A summary of the Keynote Address delivered by Mr S Mahalingam, Chief Financial Officer & ED, Tata Consultancy Services Ltd at the Valedictory Session of MMA Annual Cnvention 2008 held on 15 & 16 Feb 08 at Taj Coromandel Hotel, Chennai.

I thought in this address I would talk about the impact of globalization in finance and governance but I essentially wanted to talk about the Indian multi nationals that are emerging at this moment in time. There is a fair amount of personal reflection that will take place because of the kind of growth that TCS has had during this period.

First I will start with a quotation because this essentially reflects the experience of the United States as a Government as it ventured into another area which is in Iraq, Afghanistan and so on. And it also reflects the issues that they were facing in some sense of globalization. I do not know how many of you have listened to Donald Rumsfield, US Secretary of State 2002. It has always been a pleasure listening to him because you could never understand what he said at any point in time. In Rumsfields’s briefing, he once said, “As we know there are known knowns. There are things we know we know. We also know there are known unknowns. This is to say we know there are some things that we do not know. But there are also unknown unknowns, the ones we don’t know, we don’t know.” If this did not confuse you, then you got to listen to Alan Greenspan after this.

The first thing I would discuss today is, when does an Indian Company become a Global Corporation because there is a difference between operating globally and being a Global Corporation. I will first talk about this.

How do you govern a global Corporation because for most of us it has been a learning at this time? When you become a global corporation obviously you are accessing global capital also, of course everyone is accessing capital money because the money that is coming in is through the foreign institutional investors and so on but again handling global investors, accessing global capital, there is a process that we need to go through. And most important of all, as you become a multi national, with of course head quarters in India, how do you build competency for that? Of course the competency will go beyond having Indians as the only managers. There are going to be global managers. But again building competency is the kind of issue that you need to address.

So essentially, many companies in India, have been companies with international operations because they have been exporting to a number of places in different countries and so on. They know how to operate internationally. But then what is it that is going to transform them into a multi national corporation which essentially means that they will become a global corporation. There are issues in terms of risk management: issues of financial reporting that we need to get into. Treasury, because currency is presenting a big issue at this moment in time. For a long time, I have been part of TCS and there is one thing constant till about 2003 and that is that Rupee will continue to depreciate and in fact you can be extremely inefficient but still, if you are in the export business you will do very well because Rupee would continue to depreciate. It would depreciate at a rate faster than you would have imagined. Had you been more efficient in collecting the money and bringing it to India, you would have been considered a fool at that time. But things changed since 2003. Since then Rupee of course has been in a volatile state but of late is has started appreciating. Therefore, currency management or treasury management is becoming very important and the issues with regards to MIS and controls in this relation. There is corporate governance also. These are the kinds of issues that we need to address as a company transforms itself from being a company with international operations into a multinational corporation.

The mind-set is that if it is a multi-country operating company, there is an India-centric view of all issues. Because it ultimately comes down to one profit and loss account, one balance sheet and that balance sheet turns out to be in Rupee and therefore there is an India-centric view of everything. Is it going to be beneficial to me ultimately as an Indian corporation? It is a very simple structure for compliance because you essentially would have branches if at all you require any presence in different places and therefore from a compliance perspective, you are essentially looking at India as a place where you are going to be. Of course I am not ruling out the fact that you would be compliant in different jurisdiction and so on but still it is a fairly simple structure that you would evolve because you do not really want to deal with complexity. There is an Indian workforce that you are dependant on. It is culturally an Indian organization, in fact, in most places, you would end up talking in the regional language that you are used to. And therefore it is culturally a very simple kind of thing because everybody would be in a homogeneous kind of set up.

