TCS, a giant at home, finds itself dwarfed overseas by the likes of IBM, HP and Accenture. We explore the strategy it’s adopting to fulfil its dream of figuring among the top global IT services providers.
S Ramadorai should be full of uncontrollable glee. But he isn’t. Mumbai-based Tata Consultancy Services, of which he is the chief executive officer, netted over $1 billion in profits last financial year and is on course to surpass the $7-billion revenue mark in 2008-09. Not surprisingly, it is India’s largest information technology services provider, accounting for almost 15 per cent of Nasscom’s software export target.
Yet, the emotion Ramadorai exudes is one of guarded optimism. For, he is looking beyond this financial year, beyond India’s geographical boundaries, and beyond Nasscom’s targets. He is aware that the frontline Indian IT services companies, even though they are legitimate success stories, continue to be small specks on the global outsourcing horizon dominated by IBM (annual revenue $100 billion), Accenture (over $25 billion) and Hewlett-Packard (over $100 billion), which recently acquired EDS.
Those that hold on to the tier-I position globally, say analysts, will have to have multiple lines of services and a global delivery model that also covers low-cost delivery centres such as the Philippines, China and Vietnam.
“We have made investments to diversify our revenues and grow in new markets, to develop new services and solutions, and build new delivery centres globally. These investments are already beginning to pay dividends. The above average revenue growth from our emerging markets is helping to accelerate overall company growth,” acknowledges Ramadorai.
The UK, for instance, added over $1 billion in revenue and Europe contributed over $500 million, while the revenue from US has stayed at about 50 per cent. Emerging markets, including APAC, Latin America, India and West Asia and Africa, comprised almost $1 billion or about 20 per cent of company revenue.
Staying agile
TCS is the only IT firm in India to have over 100,000 employees. “As we continue to grow and scale beyond 100,000 employees, we need an organisational structure that is nimble and agile to allow us to capture new growth opportunities,” says Ramadorai.
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The new model provides customers with a single view of TCS, encompassing project delivery and relationship management. The structure provides opportunities for leadership growth at all levels and encourage the next generation of leaders.
The five groups will include the industry solutions group (ISG), which will look after post-sales service.
Since the BFSI (banking, financial service and insurance) segment is the largest section of ISG with more than 35,000 people, it will be further divided into four units.
The major markets group will focus on the UK, US and Europe; and the new growth markets group will focus on India, Asia-Pacific and emerging markets. The groups will be responsible for getting new clients. It will also be responsible for brand-building , maintaining relations with the analysts’ community and the customers.
The ISG will cater to existing and new customers across geographies. Each group will have a revenue size in the range of $250-500 million and staff of up to 5,000, be accountable for its own profits and pursue its own human resources and market strategies.
The delivery for the major markets group — which handles new orders in the UK, US and European geographies — is to be done by the ISG. The other two groups comprise the strategic initiative group (for SMEs and BPO firms), and the organisation infrastructure group.
The HR process is fully digitised — expenses, travel, hotel claims and reimbursements, talent management, payroll, and so on. Moreover, notes Mukherjee, the HR services are shared. For instance, an HR query can be routed through the common help desk.
Maintaining lead
The growing headcount will pose formidable challenges over the next two to three years, caution analysts. Yet TCS is still expected to hold on to its position of numero uno among the Indian IT firms, with Infosys Technologies coming a close second.
The reasons are many. For one, TCS is adopting outcome-based pricing as opposed to headcount-based one. For instance, it was the first to identify and invest in various non-linear opportunities, namely, software products, platform BPO and software as a service (SaaS), as well as focus on unit-priced contracts, according to Macquarie Research Equities analysts.
TCS has been active in unit pricing in infrastructure management services or IMS (element-based pricing) and transaction BPO (transaction-based pricing). Macquarie analysts estimate that about a fifth of TCS’ IMS revenue and 10 per cent of its India-based BPO revenue is unit-priced.
Moreover, TCS has several products, primarily catering to the BFSI space. Notable is the core banking product for which it acquired Financial Network Solutions of Australia. A new business unit (TCS Financial Solutions) was recently formed and all financial products are branded as BaNCS. Current revenue contribution is 3.6 per cent of consolidated revenues.
Besides, TCS is the only company in its peer group to invest in building its own BPO platforms and has made the most announcements in this space, including a deal with the Pearl Group in the UK, as anchor customer for the life and pensions (L&P) platform that TCS is developing for the UK market by reengineering its existing product.
