How IT behemoth TCS under new CEO K. Krithivasan is braving global headwinds

In June, when 58-year-old K. Krithivasan took over as the MD and CEO of Tata Consultancy Services (TCS), India’s largest IT major and a subsidiary of Tata Sons, one of the first decisions he took was to rejig the organisation, aligning it with the $28-billion tech company’s verticals or business groups.

Krithivasan, who has been with TCS for 34 years, has also made sure that his new regime brings existing industry service units (ISUs) in line with business groups. About 200 ISUs now report to the seven business groups within the company. For Krithivasan, this “flip back” is a testament to the agility of the organisation. “We were able to quickly flip into the new structure within about three months or less. Being vertically organised was a very natural state for us. The earlier scheme of things was creating more distraction,” says Krithivasan, who was earlier President and Global Head of the Banking, Financial Services, and Insurance (BFSI) business, TCS’s crown jewel that contributes around 33 per cent to its revenue.

The rejig under the new chief abandons most elements of the restructuring begun by his predecessor, Rajesh Gopinathan, last April, when he had organised the company as per the size of clients. For Krithivasan, the size of the client matters, but not as much as focussing on the industry segment, a key part of TCS’s strategy that has helped it grow its profit after tax by 10 per cent year-on-year to `42,303 crore in 2022-23, even at a time when the IT industry faced headwinds globally. TCS also retained the second spot on the BT500 list, just behind Reliance Industries Ltd, even though its average market capitalisation dipped 5.3 per cent between October 1, 2022, and September 30, 2023.

Customer Focus

Focussing on customers has been a key pillar of its strategy. “We believe in only two stakeholders—our associates and our customers. We keep talking about customer centricity and employee empathy, and we also believe in long-term relationships with both of them. That’s why it’s not uncommon for them to be with us for over 45 years,” he says.

For Krithivasan, the second part of the strategy is to figure out what’s going to work in the medium term, and technology takes centre stage whenever the future is concerned. He fondly remembers a meeting in 2008 on digital technologies that took place when the global financial crisis was raging. Current Tata Sons Chairman Natarajan Chandrasekaran, who was then the COO of TCS, had said in that meeting, “Ten to 15 years later, people [will] remember the digital revolution that is happening now more than the financial crisis.”

Krithivasan believes this foresight has been the real game changer. Taking a cue from Chandrasekaran, he has created a new business unit called TCS AI.Cloud to focus on all the opportunities arising out of AI-based projects. TCS has been working on generative AI (GenAI) solutions, but the new unit will bring a more focussed approach since GenAI continues to see tremendous interest from clients. TCS is already co-innovating with multiple clients and seeing a progressive increase in use cases and the complexity of GenAI deals. “Chandrasekaran actually coined the phrase ‘default is digital’. If we are not providing a digital solution to a problem, then we need to explain why. Otherwise, the technology transformation to digital is the key and the only way of doing things,” he says.

So, he adds, TCS takes a call, follows it through with investment within the organisation to train associates, builds partnerships and prototypes, talks to customers, and finds out what works, “because technology without context is of no value.”

Challenges Ahead

Even though TCS has the wherewithal to ride out the headwinds by focussing on the big picture, in the short term, its journey seems to be riddled with challenges. During the second quarter of FY24, TCS reported weak revenues due to a slowdown in discretionary projects, especially in North America, and project ramp-downs. It expects the second half of FY24 to be better than the first, led by a ramp-up in deal wins and a healthy deal pipeline. This, coupled with the company’s focus on technologies like 5G, IoT, GenAI, virtual reality/metaverse, and digital twin, is expected to drive long-term growth.

According to Mukul Garg, Senior Vice President, Equity Research-IT Services, Internet, and Staffing at financial services firm Motilal Oswal, there is heightened caution among clients in North America and continental Europe, while momentum in the UK remains strong. “Caution among clients is leading to the re-prioritisation of spending to optimise cost, which is driving strong TCV (total contract value). Operating model transformation deals remain strong, with six large deals won during the quarter,” he says. TCS won two mega deals worth $1 billion each from BSNL and Jaguar Land Rover. It is the system integrator (hardware and software provider) for BSNL, and though this deal amounts to $1 billion, maintenance work post-implementation could lead to incremental business.

“Though revenue from order wins is expected to improve in H2FY24, uncertainty remains high on discretionary and project ramp-downs. Retail continues to face challenges as multiple sub-verticals are witnessing a slowdown, including essential spending,” Garg adds.

Experts believe these are short-term demand pangs, and that the longer-term tech spending trajectory remains robust, led by cloud, data, and generative AI. According to retail broking platform IDBI Capital, TCS will be a key beneficiary in the challenging market scenario considering its client profile, ability to win large deals, and robust demand pipeline. “The company is also seeing strong traction in generative AI, which could be a major driver of multi-year tech spend,” says Devang Bhatt, Lead Analyst at IDBI Capital.

It is growing sustainably, he adds, but the macroeconomic situation is so poor that deals aren’t being converted. “We expect 4.6 per cent growth for FY24. Then, when macro revives and deals ramp up in FY25, we expect around 9.6 per cent growth in FY25,” says Bhatt.

The Opportunity

GenAI and cloud penetration will increase over a period of time, he says. “The reason deals are not going through is because clients are conserving cash. Even attrition is happening because growth has tapered. As and when growth improves, hiring will improve,” Bhatt adds.

Krithivasan feels that it’s pointless to play astrologer at this point, and it’s rather more fruitful to focus on the long term.

“If learned economists can’t say whether there will be a recession or not, who am I? We don’t do anything esoteric. We keep things very simple,” he says. “Today, there is a lot of interest in conserving cash and saving money. It’s not that they [clients] don’t want to invest, but there is a certain amount of uncertainty because there’s a guarded investment approach,” says Krithivasan.

According to him, the migration to the cloud actually signifies a multi-year technology transformation. “Every organisation has to go through it, and this is not going to stop in a year or two. Comparative advantage comes for most organisations with the deployment of technology,” he says. “We can either be a fast follower or a pioneer in helping the customer transform.”

For TCS, what has worked is a healthy mix of conservatism and the desire to grow. “We are fairly fiscally prudent. We always evaluate an acquisition based on how easily it’s filling a gap that we have today. Then, if it fills a gap, does it also have a multiplier effect?” he asks. Krithivasan says TCS does not make acquisitions just to make its balance sheet look good.

When it comes to TCS’s desire to grow, Krithivasan likes to think like an entrepreneur. “If anybody had an idea, we would tell them what we can give is seed funding, and the most important funding they need is bandwidth. We want people to take risks and experiment with new ideas,” he says.

A combination of both of these factors is what he believes will help TCS battle current headwinds and put India on the emerging technology map.

“There are many growth areas in terms of R&D and developing Indian language models to take technology to the masses. These are also growth areas for the company, and our imagination is the only thing that limits us [from thinking] big,” he says.

@PLidhoo