TCS fights the slowdown

Technology, not just cost, is key to IT's future

Tata Consultancy Services (TCS), India's leading software company, has performed reasonably well in the first quarter of the current financial year in a somewhat difficult global environment - global spending on software is projected to go down by 4.3 per cent in the current year. Over the last five years, TCS has managed to increase its global market share at a time when leaders like IBM have registered a sharp decline. It is thus reasonable to hope that TCS will continue to get stronger vis-à-vis the competition in the current year. Actual results in the April-June quarter have been mixed; it has bettered analysts' expectations in terms of net profit and margins, but fallen behind in revenue. As this has happened along with good volume growth, evidently greater effort is having to be put into earning every dollar. Some of the downside is attributed to the pains of having to digest a recent acquisition - but it could be argued that acquisitions are also the route to quick growth in capabilities and revenue.

The increase in margins and net profits may have something to do with the strategic direction in which TCS is moving. As the traditional business of development and maintenance with billing on a time-and-material basis is being increasingly affected by automation in the information technology sector, the future lies in delivery through higher technology. Cloud-based services are becoming increasingly important; the days of steady income for the creators of licensed enterprise-based solutions, and for those who maintain them, are numbered. Another major change is the decline in the relative importance of infrastructure services in support of already-completed systems integration work. In its place has emerged what is commonly known as the "digital" trade - the digitising of a business' activity and data, and the moving of some of it to the cloud. This, it is argued, enables a firm to track itself much better, and to understand its clients better, too. TCS' claim is that it is progressing particularly well in digital work, which accounts for over eight per cent of its revenue and is growing at over 10 per cent. Technological upgrade and competent delivery of such services are key to the continued relevance and success of Indian IT services firms in the future.

The main challenge for large Indian companies like TCS will be to rely more on technological prowess and less on the cost arbitrage derived from the willingness of Indian software engineers to work for less than their developed-country counterparts. As higher skills will be needed, compensation levels and training costs are likely to rise rapidly. Along with this, it will become increasingly difficult for companies to post Indian engineers at competitive rates in client-country locations, given tightening visa restrictions. To continue to do well in information technology, companies will have to live by their wits.