What do TCS’s blockbuster contracts mean for outsourcing firms?
We’re seeing two trends here with this resurgence in the mega deals. Firstly, some clients developing more trust with their long-term partners to give them a larger piece of the pie, and finally, the cost/benefit of using a sole supplier across a broader set of processes to take advantage of the economies of scale and the provider’s willingness to invest in digitization.
Here are more thoughts on these two recent mega deals:
The Nielsen renewal is a lesson in “give a little, get a little”:
Nielsen had been a Tata Consultancy Services Ltd (TCS) client since 2007, but the terms of the television ratings measurement company’s renewed contract have changed significantly. The outsourcing contract, according to Nielsen, has been extended by five years, beginning 2020 up to 2025. However, Nielsen has committed to spend $320 million every year, beginning 2017 until 2020, $186 million per year from 2021 until 2024 and $139.5 million in the year 2025.
It’s a relief for new TCS CEO Rajesh Gopinathan to retain the business, but the diminishing future returns from the deal are a sign of things to come for the whole information technology (IT)/business process management (BPM) services industry. Simply put, clients like Nielsen are expecting to have the same services for less money in the future because of promised efficiencies from providers like TCS in the digitization and automation of services, leading to lower numbers of staff to manage the work. The real net result is that all the leading providers are refocusing their futures on maintaining profit margins, as revenue growth is flattening, and already in negative territory in some areas.
Transamerica is really as much about TCS building out its US insurance business as it is about the $2 billion+ carrot.
According to the new agreement with Transamerica Life Insurance Co., TCS will add a whopping 10 million policies to the 17 million policies already being administered under the TCS Bancs platform. These include Transamerica’s life insurance, annuity, supplemental health insurance, and workplace voluntary benefits products. TCS will be rebadging approximately 2,200 employees who work in offices across several US cities, prominently in Iowa, where Transamerica is headquartered. The deal is expected to lead to annual run-rate savings of ~$70 million initially for Transamerica, growing to $100 million over time. Gopinathan has stated that the deal has “a big transformative component at the beginning and then it has a long operations segment”, adding that TCS’s digital capabilities will be leveraged.
When studying this deal, TCS’s current competitive positioning in insurance operations becomes critical. The service provider has grown its presence in the US by primarily working with property and casualty carriers on pure-play business process work. So far, the specialized third party administration (TPA) market for life and annuity had remained elusive. TCS’s experience and platform capabilities were suited to the UK, where it operates through its Diligenta brand to service clients such as Friends Life. In the latest HfS Insurance-as-a-Service Blueprint, we called out TCS as a leading provider, but highlighted the gap in their US delivery network, noting “Clients would like to see TCS expand its delivery presence. The service provider has a large footprint in India and the UK, and needs to develop its nearshore and onshore presence in North America in the next two years as it grows this client market.”
TCS has spent a considerable amount of time in customizing its platform and investing in product knowledge for the US L&A market, and it has just found its way in—with Transamerica. With a US operations base for L&A, employees with broad product knowledge, an adapted platform, and a marquee client, TCS is now presumably set up for market success. That is, if it can pull this one off with sustainable margins. The deal promises increasing savings year-o-y to Transamerica, meaning TCS will have to ramp up automation and digital capabilities, just like the Nielsen contract.
Will mega-deals like Nielsen and Transamerica be the new norm—for TCS and for the rest of its “WITCH” (Wipro, Infosys, TCS, Cognizant Technology Solutions Corp. and HCL Technologies Ltd) cohorts?
The Transamerica announcement must be viewed on its own merit, rather than part of a larger trend back towards large-scale deals. TCS needed a solid base in the US for the insurance TPA market, and this deal brings them significant presence and local insurance talent within life and annuities. Also notably, this is a platform based services transformation mega-deal, which TCS has been known to orchestrate, as it did with Friends Life in the UK in 2011. The challenge for TCS will be in bringing the smart use of tools including intelligent automation and analytics into its new US operations base, and find value for Transamerica in new ways that the market demands—not just rebadged employees and platform conversions. The service provider has been commended in our recent Blueprint for its progress in driving better member experiences for insurance carriers, and aggressively embedding automation across the services value chain to improve quality and performance over time. We expect TCS to bring the full force of this collective insurance experience to make the Transamerica engagement successful in coming years.
Similarly, the Nielsen deal, while huge, is typical of what is going on when it comes to profitability for the providers—it is driving firms like TCS to invest in their own automation and digital capabilities so they can deliver the same services with less staff in the future. Hence, there is short-medium term investment needed to stay in the game and reap similar profits in the longer term.
The old days of consistent, back to back mega-deals aren’t coming back in a hurry, but when we do see them, it is these other factors that are leading the discussion.
Bottom-line: The mega-deal is alive in today’s digital market, but comes with a much more complex set of promises and investments—ones that TCS is willing to make.
Phil Fersht is chief executive officer (CEO) of US-based HfS Research, an outsourcing research firm.
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