In the biggest ever outsourcing deal won by an Indian firm, software
leader Tata Consultancy Services (TCS) said it has secured a $1.2
billion global contract spread over 10 years from Dutch media and
market information provider The Nielsen Company. The order covers a
range of services from software to back-office functions to knowledge
process outsourcing (KPO) and the revenue flow will start immediately,
top TCS officials said.
The agreement will also bring 350 employees of Nielsen’s under the TCS fold with expertise in information management in the area of KPO. In addition, the scope of the partnership includes setting up an innovation centre for next generation businesses in information and media. The centre will, however, cater to customers other than Nielsen as well.
The news drove TCS shares, which were trading weaker in the morning, spurting by 5%. The gains were later trimmed in a broad market fall and the shares ended the day up 2.2%. “The contract is definitely very positive. But it also has to be viewed in the context of being a 10-year deal. As percentage of revenues it will be only around 2% annually,” said an analyst.
“The deal will be profitable from the first year itself. There is no additional discretionary spend or concessions that are being made,” CEO and MD S Ramadorai told mediapersons. The deal also does not involve any asset takeover, and revenues will be spread more or less evenly during the contract tenure, he added.
The only other billion-dollar contract to have come to an Indian IT provider is British Telecom’s contract to Tech Mahindra in December last. However, Tech Mahindra had to make an upfront payment of $110 million to BT and take a hit on its bottomline as a result. Not counting this deal, the second largest contract in Indian IT was TCS’ deal with the UK-based Pearl Group. This contract was for $ 850 million involved the transfer of 950 Pearl Group employees to TCS.
Typically, large contracts also bring with them lower profit margins as companies tend to give volume discounts, but Mr. Ramadorai said the TCS-Nielsen agreement would help it maintain existing core profit margins at 27%. “The pricing also takes into account inflationary measures and provides for rate increases,” he added. In addition, both parties have the option to review the pricing at the end of the fifth year.
Hiring specifically for the Nielsen engagement has already begun and TCS intends to recruit “thousands of employees in BPO and IT over the next three, six and 12 months” for it, chief operating officer N Chandrasekaran said, but declined to give numbers. Further, the company may build a new centre in Eastern Europe for the project, in addition to its existing one in Hungary. The services will be delivered from three locations — India, Eastern Europe and Latin America.
TCS will manage Nielsen’s IT operations worldwide, support and maintain existing applications and develop new applications. This part of the contract comes under the lucrative infrastructure management services space, and under application development and maintenance where Indian players have traditionally been strong.
The other parts of contract are in BPO, KPO and transformation and innovation. The BPO piece includes accounts payable, accounts receivable, billing, general ledger, human resources-related processing and global reporting. Some finance and human resource processes will be executed on a platform-based BPO that TCS will build. This marks a milestone for the Indian BPO industry as this is the first platform-based BPO contract for an external customer.
Many Indian companies are trying to standardise their services into platforms that can be sold as a package of services, and with this contract, TCS has been the first to realise the transformation. This will be a transformational engagement with Nielsen, and TCS will have the option to move to outcome-based pricing from seat-based pricing, which is linked to manpower rather than output. Internally, TCS already has such a platform to manage its HR globally.
The KPO part of the contract includes analytics reporting and reference data management. The Nielsen unit that it will takeover in Baroda will be part of the KPO contract. “As a global information and media company, Nielsen deals with a large amount of information and analytics reporting and information management is core to its services. As part of the partnership, TCS will now provide these high-end services to Nielsen,” Mr. Chandrasekaran said.
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