Showing posts with label TCS. Show all posts
Showing posts with label TCS. Show all posts

Monday, March 26, 2012

Tata Consultancy Services Limited - Revenue Analysis & Operating Metrics 2007-2011

TCS Financial Performance – 2007-2011
Financial Performance:
  • TCS saw strong revenue growth in FY 2011 (29% YoY) compared to FY 2010 (5.4% YoY) and FY 2009 (6.8% YoY). 
  • Revenue growth in FY 2010 and 2009 affected by the global financial crisis and TCS through its strategy of improving efficiency and constant cost base kept up the profitability and delivered good results. 
  • Due to the volatile economic environment that originated from the 2008 Global financial crisis TCS was forced to control its expenses by reducing costs on travel, communications, rationalizing infrastructure and optimizing resources which was evident in constant operating expenses for FY 2008, 2009 and 2010. 
TCS Geography Mix 2007-2011

Geography Analysis:
  • North America continues to be the major market as American companies are the forefront in Outsourcing to India. US has always been the primary market with significant dependence. 
  • Europe including Continental Europe is the second largest market but facing problems due to European sovereign debt crisis. UK has seen fall in contribution since 2009 due to weakness in the Telecom sector. 
  • TCS is very active in Indian Market. TCS has many Government of India and other projects in India. 
  • Latin America is another focus area for the company but the contribution fell in 2011. 
  • APAC is also seeing good growth particularly in 2011. Middle East Africa constant contribution. 
TCS Vertical Revenue Mix 2007-2011

Vertical Analysis:
  • BFSI is the dominant vertical and TCS strengthened its position in this vertical. 
  • Telecom is the second vertical where TCS is very active and this vertical revenues has fallen down since 2009 as there is weakness in the Telecom sector. 
  • Retail & Distribution is the third largest vertical and it has gained significantly since 2009. Hi-tech vertical revenue contribution also started in 2009. 
  • Life Sciences is one vertical where TCS is constantly improving and since 2009 started to wil significant deals in Media and Entertainment vertical. 
  • All the industry verticals are seeing good growth in 2011. 
TCS Services Revenue Mix 2007-2011

Services Segment Analysis:
  • Application Development and Maintenance is the dominant service offering. 
  • BPO services have started picking up since FY 2008-2009 with Citi Bank Captive acquisition. 
  • Infrastructure services category saw slight growth and constant Engineering and Industrial services revenues. 
  • Falling revenues in Enterprise Solutions. Assurance Services seeing some growth. 
  • Global Consulting revenues are not seeing growth along with Asset leverage solutions. 
TCS Contract Type 2007-2011

Time & Material contracts are the most preferred. But the Fixed price contracts are also seeing growth since 2010.
TCS Onsite/Offshore Mix 2007-2011

Initially it was Onsite but due to recession and Financial crisis, Offshore was preferred by clients since 2009. TCS also serves clients through its Global Development center .

Source: Company Investors Site             Website: www.tcs.com/investors 

Friday, December 2, 2011

India Outsourcing Industry – Low R&D spend for Non Linear Revenues


Non Linear revenues are essential for revenue growth. Currently non linear revenues account for only 10%-15% of revenues currently for large IT companies and they are planning to increase these revenues to be 20% of total revenues in the next three years and 1/3rd of total revenues in five years. Research and Development (R&D) spend is key for non linear revenues. Indian vendors have been investing in R&D for some time and they are not investing significant amounts of money. Infosys is the only vendor that has invested in R&D and it’s investing slightly more than 2% of revenue. HCL is investing 1.4% of revenue in R&D. TCS and Wipro are investing less than 1% of revenues in R&D and they are investing 0.3% and 0.7% of revenue respectively. This is far lesser than global players that invest close to 5-6% of revenues in R&D. Indian Vendors have exclusively set up innovation and research labs with close to 600-800 highly qualified and skilled employees working full time for developing new products and services. Chart: 1 is the R&D spends in Rupee Crore. Chart: 2 is % R&D spend to total revenue.
Chart:1 
Chart: 2

Infosys Labs R&D is focused on applied research in software engineering and other areas of Enterprise IT. Finacle R&D unit is engaged in research of developing new technologies in banking domain. New strategic direction ‘Building Tomorrow’s Enterprise’ identifies new trends that are transforming the client’s business. Areas of research include semantic and language tech for information extraction from social media and for customer engagement, cloud computing, software engineering, security &privacy, etc. Research groups have published two books Raising Enterprise Applications- a Software Engineering Perspective and Process centric Architecture for Software Systems and 125 papers in leading journals in 2011.Infosys have an aggregate of 357 patent applications pending in India and US. The USPTO has granted 22 patents. Source: Annual report.

