishing and competing fiercely on price.

V G Gopalakrishnan, formerly a vice president at TCS, believes its focus on resource utilisation was key to its staying ahead. "No other company I know focuses as much on utilisation;85 per cent resource utilisation is the bare minimum, 87 to 91 per cent is the average, " he says. "Client size is secondary. Utilisation is paramount. " It's this single minded pursuit that also allows the company to compete aggressively on price wherever possible. In contrast, Infosys had an 'abnormally low' utilisation of 64 per cent of its technical workforce, the lowest in many years.

LOOKING AFTER THE FLOCK

TCS is externally seen as low-paying, stodgy and bureaucratic. Bhuvnesh Singh, head of Equities Research, Barclays India, dismisses this. "If you look at employee retention, TCS has a low attrition rate, the lowest among the big three. Most of the churn is usually at the lower levels, and TCS was one of the first companies to protect itself with a bond. If you look at most of the seniors, they have been with the company for a long time. As for bureaucracy, the company has nearly a quarter million employees. You cannot handle that kind of number without processes and systems that may be perceived as bureaucratic. "

Gopalakrishnan agrees: "The strength of their internal systems makes for great discipline at TCS. Take a small thing like the issue of a laptop. If a new employee is scheduled to get a laptop so many days after joining, he will get the laptop on that day. Not a day before, not a day after. It doesn't matter if you are a vice president or a junior employee. And most of these systems are automated in-house by an excellent team. "

CHAMPION COST-CUTTER

Ashish Chopra of Motilal Oswal believes that TCS was able to weather the crisis of 2008 better than most because of relentless cost management. "Their aggressive cost management has helped them expand EBIT (a measure of a company's operating profitability ) margins and increase the proportion of revenues from fixed bid contracts, " he says. "During the 2008 crisis, the company pulled back onsite resources to work offshore to reduce costs. It was managed beautifully, " says Gopalakrishnan. "Another major cost-cutting initiative was around foreign travel. All foreign travel had to be approved by the CFO. As you can imagine, the number of foreign travel applications dropped dramatically, " he adds.

LEADING ROLE

Do you need charismatic leaders at the top to put a company on the path of turbocharged growth? Not if you are TCS. F C Kohli, the MIT grad who started TCS and is recognised as the father of Indian IT, was succeeded by Subramaniam Ramadorai in 1996. Shortly after that, Kohli would remark to a magazine: "Ramadorai had no vision for TCS, but will acquire it over time!" Ramadorai's vision, or lack thereof, saw the company enter into a period of explosive growth - from a 6, 000 person, $160 million revenue earner to a $6 billion dollar company with nearly 150, 000 employees in 2009, when he hung up his executive boots.

And the momentum hasn't let up since Chandrasekaran took over from Ramadorai in a typically no-fuss transition. Perhaps it is telling that Chandrasekaran's, "I could have ended up as farmer in Tamil Nadu if I had done what my father wanted, " interviews today are the business media's success story du jour, the way that Narayana Murthy's Horatio Alger story of a school teacher's son made good used to be earlier.

MANTRA: DIVERSIFY

"TCS has always behaved like a large conglomerate, " says Singh. "They were the first in Latin America. They moved into China in 2005. Other IT companies stayed with the US and European markets, but TCS was an early believer in geographical diversification. " That behaviour has made TCS a quiet pioneer. "The company was doing BPO work before the term became fashionable - they did work for HDFC, for Swissair, " says Singh.

TCS has balanced internal skill development with a judicious acquisition and joint venture strategy - using acquisitions to gain access to markets and clients.

Outlining his policy for acquisitions in The Wall Street Journal, Chandrasekaran said, "We will buy, but not for pure revenues. We will buy for strategic foothold, in a sector or a market. We're not interested in buying in small markets. We are looking at Europe and Japan, and in industries like health care and in areas of new technologies such as smart mobile and data cloud. "

"They have been willing to bolster growth by the acquisition of dedicated BPOs as well, something that an Infosys would be unwilling to consider, " says one analyst. "Take the case of the Citi E-Serve, or the Super Valu deal. Questions remain whether this was the correct strategy for them, but there is no denying these acquisitions have been beneficial so far. "

BUY TO CONQUER

Chopra is neutral on the company. "Their utilisation levels are at historical highs. Their cost-cutting aggression has given them limited headroom to improve margins, " he says. Singh believes that the company will continue on its growth path. "TCS is a mature organisation. Growth rates of large IT companies will stabilize around 10-15 per cent. Going forward, it will be acquisitions that drive growth. And TCS has a lot of experience with acquisitions. Most importantly, they know how to assimilate acquisitions, " he says. "Ultimately, large organisations fail, not so much because of market changes, but because of failures of leadership. Chandra and his team have been ticking all the right boxes so far."

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