Q&A with Tata Consultancy Services

One of the keynotes at last week’s Software 2007 conference was S. Mahalingam, CFO of Tata Consultancy Services (TCS), one of the biggest IT outsourcing companies in India.

Mahalingam’s keynote was in the form of an interview with Steve Hamm, senior writer from BusinessWeek. Here are some of my notes from that talk; none of these are necessarily verbatim quotes, but rather my attempt to boil the wide-ranging discussion into a more tightly focused narrative.

Introduction

TCS is a big organization, with 89,000 employees, and is growing at about 600 employees per week, and with local offices in 32 countries. The company reported revenues for its last fiscal year of US$4.3 billion.

The company doesn’t just sell labor arbitrage – that is, there’s more to TCS than low-cost workers. The company believe that it has the advantage because it can offer a wide range of services, some of which are very labor intensive, and others of which pay off because TCS has a lot of strong expertise and experience.

How does TCS manage to retain its employees?

By investing in people over many years, with frequent training to upgrade their skills, by rotating assignments, and providing opportunities for travel and foreign assignments. There’s a lot of turnover for the first few years after an employee is hired, but once someone has been onboard for seven or eight years, they’re like to stay at TCS.

What about wage inflation, which is running at 12-15 percent in India right now?

The competition for talent is intensifying, not only as TCS grows, but as companies like IBM and Accenture open large R&D and service facilities in India. However, TCS believes that this high wage inflation won’t last for too long before it settles down; it should settle down in two or three years.

What’s the quality of Indian engineering graduates? There have been stories that only 30 percent of engineering grads are employable.

A part of the problem is there are many new educational institutions, and not all of them are teaching the graduates the right skills. Even so, they’re graduating bright people: you can’t get into an engineering school, even a new one, without the right examination scores. TCS is trying to help the schools fix this problem. Often, the issue isn’t a lack of engineering expertise, but more of a lack of “soft skills” needed to be a good employee of a service company. This often takes 4-6 months of on-the-job training for a new graduate to learn. Also, TCS is experimenting with hiring science graduates, in addition to engineering grads. If you can go outside the traditional engineering pool, the talent issue can be resolved.

Indian tech companies have been a disruptive influence for a decade – but as U.S. companies like IBM and Accenture open large Indian facilities, how can TCS differentiate itself?

Every company has its Indian story now. Our value proposition is that we can do everything from one shop, and can service multinational companies from many different locations and local offices. Ultimately, we’re a better value.

TCS is globalizing rapidly, and is expanding into places like China and Latin America. Will India remain central to TCS?

Yes. Someday I hope to 5,000 employees in China, but India will remain where we have the largest concentration of talent. That’s where we know how to scale, where we have solid processes for success, and where we have the trained workforce.

TCS has huge margins, of 25 percent or more – more in line with a software company than a services company. How can TCS maintain those margins when customers are driving you to cut costs?

The biggest challenge for our margins right now is the exchange rate. In the past two months, we had a 7% increase in the value of the rupee against the dollar. But even with that challenge, that, we can maintain margins because of the value that we provide. About 40% of our business comes from fixed-priced bids, so as we continually improve our business processes and leverage our own intellectual property as part of the solution, our margins can get better. On the wage side, yes, wages are going up, but Indian wages are still lower than what the customer expects.

We don’t hear much about innovation in tech services companies like TCS. What type of innovation is going on?

We have become a disruptive influence on services. We have changed the game by helping our customers define their business processes — and then outsource them. We are innovating around the services that we offer, the platforms we can create and how we create an ecosystem around our services and platforms. We also have a team thinking about the future: we’re not IBM, but we have 200 scientists dedicated to R&D.