With a market cap of around Rs. 4.9 lakh crore ($77 billion), Tata Consultancy Services (TCS) is the most valuable Indian company. It is around 70% more valuable than ONGC, India’s second most valuable firm, and worth the same as the next four major Indian IT firms (Infosys, Wipro, HCL Technologies and Tech Mahindra) combined.
“Long-term investors look for companies that create sustained value for shareholders, the ecosystem and the community,” says the company’s CEO and managing director, Natarajan Chandrasekaran (Chandra). In an interview with Knowledge@Wharton, he talks about how the “digital five forces” – mobility, big data, social media, cloud computing and robotics – are changing the way TCS operates, and how the company is staying relevant to its customers in “a time of exponential change.”
An edited transcript of the conversation follows.
[su_note note_color="#f9fafd" text_color="#4e8df6" radius="4"]This interview is republished with permission from Knowledge@Wharton-the online research and business analysis journal of the Wharton School of the University of Pennsylvania-under a content licensing agreement with Future Startup.[/su_note]
Knowledge@Wharton: Why is the market so enamored of TCS?
Natarajan Chandrasekaran: I am not comfortable with such epithets and neither can I speak for the investors. I believe that long-term investors look for companies that create sustained value for shareholders, the ecosystem and the community. Our revenue to equity multiples are similar to other growth companies in the broader technology industry. At TCS, our focus is on staying close to our customers, understanding their business challenges, helping to address them and making the investments needed to remain relevant to our customers.
Knowledge@Wharton: In a letter to your employees, you have said: “Looking forward, we have a historic opportunity to grow and lead our industry to greater heights.” You are, of course, not talking about just India, where you are the leader by far, but also about the global market. In 2013, TCS became the world’s second most valuable IT services company behind IBM ($160 billion). Revenue-wise you have moved into the top 10. So what are your global plans?
Chandra: We are living at a time of exponential change – all of it driven by a clutch of digital technologies. Cloud, mobile, social, big data and analytics, and robotics are fundamentally forcing us to re-imagine all aspects of our lives. We are moving rapidly to a state where the default is digital.
We began investing in digital technologies and their application in enterprises at an early stage, and I believe today that TCS can play a leading role in this massive transformation or re-imagination that our customers are going through.
Unlike technology revolutions in earlier decades like mainframes, enterprise computing or the Internet, when our scale and ability to invest were limited, this time we are equipped, invested and well prepared. We also have the global scale, customer relationships and the partnership ecosystem to play a dominant role in this ongoing revolution across our key markets like North America, the U.K. and Europe. In this context, we want to remain very relevant to our customers and their business, and that will be the bedrock upon which our growth plans will be built.
In specific key markets like France and Japan, where we have not had a major impact so far, we are making acquisitions to strengthen our presence and add more local talent into our mix. We believe that these markets, along with emerging or growth markets like India, Latin America and ASEAN, will become strong growth drivers as well.
I am not comfortable with such epithets and neither can I speak for the investors. I believe that long-term investors look for companies that create sustained value for shareholders, the ecosystem and the community. Our revenue to equity multiples are similar to other growth companies in the broader technology industry.
Knowledge@Wharton: Have you looked at taking over a company ahead of you in the top 10, say Accenture or Capgemini?
Chandra: Our strategy has always been to acquire for strategic reasons only. These may include buying to enter a new market or industry sector, for acquiring a new service capability or a new technology. Otherwise, we have a strong tradition of organic growth that will continue. I would also like to add that when acquiring or merging with any company, big or small, the key is to find the cultural fit between the two organizations.
Knowledge@Wharton: Do you see a day when you will overtake IBM?
Chandra: It’s not something that I think about or measure ourselves on. Our focus remains on capturing the growth opportunities across all the markets we operate in.
Knowledge@Wharton: You have just about reached the entry point for the top 100 most valuable global companies. In 2005, Ratan Tata (former chairman of TCS) had said: “We always visualized TCS as needing an international listing.” What is the position on that now?