Funding is again India-centric because there are restrictions and you would have an India-centric view of how are going to raise resources. And of course, how do you know you are compliant, so essentially, you rely on audits and various other processes to ensure that you have effective control right through the organization. But as you turn into a global corporation and that is where certainly in our own case, that as we became a multi national, we had to change our mindset considerably. In fact there are many discussions that would take place, we have some document that we were going to be looking at and ultimately the question was is it going to be a document that only Indians employees would sign or is it a document that every one else, the global employees would sign? What kind of issues that arise from very many matters? Because things are very different in different parts of the world. There are cultural issues, transparency that will make sense to lots of people globally, global workforce and dealing with global workforce is not easy at all. Not only is it in terms of communication but in terms of the values and systems that they have, the kind of intuitive feelings that they have for various kinds of things and how do you communicate with everyone?

Tax, which becomes extremely important as you go away from an India-centric view of things. Funding, you can access funding everywhere and how do you make sure you optimize the whole thing? Processes becomes more important, because you are essentially operating globally and what kind of processes that you have, global best practices.

One of the most important things is the high level of mobility. I am not talking about Indians moving to different parts of the world. There are people from different parts of the world that are coming to India. There is a fair amount of mobility. So what distinguishes a global multinational from an Indian company with multi-country operation, from a financial perspective? Some of these we will examine as we go along but there is a very big change in the mindset.

How do you know that you have arrived? I borrowed a term from Geoffrey More where he wrote a book on “Crossing the Chasm”. How do you know that you have crossed the chasm and not fallen in between? You know that you have arrived when you essentially adopt a global corporation as a strategy. This is an important mindset change because now there are questions such as where do you want to invest? Where do you want to allocate your resources? How do you know which is the best place for doing things rather than looking at an India-centric strategy and so on.

The second question is how well are you recognized as a global corporation? If I were to look at TCS, how do I get a client to perceive that he is placing TCS at the same level as Accenture, IBM, Computer Sciences Corporation or any one of those? And therefore you need to be in a position to operate as a global corporation and as well as a local corporation in different countries. How do you invest strategically at different places? This is an important question because it is assumed that India is the best place for many things from the cost perspective. But India is not the best place for many things. It makes sense to go somewhere else and do things. So how do you list strategically and most important for us, how do we to listen to people all around the world? How do we innovate globally not in a structured fashion but at the edge of chaos? Once we have started dealing with it in that fashion, then you know that you have arrived. In fact in one of the discussions that we had in our Board of Directors meeting, we have an international board of 12 people at this time of which about 6 people do not hold Indian passports. When we did not raise this question of us being recognized as an Indian corporation because we are largely Indians at the top management level, one of the overseas Directors said that does not mean anything. As far as we are concerned, we have crossed that stage and we do have a number of Indians as heads of global corporations. So the cultural capability of Indians to perceive things in a different way is recognized and people know that you are not essentially looking at it from a narrow regionalistic or country-wide perspective. Therefore it is not the nationality of the person or the group of people who might be involved at the top management level, but whether the management can think in terms of really looking at it from a global perspective. Can they ensure that the innovation ideas that come in from different parts of the organization get received with the same amount of attention and seriousness as it would get when it comes from their own country’s organization.

Now let me get on to what I call the known unknowns, borrowing the term from Rumsfield’s phrase. When you start looking at the risk profile of the organization and this of course represents the kind of things that we look at from a TCS point of view, there are various things that come up. There are strategy drivers, we are essentially facing country economic risks at various points in time, it could be in terms of specific industry risks that one might be facing at different points in time. So there are very many strategy drivers where you have to look at how each of the components is progressing in the world. Then there are of course the finance drivers because as I talked about earlier, you would tend to look at racing resources from any part of the world and once you do that, then you get into a whole host of things.

Then there are of course selling drivers which is in terms of clients, whether they are growing and so on. Then there are the delivery drivers and delivery need not come from India itself. There are more drivers including security, legal drivers and so on and at last there are the people drivers. People drivers could be from a global corporation. And therefore, when you start looking at it from the risk management perspective, and how are you going to balance the various risks, it is always essential that you come up with a good framework where you can identify and assess the impact of that risk, likelihood of occurrence, what kind of mitigation plans and finally how you can plan for taking care of that risk. This risk management becomes a far more complex process as you deal with it as a global corporation than as you would deal with it as an Indian corporation. Because you will have to know what kind of risk you are going to accept, what plans you are taking to reduce the risk and can you transfer the risk. For instance, by insurance I could transfer the risk or avoid those risks. And then what kind of a risk management plan that I am going to be implementing. And what am I essentially going to monitor. Because as you go into this global corporation scenario, the complexity of this dimension becomes far bigger than usual.