A second contract (from the UK operations of Sun Life Insurance of Canada), note Macquarie analysts, that will eventually be serviced from the same platform has also been announced. Nearly 2.5 per cent of TCS’ consolidated revenue is expected to come from platform BPO.
Finally, managed services entails providing IT infrastructure services or IT application services on a subscription basis. TCS’ forays in managed services include a software as a service (SaaS) initiative targeted at the small and medium business segment in emerging markets (branded IT as a Service, or ITaaS) announced earlier this year. There is no revenue flow yet.
“This is a pilot to offer SMEs an end-to-end solution which includes infrastructure management, networking, applications, and solutions like mail and merchandising. It will be a vendor-agnostic platform. The pricing will follow either rental or revenue-sharing model. The solutions will be pre-configured and cost anywhere between Rs 50-500 crore. The solution will be web-based, too,” explains Chandrasekaran.
In the managed infrastructure services space, TCS has entered into a contract with group company Tata Teleservices Limited (TTSL) to take on all IT functions for TTSL, including a commitment to invest in incremental software and hardware requirements.
The maturing of the new non-linearity initiatives and generation of higher-than-average EBIT (earnings before interest and tax) per employee — TCS generated an EBIT of $13,400 per employee in the third quater of 2008-09, which was the second-highest in its peer group, despite making substantial investments in non-linear businesses — should provide the leeway for investments in still more non-linearity initiatives, thereby creating a virtuous cycle, note Macquarie analysts.
Competition strategy
Infosys’ product efforts are centred on Finacle — its core banking solution. Several years ago, Infosys formed a separate banking business unit to focus on product development. Its revenue contribution is currently 3.6 per cent. The company has adopted a strategy of allying with owners of software products rather than building its own BPO platforms.
While this limits its upside, note analysts, it is a relatively low-risk approach. Infosys has launched a supply chain management (or ‘Procure-to-Pay’) platform in alliance with SAP and an HR (‘Hire-to-Retire’) platform with Oracle/PeopleSoft. Revenue flows from these platforms are yet to start. Infosys has also stated its intention to create offerings in the software as a service (SaaS) space.
Wipro’s employee strength is currently less than 75 per cent of that of TCS and about a fifth of IBM’s. This provides headroom for continuing linear growth for several years and would allow Wipro to focus on increasing non-linearity in the business. The company is known for its capabilities in the infrastructure management services (IMS) space (so are Satyam and HCL Technologies), deriving 11.9 per cent of its revenues from such services in the third quater of 2008-09, the largest IMS practice among peers.
Wipro has been able to capitalise on the experience gained over the years in managing customers’ infrastructure and offer element-based pricing (that is, payment per server, desktop, network switch, and so on) for IMS contracts.
Similarly in the BPO space, Wipro offers transaction-based pricing (that is, for processing, payment per invoice, claim, and so on). From the customer’s standpoint, such pricing mechanisms can convert fixed costs into variable costs and can be particularly beneficial where the customer’s business experiences seasonality or has wide variation in its workload.
Wipro has supplemented organic non-linearity by the acquisition of Infocrossing, a US-based provider of hosting and managed infrastructure services, to position itself as an end-to-end provider of infrastructure services. As part of the Infocrossing acquisition, Wipro has also got access to BPO platforms catering to the healthcare payer segment and tax collection for state governments in the US. Macquarie analysts note that around 5.4 per cent of Wipro’s revenues are contributed by non-linear business lines.
Focus on India revenues
The earnings of Indian IT companies in rupee terms dwindle with every upward movement of the currency. Moreover, with the global IT services players such as IBM and HP cannibalising the home market by winning multi-million dollar deals, the Indian IT companies are taking a serious look at the domestic turf. The Indian domestic outsourcing market is estimated to be around $2.2 billion, if one considers deals above $50 million.
“Margin pressures are affecting even large players. Hence, the domestic [Indian] market is a viable proposition,” said Sudin Apte, senior analyst and country head, India, Forrester Research. Large multinationals such as IBM do not shy away from picking up work that only gives them 5-10 per cent margins. Multinationals have an expertise in multiple verticals and emerging markets, while the Indian IT companies are experienced primarily in the North American markets, reasons Apte.
The scene is changing, though. TCS is a strong case in point as slightly over 9 per cent of its revenues (excluding CMC figures) comes from India. India continues to be a strong growth market for TCS, growing at about 22 per cent on an equal footing with its international business. TCS has done government work (MCA-21) and has prominent clients including the NSE, BSNL and Mumbai airport. It recently won an over Rs 1,000 crore e-passport deal from the Indian government.