Chandra: We are listed on the two largest stock exchanges in India, which are among the top 10 exchanges in the world in terms of liquidity and number of transactions per day. Foreign investors find it very easy to invest in India through multiple routes so there is no reason for us to think of an international listing at the present time.
Our strategy has always been to acquire for strategic reasons only. These may include buying to enter a new market or industry sector, for acquiring a new service capability or a new technology. Otherwise, we have a strong tradition of organic growth that will continue.
Knowledge@Wharton: Won’t an international listing help you grow inorganically? It will give you the currency for takeovers. It will also help change the perception that Indian companies are taking away jobs from the U.S.
Chandra: We have a strong balance sheet and we generate strong cash flows on a regular basis. This mitigates the need for currency through an international listing.
Companies like TCS are creating STEM jobs in the U.S. For many years, we have been a net hirer in North America, so we continue to create new jobs. At the same time, we are also growing stronger roots in the community. We are committed to working under the STEM “Education to Careers” banner in North America at multiple levels, helping shape the discussions on platforms like US2020 and NPower and providing technology solutions for STEM programs like Million Women Mentors.
Our student technology awareness program [named] goIT provides in-school IT career and awareness workshops and hands-on technology education to high school students. Since its inception in 2009, goIT has impacted over 7,000 students across 40 schools.
Unlike technology revolutions in earlier decades like mainframes, enterprise computing or the Internet, when our scale and ability to invest were limited, this time we are equipped, invested and well prepared.
Our year-round involvement in events like the TCS New York City Marathon and school and community programs around wellness and fitness are also making an impact.
Knowledge@Wharton: You have managed industry-beating results when some big boys have been faltering. How?
Chandra: Conventional wisdom says that companies loosen the reins and decentralize decision-making in good times to pursue growth, often at the risk of building up some inefficiencies in the system. When times turn bad, they tend to do the opposite — centralize and take tighter control on operations to optimize profits. When the financial crisis struck in 2007-2008, we did not go by convention. We did not tighten up the company. Instead, we reorganized into smaller, agile units and empowered the managers on the ground because they were closest to reality and not distracted by external news. This also freed up time for my management and for me to travel extensively and meet with customers and understand how we could help them. This period only reinforced my strong belief that if we stay relevant to our customers and run our business well, everything else will fall into place.
Knowledge@Wharton: Some of your competitors have had leadership problems. Could this be one of the factors that has affected their performance?
Chandra: I have tremendous respect for all my peers. I will not be able to comment on this question.
Knowledge@Wharton: You have restructured the company twice in response to the internal and external environments. What were the circumstances, and how did the changes help?
Chandra: It is always easier to make changes before you are forced to do so by circumstances. As I explained, in 2008 we restructured into smaller, industry focus units because we had to be close to the customer – that was the only way to focus on helping our customers in what was a terrible business environment globally.
Knowledge@Wharton: Are you still in a state of change, or do you have a strategy for the near-term/medium-term?
Chandra: The technology business requires companies to always operate with an agile mindset. Our strategy is to become more relevant to our clients — increase the depth and width of our relationships with them, be an integral part of their business plans globally and play the role of a full stakeholder to their business — and to keep making the investments in technology and our capabilities to stay ahead of the pack.
[blockquote source]In recent years, taking up long-distance running has helped me refine my leadership style. It has taught me to reflect in silence amidst the daily noise around us. It has taught me the importance of endurance and of perseverance. Running my first marathon was one of my best moments because I could feel that I was truly stretching myself.[/blockquote]
Knowledge@Wharton: You have talked about the “digital five forces” – mobility, big data, social media, cloud computing and robotics. How are these changing your way of working?
Chandra: In a world where the default is digital and everything is real-time, it is important to have a flat structure with no artificial hierarchies and where the people are empowered. That’s the only way we can have faster decision-making and faster response times. We have to create an idea-sharing network, as opposed to hierarchies. We have to push the right data to the right people across the organization.