Let me just illustrate one of the other risk parameters that I keep dealing with on a regular basis. I call it the known unknowns because we know that we do not know. If someone comes and tells me that the Rupee is going to be appreciating, that is the stand that of course I take, but I really do not know if that is the course that the Rupee would take. Just to go back to 2004, before the elections were announced, we all thought that the Rupee was going to continue to appreciate and when the elections were announced, the decisions were different from what was expected and the Rupee depreciated. Just about a year back, around 2006, 2007, the average rate per dollar was a little over Rs 45. Today of course, we are talking about Rs 39.50 and we have seen periods before that where we had seen Rs 43 and so on. So it has been volatile in this field. But if you are a global corporation, you have all kinds of risks, economic risks, exposure because you are dealing with multiple currencies.

There are different degrees of complexities that I do not want to get into at this stage here. When we have operations in Brazil which is servicing customers and also in Spain and so on, there are all kinds of currency risks that are coming in at those stages. So there is an economic exposure that takes place and there is a transaction exposure and of course this could be taken care of through the “Hedging process”. So there are these known unknowns. The point that I want to make here is that you have got to be in a position to add this as a major competency as you become a global corporation. And this would essentially separate a good global corporation from another corporation which is not global yet.

But then, the complexity is even growing bigger, because there is an India-centric view that you can take at this point in time because all your profit and loss account and your balance sheets is in Rupees so you would essentially look at that as a functional currency and you would tend to deal with that. But as you operate in different places and as there are interconnections among various places and so on, then it gets even more complex as you go along. So can you then move on from having a corporate treasury head-quartered in India which essentially looks at it from an India-centric view to having a global kind of treasury? We do not yet have in my company a global treasury of operation, in the sense that we essentially control everything from India, but as we look at the complexity of dealing with operations in 40 countries, there are all kinds of complexities in various places, subsidiaries, sub-subsidiaries, various currencies, risk patterns and so on. There are pricing advantages in terms of being able to get the same amount of cover for different places and therefore there are off shore markets that provide you with pricing advantages and so why would you not optimize it? For instance in the case of TCS, we are hedged to the tune of about 3.1 billion USD at this point in time. And by any standards that is a fairly large amount of hedging that any global corporation has and therefore you really start getting worried about the liquidity in the market that you are operating in for facilitating that kind of curve, and what kind of turn-around time that you can have and so on. So this is another complexity which essentially arises.

Let’s look at another level as you build a global corporation. The whole financial reporting process, because one of the things is that there are presence in different countries and entities, there is a global workforce which creates its own issues. There is the MNA activity that I will show you later in terms of the number of MNAs that we have done ourselves. Mergers and Acquisitions themselves present issues in terms of how it gets integrated into the accounting statements. There is of course no room for errors because in any case multi-country audit team coordination. Because you are essentially getting into different countries and you have reasonable size operation in different places. And time differences that exist and multi dimensional view of financial performance. More importantly a challenge I face on a regular basis is the issue of seriousness. I think it was a couple of years back that we were closing the accounts for the year 2005-2006 and it turned out to be around the Good Friday time period and in South America, I could not find anyone to work at that time. So what do you do? It is not like a large operation but you still have operations there. So it becomes a bit of a challenge there. But that is of course a cultural and logistics issue. You need to have an extremely good system to run a global corporation and of course real time recording of transactions, individual country financial statements, consolidation and so on. How do you standardize the whole thing? Is it through reporting tax, validation, finalization? The point that I want to emphasise here is that it is not just one competency having people proficient in one place or one area, but you are essentially looking at a multi country competency in these areas and the various enablers are single ERP systems or technology standardization. You can have a common auditor planning for contingencies and organizational commitment and focus.

