Tata Consultancy Services (TCS) announced that it will separately report its non-linear revenues starting in fiscal year 2012. TCS is targeting 10% of its incremental revenues to come from non-linear models by the fourth quarter of 2012. TCS is focusing on developing new products like its BaNCS banking software and cloud-based iON platform, as well as acquiring companies, to increase revenues from intellectual property, cloud computing, and other non-linear sources. Reporting non-linear revenues separately will benchmark TCS's progress in shifting away from a reliance on headcount growth and toward higher-margin business models.

1. Analysis & Outlook
Case Study – TCS to announce its Non Linear Revenues Separately
Tata Consultancy Services (TCS), India’s largest IT Company had announced that it
will show its non linear revenues separately for the Fiscal 2012 which will be a
benchmark for other Indian IT vendors. In June 2010, CEO N Chandrasekaran
announced that TCS is targeting to get 10% of its incremental revenues by Q4 of FY
2012 from non-linear models. Non Linear revenues have been a focus area for the
Indian IT Vendors since past few years and all the Indian IT vendors are looking to
delink revenue growth with employee headcount growth. TCS has close to 2,50,000
employees with 2012 fiscal revenue target of US$ 10 billion and strategy to increase
employee headcounts for incremental revenues is risky as managing, training, and
hiring such huge number of employees is difficult and requires significant monetary
and human resources which is not cost effective. Non Linear revenues also help in
increasing the revenue per employee, employee productivity, and also the operating
margins as non linear models help vendors to charge higher prices for the services. Top
Indian IT Vendors have adopted following models Intellectual Property/Products,
Cloud Computing, Platform BPOs, Non Linear Pricing Models, Delivery Accelerators,
Branding of products and services/solutions and Merger & Acquisitions to increase the
non linear revenues.
TCS core banking software BaNCS, which is a complete suite of business solutions
covering Core Banking, Compliance, Islamic Banking, Channels, Payments, Treasury,
Corporate Actions, Securities Trading, Securities Processing, Market Infrastructure,
Private Banking, Wealth Management and Insurance, is at the heart of its non linear
strategy and its acquisition of Sydney-based Financial Network Services (FNS), a
leading Australian core banking solutions vendor for approximately US$ 26 million in
October 2005 which at that time had the core banking solution installed in over 115
banks spread over 35 countries with clients that include Tier I and Tier II banks in
emerging markets in Europe, Asia, Australia and Africa also fueled revenues from this
segment. In September 2011, TCS launched new version of BaNCS 12.0 for the
banking and capital markets with an advanced Multi-Entity support that allows a single
installation to support customers units across geographies, providing cross entity
customer transactions with configurable business restrictions. Over 50 enhancements
like spanning syndication, Project & Contract Finance, membership module for credit
unions, etc have also been added and the core banking software is installed in 240
financial institutions in over 80 countries. The product also won major accolades from
clients and industry experts and always figured at top of the category. TCS offers other
technology products in engineering, Life sciences, healthcare, etc but revenue
contribution to total revenues is in single digit and mostly contributed by BaNCS. As
part of its non linear revenue growth strategy TCS is focusing on developing new
products and further upgrade the existing ones.
Platform BPO solutions which is bundling of IT, BPO and consulting is another major
focus area for non linear revenue growth. TCS started its platform BPO unit in April
2008 and it has platform offerings in the areas of Human Resource, Finance &
Accounting, Procurement and Analytics and it has more than 20 clients on Platform
BPO. Diligenta, a subsidiary of TCS with its insurance services platform assumed
administration responsibility for 3.2 million policies for Friends Life, a provider of
Rajesh Prabhakar Analyst Bio @ http://analysiscasestudy.blogspot.com/