HCL Engineering, R&D Services group offers end-to-end engineering services and solutions in hardware, embedded, mechanical and software product engineering to aerospace and defence, automotive, consumer electronics, medical devices, networking and telecom, servers, storage and software industries. HCL has started a business unit with a dedicated team to focus on Defence, Space and Security. HCL is investing heavily in developing its own IPs and solutions to help customers' impact the overall product ecosystem faster and better. Solutions include a unified communication platform, a remote diagnostic reusable module, telematics and test platforms in multiple verticals. HCLT has partnered with Cisco, and filed multiple patents in the field of Mobility, Banking, etc. Source: Annual report

Wipro’s R&D focus is to strengthen the portfolio of Applied Research, Centers of Excellence (CoE), Solution Accelerators and Software Engineering Tools & Methodologies. In FY 2010-11, company had filed for 7 new patents and from the previous filings, 6 patents have been granted. The technology themes identified were Cloud Computing, Green IT, Social Computing, Information Management, Mobility, Collaboration and Open Source and resulted in creation of several new services like Cloud SI Services, Cloud Originator Services in areas of Mortgage Processing and Green Consulting. Wipro researches actively involved in Government committees to integrate Rupee sign into ICT environments. Source: Annual report.

TCS’ R&D organization is focused on creating intellectual capital for the Company and enabling innovation across the following three dimensions: Supporting the competitiveness of current business across industries and service lines; enabling the creation of new platforms for non-linear business growth; Exploring new areas and technologies for future new business opportunities. TCS has initiated ‘Research Scholar’ sponsorships to benefit research in the IT disciplines in Indian Academia. A number of innovation platforms, contests and awards were launched. The Company also hosted innovation forums in three continents and held over 40 innovation workshops and symposia. TCS’ researchers participated in more than 150 conferences and published close to 200 papers in prestigious journals. TCS increased its Intellectual Property Rights (IPR) significantly. 223 patents were filed in several countries in FY 2010-11. Until now, cumulatively, TCS has filed 448 patent applications of which 68 have been granted. In the current financial year 6 patents have been granted. Source: Annual report.

R&D departments need to further deliver more products and services and Vendors have to increase their R&D spend. They have to increase their collaborations and tie ups with other research and academic organizations and look to recruit more skilled and qualified professionals. Vendors have been trying to increase their R&D efforts and increase R&D contribution but they have not seen significant success. They have to look for ways to increase their R&D spending and also look for more contribution form the R&D department. 

Tuesday, November 29, 2011

India Outsourcing Industry- Increasing number of Fixed Price Contracts but Time & Materials Contracts still dominate for Major Vendors

The outsourcing contract is critical document in an outsourcing relationship which typically contains: scope of services, assumptions, deliverables, pricing, intellectual property and deliverable ownership, contract duration, service levels, customer responsibilities, Vendor responsibilities, conflict resolution, and termination process. There were 472 outsourcing deals struck in the third quarter of 2011 compared to 516 transactions in the second quarter of this year according to Everest Group. Indian IT Vendors constantly write contracts with clients every quarter. Indian ITO vendors contracts are based on two types of pricing Time & Materials based pricing and fixed Pricing. Most clients still negotiate for T&M or Fixed Price contracts with T&M contracts more than 51-58% of total revenue and rest is fixed price contracts. Fixed-price projects to mitigate the impact of the rising rupee and wage inflation on their profitability.