The whole idea is to kill workflows – which are an anachronism. Work should not flow; work should just get done. Twitter Workflows were created at a time when the data to make decisions was not available with one person. As a file skipped from desk to desk it got populated and then the “manager” made the decision. Digitization only removed the paper but kept the workflows. But, with real-time data, any person who sees data can make decisions. So workflows are no longer needed. What is needed is a way to communicate these decisions to the whole organization and have processes to mitigate responses as required. It’s a journey we have started on.
In sum, we have to work as a smaller company which has the advantage of scale and bring the power of one TCS to bear upon the customer. We want to remain humble and hungry.
Conventional wisdom says that companies loosen the reins and decentralize decision-making in good times to pursue growth, often at the risk of building up some inefficiencies in the system. When times turn bad, they tend to do the opposite — centralize and take tighter control on operations to optimize profits. When the financial crisis struck in 2007-2008, we did not go by convention. We did not tighten up the company. Instead, we reorganized into smaller, agile units and empowered the managers on the ground because they were closest to reality and not distracted by external news.
Knowledge@Wharton: How is technology changing the world?
Chandra: Technology is playing a bigger role in our lives, each passing day. Today, there is more technology everywhere – in our homes, offices, around us. This gives rise to huge opportunities for companies like TCS.
The way to look at digital is that everything is on its way to evolving into a digital platform. Of course, the opportunity is many billions of dollars but there will be different components based on the combination of the digital five forces or new composite technologies like the Internet of Things, hyper-localization and 3D printing.
One thing is now clear: A digital strategy is not about building mobile apps or using the cloud. It is about building new business models. It’s about changing the whole way of working, the way you understand and interact with your customers as well as the products and services you offer. As companies go through their digital transformation journey, TCS is very well positioned to partner with them in the new digital economy.
In a world where the default is digital and everything is real-time, it is important to have a flat structure with no artificial hierarchies and where the people are empowered. That’s the only way we can have faster decision-making and faster response times. We have to create an idea-sharing network, as opposed to hierarchies.
Knowledge@Wharton: Where is the innovation at TCS? You have the Innovation Labs and the Co-innovation Network. Why has TCS not produced any marketable innovation?
Chandra: We have nurtured a strong culture of innovation across the organization. But as in everything we do, our research and innovation activities are done with the customer at the center. This enables us to understand our customer’s latent needs and deliver innovative solutions in a rapidly changing technology and business landscape.
Towards a streamlined delivery of “innovation to business,” we have built a “4E” innovation framework involving “explore, enable, evangelize and exploit” aspects. Path-breaking ideas are “explored” by research teams, and those with market traction are “enabled” further. The most promising of these are scaled up for business consumption or “exploit” programs. The customer feedback and market insights are constantly provided to the research team by the “evangelize” team.
If we stay relevant to our customers and run our business well, everything else will fall into place.
The research and innovation team also looks at out-of-the-box ideas from the innovation landscape outside TCS. We are working with some of the top universities in the world in areas like genomics, quantitative finance, supply chains, information systems, software engineering, intelligent city frameworks, service design and many more. We also collaborate with startups and emerging technology companies around the world through the TCS Co-Innovation (CoIN) program and provide the best solutions for our customers.
From medical devices to surgical implants, from electric cars to Hollywood blockbusters, from top-rated banking apps to award-winning customer loyalty, there are plenty of products and services in use today that carry a deep TCS imprint in their R&D and product engineering.
Knowledge@Wharton: TCS has a staff of 300,000 plus people. Many of them are engineers. Why has this big pool not produced anything really innovative like Facebook? Is it an issue of marketing?
Chandra: We have produced great innovations for many of our customers which have made them leaders in their business. We are a B2B company and given the long-term growth opportunities in this space, we have not considered trying to create or market social platforms for end consumers.
Knowledge@Wharton: Will an Indian in India (not an Indian abroad) ever produce a great product? The next big app will come out of India, says [Microsoft executive] Joseph Landes. Will it come out of TCS?