“There’s a perceived conflict of interest which we need to rectify. However, as new telcos come in and the competition hots up, we believe that our ability to manage business growth from customer acquisitions will help us. We also have a host of pilots in our laboratory in Chennai for telecom-enabled services; a complete network test factory in Delhi; besides mobility solutions for banks, and so on,” he adds.
On the retail front, Prateek Pal, Head of retail practice, notes that TCS went with “live solutions” for outlets like Subiksha, Birla and Madura Coats. The strategy is to propose enterprise resource planning (ERP) solutions for tier-I firms to begin with. This is followed by proposals for “total outsourcing of the IT infrastructure and mobility solutions”.
However, analysts point out that most of the major domestic deals have been clinched by service providers which offer a range of services from hardware infrastructure to data centres and software services. Wipro is already in the hardware business, and so is HCL Technologies.
TCS, according to Chandrasekaran, too has set up a group on outsourcing deals. Incidentally, the group also works with IBM and HP to offer end-to-end solutions (software, hardware, systems integration, et al). It is also taking the help of its subsidiary CMC to strike “pro-active” deals. Also, Ramadorai has reportedly added that TCS would not hesitate to look at inorganic growth route to expand its business further. All put together, TCS looks well on course to rub shoulders with the Goliaths of outsourcing.
| SWOT ANALYSIS STRENGTHS |
- Around 150 offices in 40 countries
- Large number of offshore employees
- Large European presence
- Part of the Tata group, which helps it gets more international business. Cases in point: the $1.2-billion Nielsen deal, Ferrari, and now Jaguar-Land Rover (bought over by the Tata group)
WEAKNESSES
- Lack of scale compared to global competitors like IBM, HP (which bought EDS), Accenture, CSC and Capgemini
- Needs to establish a track record when it comes to large deals
- Consulting accounts for less than 4 per cent of global revenues; IBM, Accenture score on this count
- Needs to strengthen other service lines besides application, development and maintenance (ADM) that accounts for nearly 48 per cent of its revenues
OPPORTUNITIES
- Emerging markets
- Growing presence in the domestic market
THREATS
- Slowing US economy
- Labour challenges, globally
| Men who see tomorrow “In five to 10 years, you will see a dramatic change in the way people are serviced... By 2015, there may be no such term like business process outsourcing or offshoring.” Som Mittal “You will have five or six large players [by 2015] with multiple lines of services across low-cost delivery centres. These firms will have thousands of workers in different geographies, servicing many industry verticals.” Sudin Apte “Indian companies will acquire some of the low-rung international incumbents to gain on the branding, size, services and vertical portfolio and C-suite relationships. Given that the global valuations have hit lows and Indian companies have strong acquisition currency, only leads to a conclusion that this is an opportune time. TCS being the leader of the pack is the right candidate to pursue this lead .” |
Alok Shende
Principal analyst, Accendia Consulting
“There will be a lot of consolidation, especially with smaller firms being bought out by the bigger ones. Smaller firms will have an established customer base, niche offerings, and respectful order book will command a premium. The others will have to make do with lower valuations.”
Monish Chatrath
National markets leader, Grant Thornton
“The ‘super achievers’ or tier-1 firms of today will have built significant operations in western countries by 2015, either through acquisition or through aggressive, investment-backed organic growth. My bet is that there will only be one or two such firms”
Siddharth A Pai
Partner and MD, TPI India
| The outsourcing market: Miles to go There have been concerns on offshore penetration, especially in the BFSI segment. Indian IT service providers have an insignificant market share of the global BFSI IT services spend. While one accepts that all services are not “offshore-able”, industry conversations indicate that offshoring from BFSI can grow multifold (over twice the current size) over the next few years. Further, Indian IT companies have significant growth potential in relatively newer services like infrastructure management, note J P Morgan analysts. BFSI accounts for around 40 per cent of overall IT/ITES exports from India and around 25 per cent of all global IT spending as per IDC (excluding the government IT spend). However, Indian IT revenues from BFSI account for only approximately 8 per cent of the total IT spend by this vertical indicating plenty of scope for growth. Volume market share in BFSI would be higher — around 20 per cent, say the analysts. However, they believe that there is sufficient scope to expand this market share — over 50 per cent of services from BFSI can be offshored and hence there is significant potential for Indian IT companies to get more work from banking sector. |
They also see good penetration by Indian IT players in the custom application development and application management segment. The Indian IT players have only around 5 per cent market share in the overall spend with plenty of room for growth in large areas such as systems integration, infrastructure, network and desktop outsourcing and software deployment and support.