TCS bags Somerfield's $65 m contract

Source : The Economic Times Network, www.economictimes.com
Dated : 30/11/2006

Tata Consultancy Services (TCS), the $3-billion IT outsourcing major, has bagged a $65-million, seven-year deal from the $10-billion UK retail chain, Somerfield.

By TCS’ standards this isn’t a very large deal but it is unique because this is arguably the first time an Indian IT company has won a full service contract. This means that TCS will be responsible for developing and maintaining customised software and keeping off-the-shelf hardware and application software that Somerfield uses up-to-date.

Normally, Indian companies win a part of the contract that deals with the development and maintainence of customised software first and then work their way into other things like infrastructure management and package implementation.
This is a good development because TCS won this deal against global majors who do these deals regularly.

“We believe if we do this deal well then the client will look at us for managing their discretionary spending on IT later on,” says Phiroz Vandrevala, global head (corporate affairs, TCS). TCS also believes that it has been able to structure the contract in a way that will not impact its margins. What has it done differently?

Normally full service deals require the service providers to take over all the assets — hardware, software, people — from the client’s books to its own. Not in this case. TCS will not take over the hardware and off-the-shelf software.

“They will remain on the client’s books. We will manage it as if it was our own but the cheque for these will be written by the client directly to those vendors and we will get management fees for this advisory bit,” says Mr Vandrevala.

Since off-the-shelf hardware and software are low-margin business TCS will avoid any hits to its margins. IT industry analysts realise this but feel it is not bold enough. “I think they have stopped a shade short making this a total outsourcing deal.

They will have to consider taking the entire operation on their books in their future deals because it makes the life of their client much easier and it also delivers bigger topline growth,” says Siddharth Pai, partner, TPI, an outsourcing advisory firm.

Mr Pai may have a point there because if this contract were to be done by a global outsourcing major it would have been at least 2.5 times bigger in revenues, albeit less profitable. This contract is a fixed-price one, an Achilles Heel for Indian companies.

TCS seems to be on a safer grounds here because it does more business on fixed-price contracts that any other indian companies. “Since the contract has a large infrastructure component to it and appears less project-oriented the risk of margin loss appears to be less,” says Mr Pai.

TCS has shown more purpose by announcing that approximately 115 people will lose their jobs in Somerfield’s UK operation. This shows the changed environment as far as outsourcing is concerned. Three years ago, any mention of a job loss due to outsourcing would have been considered blasphemous.

TCS has also shown some good political acumen by stressing that these jobs will move to the TCS’ UK operations and therefore the country will remain job-neutral — for the time being.