Chandra: Over the past decade, India has matured as a hub that is setting the pace for innovation in the next generation of IT services — innovative services that fill the white space between technology products and the total solution that a customer desires. In doing so, Indian service providers have developed a deep understanding of and points of view about most technology products. They now know what works and what doesn’t, and most importantly, they know what enterprises really want. It is this knowledge that is enabling Indians in India to develop “new age products” for the next frontier.
At TCS, we are incubating several ideas, and as we go forward we will be launching products and platforms that are disruptive.
Knowledge@Wharton: A lot of people praise TCS’s Knome [a social platform]. Is this something that takes the best of Pinterest and Facebook? Does it unify your global team?
Chandra: Organizations today need a multi-dimensional perspective across lines of business as well as functional areas. We need platforms which facilitate collaboration in its many forms, such as person-to-person, systems-to-persons and systems-to-systems collaboration. These platforms also need to be designed to bring in an element of enjoyment among employees in the workplace.
To address these requirements, we built Knome, which provides … social networking activities — tweets, blogs, posts and queries — blended together with gamification elements. It is designed to be the single virtual workplace for employees where they can connect with each other with an objective to realize the true collective potential of the enterprise and harness its collective wisdom.
Today, we have over 1,000 focused communities and 250,000 users across the world. Not only does Knome connect people across the enterprise, it can also identify experts, enable cross-pollination of ideas and allow for crowdsourcing of ideas. Platforms like this facilitate closer connects with the leadership team.
Knowledge@Wharton: What is your total headcount now? How much of this is in India?
Chandra: Our headcount has grown to over 318,000 professionals across 60 countries and 118 nationalities. We now have over 14,000 people in Latin America, over 4,000 people in Japan, and our new center in the Philippines has crossed 2,000 people. We have a depth of talent in all key markets where we operate.
Knowledge@Wharton: How do you motivate people in such a large company?
Chandra: We have a strong employee engagement program in many dimensions. Across the globe, we engage with our employees through our platform called Purpose4Life which encourages TCSers to volunteer their time to do something worthwhile in the local communities. Last year, we clocked over 200,000 hours on this platform. Then we have a gamified wellness and fitness platform called Fit4Life which encourages TCSers and their families to adopt healthy lifestyles. These are global platforms. In addition, we have local or regional initiatives that our teams [support] – teaching STEM in schools in the U.S., U.K., Canada and Australia, employability and skills training in India and many other such programs.
Of course, I cannot stress [enough] the focus on building global careers and a culture of continuous learning and great opportunities that keep many professionals rooted to this company, giving us the highest retention rate for employees among all companies in this industry globally. That is something we are very proud about.
Knowledge@Wharton: Do you plan to increase hiring abroad, particularly in the U.S.?
Chandra: We have been hiring in North America and other geographies for some years. We are net hirers in any key market globally as we continue to expand. We are hiring from engineering colleges in the U.S. as well as management graduates. This is an ongoing process and it will continue.
Knowledge@Wharton: Are your visa problems continuing? Your rejection rate is 50% plus. Will hiring in the U.S. help mitigate this problem?
Chandra: We have always said that countries around the world will continue to keep a tight rein on visas and temporary immigration measures until the unemployment rate drops below the long-term average in developed markets. Since 2008-2009, we have been using multiple mitigation measures to ensure that lack of visas does not impede our customer’s business.
Over the past decade, India has matured as a hub that is setting the pace for innovation in the next generation of IT services.
Knowledge@Wharton: Where is your growth market in the future likely to be – in India or in the U.S.?
Chandra: Our business split closely follows the size of the technology markets across the world. North America, U.K. and Continental Europe are the top three IT spenders and our business will continue to track those numbers. India as a growth market has a lot of potential, as we have been saying for many years. But now with the Indian government’s focus on Digital India as well as other programs like 100 Smart Cities and Make in India, we think that companies like TCS can play a big role to make India emerge as one of the smartest nations in the world.
Knowledge@Wharton: Your retention rate is 90%. Is the rest natural attrition or the pink slip for poor performers?
