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TCS seeks to leverage offshore presence to boost efficiency

Romita Majumdar/Mumbai 11 Jan 19 | 10:30 PM

With rising subcontracting costs in on-site locations — especially in the US —weighing on its margins, TCS is looking to execute as much work possible from India, to raise the off-shore efficiency to as high as 90 per cent in addition to hiring locally onsite. 

Traditionally, the IT outsourcing services industry uses its off-shore base for service delivery to the extent of 70 per cent, while the remaining is executed out of on-shore locations in client geographies. Under its Agile business model, the company has started using its off-shore base up to the extent of 90 per cent which, along with several other measures, will benefit its operating margins, said Chief Operating Officer N Ganapathy Subramaniam. 

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“We hired more people than we had budgeted for in the quarter, which is why manpower costs increased and ultimately played down into the dip in margin. We decided that if there is demand, we should capture it rather than let someone else do so," said Subramaniam told Business Standard. 

In the quarter just gone, TCS’ net margins saw a dip of 90 basis points to 25.6 per cent despite posting strong growth in revenues and profits, primarily because the firm had to rely on subcontractors. 

The other reason was heavy hiring in the US owing to the spike in demand, an unusual phenomenon in the October-December period that is typically marred by extended holidays and client furloughs. 

Increase in sub-contracting costs, as well as the cost towards almost 6,800 new hires during the quarter, negatively impacted margins by 60 basis points. Most of the new hires have already commenced work on projects signed over the past quarter.

Subramaniam attributed the spike in manpower costs to the Business 4.0 model, which advocates embracing risks. While not a traditionally hiring-heavy quarter, TCS has gone all out to tap into the upswing in demand. The hiring was meant to tackle both the visa situation as well as the US and UK markets, which are very supply-constrained at this point.

“The sub-contracting pool is a flexible, so we hired locally rather than waiting for visas to come through, to ensure that project works kick-start," he added. 

In the first three quarters of FY19, TCS added a net 23,000 people to its workforce, a significant increase as compared to a net addition of 7,000 in the whole of FY18. The company has also hired more candidates across its US centers over the past nine months than the preceding nine months, a move analysts have largely appreciated.

This aggression was also partly on account of the healthy order win during the last nine months. In Q3 alone, TCS signed contracts worth $5.9 billion, a record in itself, with majority of them coming from North America. Subramaniam attributes the firm’s ability to structure the existing demand with the right mix of on-site and off-shore resources as the secret to its aggressive growth. 

“I would say the off-shore component is a lot more today than it was earlier, especially in projects adopting the location-independent agile methodology. It (use of off-shore) used to be around 70 per cent earlier, but we now see projects getting executed from off-shore to the extent of 90 per cent, or even fully, depending on customer comfort and complexity of the project." 

TCS typically looks at the most appropriate way to form the teams and locations so that the right value is created and the right cost models are put in place, which also factors in where customer’s resources and talent pool are located, he added. 

While the demand environment, the company says, stays healthy, given the deals in hand, analysts tracking the sector also expect client budgets to see a jump in 2019, after remaining subdued for many years. 

“According to initial interactions, there doesn’t seem to be any constraint on client budgets. If at all, there will be an increase," said Subramaniam. “In fact, even some analyst polls expect a 3-5 per cent increase in budgets, so I don’t see any stoppage or downturn."

Why TCS is so optimistic?

Unusual spike in client demand in December quarterNo client furloughs; in fact many projects kick-started as early as Jan 3Contracts with record total value of $5.9 billion signed in Q3Company used subcontracting route and speeded up hiring to meet demand

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