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TCS CEO looks to digital services as growth continues to slow

Stuart Lauchlan Profile picture for user slauchlan July 9, 2015
Summary:
Digital services revenue now accounts for 12.5% of the total at TCS, but can they improve the underlying growth rates at the outsourcing giant?

TCS
Going digital

In a first for TCS, and one that reflects the changing nature of the services landscape, the company chose yesterday’s first quarter results announcement to break out its digital revenues.

These are pitched at nearly 12.5% of total on a conservative basis, which would put the firm on track to pull in more than $2 billion from digital services this year.

Net profit rose 13% to Rs 5,709 crore ($900 million) for its fiscal first quarter to June 30, while revenue rose 16.1% year-on-year to Rs 25,668 crore.

But it’s really all eyes on digital transformation, with TCS Chief Executive and Managing Director N Chandrasekaran committing to train 1 Lakh (100,000) employees in digital skills this year. He said:

Digital is the default. Any new work typically has a digital component.

Looking at how our digital business have scaled up and how the digital technology cycle is progressing, I am convinced that in the next three to four or five years every one of our service offerings will be predominantly digital.

To be able to fulfill that demand for our services at this point in time, we have already taken a large scale progress to educate, train, re-skill our workforce.

He added:

Towards this, we have prepared a comprehensive platform, a digital line platform with a huge amount of content which is very high quality across digital technologies, customized for the different industry verticals of the customers and where we operate. It is our intent to train 100,000 employees. The platform is already operational and the training as we speak is being adopted by our associates across different verticals.

TCS’s global footprint and existing investment in digital talent will help, he stated:

We are globalized. We have got a global footprint. Sometimes we will need to do operational work or design work or marketing related work based in studio. This ability to bring together the different talents in different parts of the world for the right engagement [helps us].

We have made a significant number of investments systematically over the last five years in digital, right from setting up of a digital collaboration lab to hiring people with diverse skill sets to setting digital studios all these investments we have made at varying points in time and we have got lot of design talents, lot of front end talent.

Chandrasekaran doesn’t rule out buying in more skills:

I don’t think that we have talent shortage. That’s not to say that we will do acquisitions or we will not do acquisitions. At any point in time if we feel that there is an asset which we need to buy, or a capability that we need to bridge for that, if we need to buy a particular company, we will look at it seriously. We have an open mind, but at this point in time I think we are extremely well placed. I think we are very strongly placed in digital and we’re looking to accelerate.

Getting bigger

The type of digital business that TCS is seeing comes in the form of large, transformational infrastructure initiatives, said Chandrasekaran, and getting bigger:

Digital has a huge play across all the service lines that we operate in today. So you will see increasing adoption of digital permeate in through all the service lines.

Customers taking large scale transformation projects, already they are talking of growth side of these. How many of those projects will get the push very quickly is something that I can't say, but there are a lot of transfer matters in the infrastructure space.

I think those kind of deals will come. So [in] size, I think digital will also increase.

The type of deal is:

predominantly transformation engagements where the customer is trying to revamp their front end completely, that requires a lot of digital designs sometimes not only technology but also skills.

Big Data and Analytics is a very big area and we are seeing a lot of traction in that area where customers are building huge platforms to gain knowledge over the customer, knowledge about inventories, knowledge about pricing across industries. So that is a huge area. On the Cloud side a lot of transformation has moved to Hybrid Cloud.

N Chandrasekaran
N Chandrasekaran

While all this seems upbeat and positive, there is an underlying decline in revenues, which slowed down for the third consecutive quarter, so there is a need to deliver on the digital promise. Amy McLaughlin, Research Analyst with Technology Business Research, reckons that digital added approximately $1.93 billion to TCS’ FY15 overall revenue. She sees digital marketing as a potentially lucrative niche for the firm to pursue:

In 2010 TCS acquired BT Group’s Mosaic business and gained an on-demand digital media management platform. Combined with TCS’ Connected Marketing Solutions and mature Mastercraft portfolio, the company provides integrated campaign management, CRM, digital marketing planning and design, digital content production and marketing analytics. According to TBR’s 4Q14 Digital Marketing Services Benchmark, revenues in the digital marketing services (DMS) market expanded 23.3% year-to-year in 2014.

As IT services vendors earn a greater quantity of contracts that include customer experience components and enterprises expand their digital transformation projects across the enterprise, a natural lead-in is created for leading IT services vendors such as TCS to cross-sell and up-sell digital marketing solutions.

But she believes that ultimately TCS will need to dip into its wallet and make further acquisitions if it is to differentiate itself in the emerging enterprise digital services space:

As disruptive technologies take time to emerge, digital transformation becomes a baseline business practice, connected devices become ubiquitous and Industry 4.0 (aka the fourth industrial revolution) manifests, TBR believes investing in acquisitions is TCS’ best shot at rapidly distinguishing itself as an end-to-end business partner while cultivating organic revenue streams.

My take

One interesting thing that emerged from Chandrasekaran’s comments yesterday is his rejection of the idea of creating a specific digital unit within TCS. His argument is that digital pervades all the existing revenue streams the company taps into and that within a few years, it will be difficult to distinguish digital work from the rest.

He’s correct about this - digital should just be the default model. But it’s an interesting alternative route to take in a market in transition compared to, for example, Accenture, where ‘digital’ is up front and branded at every opportunity. Given the competitive pressures that the Indian offshore pure plays currently face, it’s an interesting gambit to take.

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