When you look at the reporting standards you have to look at adherence to global accounting and reporting standards. You get away from looking at it purely from your own country point of view, frequencies of audits and boards reviews because you are spread all over. There are issues that you need to face and regulatory requirements that really take place at different jurisdictions, especially for listed companies which are listed beyond one place. Therefore, the known unknowns as I call it and the reason why I call it that is because a question like what does the future look like is a known unknown. But the present reporting practices are because you have a home country gap for everyone, so that by itself is a complexity if I am operating in Brazil, Hungary and so on. So that is a generally accepted accounting practice that you need to be able to adopt that country specific gap for subsidiaries in various countries and consolidated US gap because the investors want to look at it from one of those accepted patterns whether it is an IFRS or US gap. But of course the future looks like moving towards a global adaptation of IFRS which hopefully will make my life simpler as we go along. But today it is a fairly complex one for running a global corporation.

The various benefits that we are really looking at from a best practices point of view, near real time transaction accounting, early attention to issues are ones that you have got to pay attention to because you have all kinds of complexities arising at various places and so on. You have to satisfy auditors at different countries and if you do not take up issues at an early stage as you are getting into a complex transaction, especially if I am doing mergers and acquisitions, then there are delays that could have a catastrophic consequence to the final reporting schedule that I might have. Extensive use of ERP systems and technology, but then there are skills and deployment issues at different places, building technical accounting skills and so on.

The other one is the global regulatory requirement. Again it is a known unknown. And there are all kinds of regulatory requirements and as you spread yourself, you have got to be sure that you do not have an issue of ethics at different places. Then you have got the ability to generate a lot of in house expertise in terms of handling things. Extensive use of technology becomes very important. High standards of corporate governance, legal issues and then you are also dealing with different regulatory bodies such as SEBI, SEC, Financial Services Authorities in the UK, Sarbanes-Oxley act and so on. So there are many things you have to consider.

And then of course MIS itself is a very complex piece because you are essentially having a multi dimensional view of everything and ultimately you want to make sure that the project makes profit and our profit from dealing with the customer is as expected but you also have to look at the geography and see whether that geography is making profits and so on. Or the various expert groups within the organization, whether they are delivering their performance requirements and so on. So as a global corporation, there are very many different views that come in and add to that is the complexity of converting it into one currency and making people look at it in that fashion makes it for a bigger challenge.

I talked about accessing capital from different parts of the world and once you do that there are all kinds of issues that really happen. You have investors from different countries and ones who need to know how your organization is shaping up at different points in time. There is a fair amount of interaction that one needs to have. So developing a network of analysts and investors, a good quality of investors that you want to have for your own organization, marketing function insight finance for the relations activity, role of conscience keeper for the management because this is very critical in the sense that you want to make sure that whatever you are reporting is accurate and helping build share holder value, share holders are spread across various countries, and how do you do that is another issue that comes in. So therefore when you are really looking at the governance issue how do you build a board for a multi national corporation and that is one thing that we learn fairly early in the game. As I said six people do not have Indian passports and so on, and still they are the ones who are going to give you advice constantly and guide you in your own deliberations and so on. Do you have the right kind of people? They are the ones who are going to throw the search light over what I would call as the unknown unknowns.

Because you do not know that you do not know. They are the ones who are going to guide and do they have the capability to guide? You cannot really have an Indian board to guide you at that point in time. There are different sensitivities that come in and in our own case, when we were looking at affirmative action and there were certain things that we thought we would adopt as a board, there was a Chinese board member who turned around and asked how does it apply to these countries and what kind of issues? You have not been there signing something that is not relevant to India but you are signing something which is relevant to the globe. So we said we would take a look at it in a different fashion and therefore they are the ones who are essentially throwing the search light on what I call the unknown unknowns. Technology and innovation oriented in our case because that is the competency that is required and in fact amongst our directors we have a professor from Harvard Business School, Clayton M Christensen, who is considered to be a very big authority in innovation; we have Thyagarajan who is the Asia Head for GSK and there is also another person, Rod Sommer who is to be the Chairman of Deutsche Telekom.