2. Analysis & Outlook
pensions, investments and insurance in UK from March 2012 and the deal is worth
$2.2-billion (Rs 10,800 crore) over a 15 year period. The deal is transaction-based and
TCS Diligenta will charge the client a fixed monthly fee per policy and migrate policies
of Friends Life to TCS BaNCS Insurance, a globally recognized insurance platform
over the next 2-3 years. TCS is seeing good traction for its Platform BPO offerings in
Europe, North America and India. TCS has changed its branding strategy in 2007 and
launched a new campaign called Experience Certainty on which it had spent close to
US$10 million dollars and even today the company uses this branding which had been
very successful. Delivering as promised with higher level of certainty and not
promising anything they can’t deliver is the basis of the message.
TCS in early 2011 launched iON product solution that uses cloud computing
technology to deliver on-demand services to small and medium businesses. TCS said it
expects revenues from the product to cross the $1 billion mark in five years and targets
to add 1,000 in one year. Till January 2012, TCS added more than 440 customers in its
cloud-based small business line and it expects the product line will contribute to the
overall revenues over the period of time as more and more clients are added. TCS iON
is focused on the Indian market only and is partnering with 100 system integrators
across the country that provides the cloud ecosystem. The offering is based on the pay
per use model and SMBs need not invest in IT Assets and can leverage the technology
in their business as iON addresses all the SMBs technology needs which range from
business solutions like HR, finance, inventory, sophisticated domain-based ERP
solutions as well as basic applications like email, document management and website
services. TCS is targeting SMB companies with a turnover between Rs 10 crore to Rs
500 crore and with 10-1,500 employees. TCS is betting big on the SMB cloud platform
as major source of non linear revenues.
TCS adopted outcome-based pricing in 2006 in some of its deals and a project from
Ministry of External Affairs India to automate passports, which it won in 2008 and was
one such deal where in TCS is paid a combination of project fee and an outcome fee
based on number of applications it process. But TCS is adopting caution in signing such
deals as there are risks involved in achieving the agreed goals. Even the TCS Diligenta
Deal of Friends Life is also based on outcome based pricing. TCS also developed
Solution accelerators based on the existing third party tools and technologies which
also include processes and systems that capture client needs quickly and deliver the
necessary solutions. TCS has over 50 centers of Excellence that track the domain
technology trends and partnered with Oracle, SAP, Microsoft, etc to develop the
solution accelerators like BaNCS which is a comprehensive Financial services solution,
TCS SOLAR framework which is a service oriented framework for Business
Intelligence and Performance Management Solution and TCS Code Generator
Framework which speeds up new application development, etc through reuse of codes.
Mergers & Acquisitions wise TCS acquired Super-Valu Services India, the captive IT/
BPO unit of Minneapolis-based grocery retailer SuperValu Inc which focuses on IT
infrastructure, applications and business and corporate services for its parent company
for over US$100 million. TCS UK Subsidiary Diligenta acquired Unisys Corporation’s
insurance business Unisys Insurance Services Limited in 2010 in lieu of which the
company received business worth £250 million (Rs 1,800 crore) for the next six years.
Rajesh Prabhakar Analyst Bio @ http://analysiscasestudy.blogspot.com/

3. Analysis & Outlook
In 2008 TCS acquired the back-office operations of Citigroup for $505 million (over Rs
2,400 crore) and Citi also signed an agreement with TCS to provide process
outsourcing services worth $2.5 billion (around Rs 12,000 crore) over the next nine-
and-and-a-half years. In November 2006, TCS acquired 75% in its Swiss partner, TKS-
Teknosoft (TKS), for CHF 100.5 million or around $ 80 million and got management
control of the company, distribution rights in Europe for the Quartz wholesale banking
product and two new products, Alpha (for private banking) and e-Portfolio (for wealth
management). In 2006 TCS has acquired TCS Management (formerly called Total
Communication Solutions), a privately owned consulting firm in Australia for an
upfront cash payment of $1.3m and performance payment of $11.5m over five years.
In November 2005, TCS has acquired Chile-based Comicrom specialized in banking,
pension and cheque processing business in Latin America for US$23 million. In
October 2005, TCS acquired Sydney-based Financial Network Services (FNS), a
leading Australian core banking solutions vendor for approximately US$ 26 million in
October 2005 which at that time had the core banking solution installed in over 115
banks spread over 35 countries. TCS fully owned subsidiary in Sweden, TCS Sverige
AB acquired Swedish Indian IT Resources AB (SITAR) in May 2005 for US$4.8
million. In May 2004 acquired Phoenix Global Solutions which has expertise in
insurance for US$13 million. Also acquired Aviation Software Development
Consultancy India Ltd in May 2004 and Airline Financial Support Services India in
January 2004 and both have expertise in Airlines and Hospitality industry. TCS
acquired CMC limited which is a domestic IT services company for US$ 34 million in
2001. TCS M&A strategy has been to acquire players with niche expertise, strengthens
its core BFSI offerings, and gives them entry into geographies where there is potential
to grow. Recent acquisitions are expected to play a key role for non linear revenues.
The time has come for TCS to announce the results of its various non linear initiatives
as promised by their CEO in 2010. Accordingly TCS has announced that they will
show their non linear revenues separately from next quarter. TCS is expected to add
60,000 employees in the Fiscal 2012 and typically for every US$1billion revenues
Indian IT vendors add about 20,000-25,000 employees. TCS is expected to close the
Fiscal 2012 with revenue of around US$ 10 billion from the previous US$ 8.2 billion.
Simply declaring non linear revenues is not enough TCS have to show that such
revenues are contributing to internal gains like increase in operating margins and
employee productivity. Non linear revenue models also have significant risk associated
as the failure will directly have impact on the revenues and profitability and Indian
Vendors should convince the employees, customers, investors, and other stakeholders
that they are fully prepared for the non linear revenues growth. TCS is going to set a
benchmark for the overall industry in terms of non linear revenues.
Discussion Points:
1. How can TCS increase its Non Linear revenues?
2. What are the risks involved in Non Linear revenue models and how to tackle
them?
3. What should be the appropriate Linear and Non linear revenue mix for TCS?
4. Will TCS investments in iON, BaNCS and Platforms drive the non linear
revenues?
Rajesh Prabhakar Analyst Bio @ http://analysiscasestudy.blogspot.com/