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ML: One swallow does not a summer make. This unprecedented event at TCS is just a reminder that CEOs are human too, and might want to pursue their dreams and aspirations just like anybody else. As for our track record in retaining senior leadership talent, it remains industry-leading.

I am proud to say that almost the entire team of 25 business heads we had created in 2008 is still in TCS. We have over 125,000 TCSers today with an average tenure of over 10 years in TCS. This cohort represents the true strength of TCS. They are the custodians of our culture, values and institutional memory, and have been central to our ability to weather the unprecedented attrition and influx of fresh talent without letting it affect the high quality of project outcomes that our clients have come to expect from TCS.

We not only retained our leadership talent better, but also expanded the leadership pool six-fold in the last five years by incubating a next generation of leaders running sub-ISUs, with P&L responsibilities. The breadth and depth of our leadership bench today makes our succession planning an industry benchmark, with multiple equally-qualified successors for any leadership position, starting from the CEO down, as you recently witnessed.

SS: Normalizing attrition is definitely a relief, but I wouldn’t call it a tailwind. We incurred a 1.4% margin headwind in FY 2023 from backfilling and retention expenses. If we onboarded a lateral hire at a 20% premium during the year, that increase in employee cost is a recurring one. But yes, hopefuly we won’t have any new headwind due to attrition in FY 2024.

Also, with the supplyside challenges easing, incremental cost of hiring laterals should be lower, and it also gives us an opportunity to bring down subcontractor expense. That is one important margin lever for FY 2024. Utilization improvement, flatter employee pyramid and hopefully, currency support, are the other levers. On the other hand, we will have our usual wage increase in Q1 and we should see further increases in travel expenses during the year.

SS: It is not true that large outsourcing deals are necessarily margin dilutive. A few high profile mega-deals in the industry whose low quality revenues impacted margins have resulted in that perception. In the last five years, TCS has won several mega deals with TCV over $500 million, and every year we win dozens of large deals, with TCV over $50 million. And yet, during this period, our EBIT margin has remained in a tight band between 24 and 26 percent.

Profitability of large deals depends on how you construct them. A client might push for a certain amount of absolute cost reduction at the time of contract renewal. The service provider can either drop prices and sacrifice margins to deliver those savings, or propose a completely different operating model that uses lesser effort, protects or even expands margins, and achieves the client’s objectives.

TCS has differentiated itself in this space with the latter approach. Its win-win propositions reimagine the customer’s operating model, leveraging AI and machine learning to reduce human intervention while improving process velocity and operational resilience. Customers have really taken to this idea. In FY 2023, we signed 29 large operating model transformation deals, business as well as IT operations, compared to 18 in the prior year.  

ML: Historically, women’s attrition at TCS has been similar or lower than men’s attrition, so this is unusual. There might be other reasons but intuitively, I would think working from home during the pandemic reset the domestic arrangements for some women, keeping them from returning to office even after everything normalized.

The higher attrition among women in FY 2023 is a setback to our efforts to promote gender diversity but we are doubling down on it. Focused leadership development programs like iExcel are driving tremendous change. Of all the leadership positions fulfilled with internal candidates in FY 2023, women made up 23% of the selected candidates, even though they account for only 14% of the applicant pool. This speaks well of the quality of the women candidates in our leadership pool as well as the supportive attitudes of our business leaders in promoting diversity. Likewise, in our external hiring, women make up 38.1% of our net hires this year, versus 35.7% in our workforce. 

ML: Work from home is definitely more convenient for everybody, but there were drawbacks. Tenured employees who are well networked within the organization can work effectively and even collaborate virtually using the social capital built up over the years. That isn’t the case with more junior employees. Workplace essentials like collaboration, mentorship and team-building suffered a lot in these two years.

Then there is the matter of organizational culture. Over half our workforce today was hired after March 2020. New employees get acculturated through physical interactions with senior colleagues and leaders, by observing and following their behaviors and ways of thinking. Without those interactions, employee engagement as well as acculturation got badly impacted. All these factors led us to gradually bring back people to our offices during the year.

ML: Yes, this is another unusual, industry-wide problem. The pay disparities will eventually go away for two reasons. One, we are running a program called Elevate that empowers employees to take control of their careers and pursue their aspirations by achieving certain learning goals. Meeting those goals can result in significant pay increases, perhaps even a doubling of salary. Second, there will be a natural time-correction through performance-linked wage increases, promotions and voluntary attrition.

SS: In the short term, higher onsite wage inflation is a headwind because our legacy contracts have much lower cost of living adjustments written in. But in the medium and longer term, this will get adjusted.

Wage inflation affects everybody in the market including the clients themselves. Newer contracts reflect the changed cost structure for onsite effort. Also, contractual terms now peg annual cost of living increases to prevailing inflation rates.  That should help mitigate inflation risks in longer term contracts

SS: Inflation differential is not the only driver of currency depreciation. Rupee is also affected by India’s trade deficit, interest rate differentials and capital movements. But for argument’s sake, let us assume that we may not have the benefit of currency depreciation in the future. Now remember, the currency depreciation basically helps us offset wage inflation in India which historically, we never passed on to clients. In the changed circumstances, this too will get baked into new contracts the same way onsite wage inflation has been. So in the longer term, we should be able to sustain our current margins.

ML: In my view, the productivity benefits will get baked into clients’ expectations around project velocity and throughput. For a given project team size, clients will expect much higher output at a much faster pace, compared to today. On aggregate, as the unit price of a function point falls, we expect volumes to increase. With ever-increasing dependence on technology for competitive differentiation, we expect enterprise spending to keep growing, for which we will have to keep hiring new talent. So the linearity between revenue and headcount is not going away any time soon.

SS: Margins are a measure of relative competitiveness. Based just on the productivity improvements in code generation using generative AI, it is difficult to see how a technology which is freely available to everyone – service providers as well as clients’ IT teams – can change relative competitiveness and by extenion, margins. Margin improvement is possible from selling higher-priced growth and transformation solutions which use generative AI. Likewise, new software products or platforms which use generative AI to deliver superior business outcomes. 

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