So there are people who are technology savvy and innovation oriented within the organization. You have to structure the meetings extremely well because you are getting them at various points and how do you do that? You have got to raise issues at an early stage of thinking within the organization so that you get the benefit of views which means that you really need to do a lot of forward planning. It is not just the main Board. What about the subsidiaries? How do you make sure that they follow the same kind of approach that you would take? What kind of sensitivity that you have at those levels? How do you remunerate an international Board? So that becomes an important issue. And result-orientation, strategy and operations, those are the kind of values that they bring into the organization. So this cannot be lost sight of as you build an organization.

TCS has a presence in 40 countries and presently operate in 150 offices across the world including India, 86 delivery centres in 18 different countries and so on. Since we are spread all over, how do I know that we are operating efficiently in Quito in Ecuador, where we have an office or Bogota in Columbia where we have an office or even in Yokohama in Japan and so on? And so there are things that we need to worry about. How do I enter into new markets? How do I make a decision whether I want to go to Bogota in Colombia? Ability to service customers wherever they operate, follow the sun model, can I create a different proposition by which a customer in the US will get served for 24 hours not just the 8 hours that I serve them from India but can I serve them from South America, Europe and so on. Therefore I give them a 24 hour operation. Challenges would be building a scale in each geography. A few years back when we were looking at what we need to do, we did not imagine that we would have anything like 3500 people in Brazil which is what we have at this moment in time. In fact we would not have imagined 1200 people in San Diego, Chile. In fact many of these places, when we have internal meetings and I go there, I cannot understand a thing because it is either Portuguese or Spanish that gets spoken and of course there is always a person who translates and I hope that he certainly does a correct job of it. There are issues also in those fronts. Building scale in each geography, political risks, currency risks, compliance requirements and so on.

As you build a global corporation, obviously MNA becomes very important. But in our business there is one more in terms of taking a job from a customer or a customer says I want to transfer people to you. The credibility of India is so high these days that people do not have an issue coming to an Indian Corporation. About 10 years back, I remember a deal that we were doing and we had to have about 150 people in the UK coming to our organization and those people rejected. They did not want to come to an Indian organization. Today, there is no issue at all and they would move and we have close to about 10,000 people who are non-Indians within our organization at this time.

This is the structure, a fairly complicated structure but then one will have to be able to live through a complex structure. There are different companies in many countries that are cascading. There are holding companies in many of these countries and there are their subsidiaries and so on and of course we have been essentially expanding our reach. Just about 5 years back in 2002, when our revenue was 0.9 billion USD, it is actually 21% of TCS’s last year revenue. So it has been a phenomenal growth in the last 5 years where North America accounted for 51.1% but their share has come down to 50.9 but we have a significant presence in Continental Europe, Asia-Pacific and so on. So it is a very major movement that has taken place. But more importantly, along with the movement, there are different nationalities of people we have. We have Hungarians, Chinese, Chileans, Americans, Australians and there are over 1000 people from England who are employed with us.

Summing up, the key differentiator, as I would like to emphasize is really a global mind set that one needs to adopt and there are quite a few global corporations such as my own Corporation, and a lot global corporations in the pharma industry. So there are many of them coming, but then all of us have tended to essentially learn how to go about it and some attributes of this global mindset that we have acquired over this period and learn. No compromise on governance and ethical issues and that is one given. It does not matter which part of the world you are from, no compromise has to be made. High standards in transparency and reporting and once you take that then obviously you are complaint everywhere and being corporate citizens in every country that you are operating in. If Katrina happens you have to be a corporate citizen as far as that country is concerned. You cannot say that India is a poorer country and I am going to be spending here. You have got to be a corporate citizen in any country that you are operating in. Continuous benchmarking in a way is an improvement that will have to take place as you go along. Recognizing and managing risks, because reputation risk becomes that much extended as a result of being a global corporation. Adopting the global best practices because you are no longer an Indian company and of course last one is that learning to think big is very critical. So financial management especially, becomes very challenging and exciting when you are growing into a global MNC.