Chandra: We have a strong performance-based culture in the organization. This leads to a certain amount of involuntary attrition which is at around 1% of total employees. The rest is natural attrition.
Knowledge@Wharton: Can you tell us about the all-women BPO center in Saudi Arabia? How is it doing? Are there any plans for extending the concept to other countries? And are there any other such initiatives?
Chandra: Last year, TCS along with partners Saudi Aramco and GE announced the launch of the first all-women business process services center in Riyadh to be staffed by Saudi women. The collaboration of these three companies underscored their strong commitment to support Saudi Arabia’s localization strategies to diversify the Kingdom’s economy and enable the growth of a viable employment sector. This center will serve as a building block to localize the BPO industry in the Kingdom. The three partners are working together with the intention of scaling up the new venture over the next few years.
We have introduced a unique business model in Saudi Arabia that is becoming a rich training ground for building new capabilities, skills and careers for Saudi women. We are hiring women graduates in the areas of finance, accounting, human resources management and supply chain management services.
Organizations today need a multi-dimensional perspective across lines of business as well as functional areas. We need platforms which facilitate collaboration in its many forms, such as person-to-person, systems-to-persons and systems-to-systems collaboration.
Knowledge@Wharton: What sort of image does sponsoring marathons all over the world give you?
Chandra: Health and fitness has long been a strong focus for us as a company given our young employee base with an average age of only 29 years. Association with events like marathons was a logical extension to take that wellness movement into the local communities, engage our employees and clients as well as raise funds for worthy causes. In cities like Mumbai, Amsterdam, Boston and New York, we have managed to use these platforms to not only elevate our brand presence beyond our target customer base and into the broader community, but we have also managed to amplify our message of wellness and fitness deeper into the local communities.
Knowledge@Wharton: “Tata” has a brand value of $21 billion (brandirectory.com Global 500 2014). TCS is $8.2 billion. Are you paying a royalty to the Tatas for using the name? Is it good corporate governance to pay such a royalty?
Chandra: There is no issue of governance. It’s all about the value derived from the brand promotion agreement with Tata Sons and the brand “Tata.” Because of the increasing breadth of the Tata brand in many global markets, the TCS brand gets additional name recognition. And because of the unique characteristics of the Tata Group — its reputation for giving back to the community, its strong focus on integrity and trust — it allows TCS a strong association with a trusted mother brand. Lastly, as the Tata brand expands globally, it provides additional support for growth of the TCS brand.
Knowledge@Wharton: Every time the Tatas need money (to shore up stakes in group companies or for other reasons) Tata Sons sells some TCS shares. Does being the treasure chest of the group impact you in any way?
Chandra: The shareholding of Tata Sons in TCS has been stable for some time. The Tata Group is committed to this company and the shareholders know that.
[blockquote source]One thing is now clear: A digital strategy is not about building mobile apps or using the cloud. It is about building new business models. It’s about changing the whole way of working, the way you understand and interact with your customers as well as the products and services you offer. [/blockquote]
Knowledge@Wharton: When did you know you were going to be the next CEO? How did the company prepare you for leadership? How did you personally prepare for leadership?
Chandra: On May 26, 2009, I was informed after the board meeting that I would be the new CEO. I had never thought that I’d be a CEO one day. Every position I have ever held in TCS has been full of rich experiences and learning and not the means to an end. I look at my career as a journey where every situation and every assignment has enabled me to learn something new.
In recent years, taking up long-distance running has helped me refine my leadership style. It has taught me to reflect in silence amidst the daily noise around us. It has taught me the importance of endurance and of perseverance. Running my first marathon was one of my best moments because I could feel that I was truly stretching myself.
Knowledge@Wharton: How do you manage succession planning at TCS? Have you identified a successor?
Chandra: TCS has a long pipeline of leaders who are now running individual business units of between $500 million and a few billion dollars. Our structure of smaller, agile business units run by empowered managers creates numerous opportunities across the organization. This means we have a deep leadership bench. My successor, I am sure, will emerge from this pool of talent.