Time & Material (T&M) Contracts are the major type of contracts done by the Indian IT Vendors. In the initial days of outsourcing of work to Indian Vendors the outcomes were unknown and both vendors and clients were not sure how effectively the work will be done by the resources provided by the vendors. They were not sure about the time and resources required, hence the T&M contracts were the best options. Clients wanted to have control on the resources and track vendor resources including the approval and clearance of time-sheets and the risks totally existed with the client. In the T&M contracts the risk lies totally with the clients. People are thrown at the problem and are billed on hourly basis and there are instances of unutilized resources in this scenario. Projects can be easily ramped up or down according to the clients needs easily. These contracts are best suited when the relationships between the clients and vendors are just starting fresh and the projects or process are new with no significant view of the outcomes and their impact. As long as uncertainty exist T&M contracts will be there and despite the fact some experts believe the golden age of T&M contracts is going to end in next ten years.

Fixed price (FP) contracts are clearly defined and deliverables agreed between client and vendor. Standard IT procedures, periodic reviews of performance and phased billing are other features of FP contracts. Risk is shared between the vendor and clients and vendors have to invest in the relationship and technologies required. This is a rigid model and mid way changes are difficult to make. Clients have to be very careful in choosing the best vendors for significant ROI and the vendors too have the scope on investing on the infrastructure and technologies as they are well aware of the client needs. Both clients and Vendors have to invest in building a relationship. Fixed price contracts are being favored by the Indian ITO vendors as they can efficiently complete the work using lesser resources and do it without much interference from the clients. In the past four years Indian vendors are trying to increase the Fixed price contracts percentage to total revenues as the client IT budgets/spend are being tightened due to the financial crisis, debt crisis and economic slowdown. Indian IT vendors looking to maintain 40-40% of total revenue through fixed price contracts. Fixed-price outsource contract attracts the customers due to immediate cost reduction followed by 3-5 years of cost control. Fixed-price projects are also more short term in nature, while the time and material are long-term contracts that give longer revenue visibility for companies

Tata Consultancy Services Limited
TCS has a higher ratio of fixed prices contracts in comparison to the competition and suggest TCS is undertaking more complex and mission critical end-to-end engagements.TCS has been looking to maintain the fixed price contracts in between 40-50% which they feel is optimal. The recent recession and financial crisis has tightened the client budgets and spends which forced to look for more fixed price as it helps them in controlling the resources and do the work more efficiently. 
TCS also increased the working hours of employees so that they can increase billable hours for T&M contracts. Fixed price contracts also have higher pricing compared to T&M and carry risk for the vendors. Fixed price contracts have to be signed constantly as the existing contracts get completed overtime and if there are no signings for some time then the overall revenue gets impacted. TCS in 2011 is facing such situation where they have seen fall in fixed price signings but confident to overcome as they have good pipeline. Margins also increase with fixed price contracts.



Infosys Limited
Infosys has successfully increased its fixed price contracts since 2008. Financial crisis and subsequent recession forced Infosys to start look for ways to curb the slow revenue growth. The US clients have changed their offshore outsourcing strategy and this prompted Infosys to look for fixed price strategy. But Infosys still have major revenues coming from T&M contracts as most of its clients want to stick with T&M and there are risks involved in fixed price like if the scope of a fixed price bid is unclear, it can lead to cost overruns. The share of fixed price contracts for Infosys in 2010-11 stands at 42% as compared to 28% in 2005-06. Infosys focused on shift to fixed-price contracts as part of the bigger effort to de-link revenue growth from manpower growth and move up the value chain. In long term, Infosys expects the proportion of fixed price bids going up.

Wipro Limited
Over the last 2-3 years, Wipro have increased focus on fixed-price contracts. Wipro has been able to increase the proportion of fixed-price contracts to 45.7% in FY11 compared to just 34 percent in FY-09. Fixed-price contracts ensure better realizations compared to time and material. Wipro is also is aiming to break the “linearity”, or revenue growth linked to the number of people added, and earn better prices through fixed-price contracts. Wipro was also forced to look for more fixed price contracts to overcome the recession. Wipro has in the past couple of years have been signing more fixed price deals as these deals provide revenue visibility and reduce the pricing pressures. 

HCL Technologies Limited
HCL Tech have increased its fixed price contracts to total revenue percentage in 2011 to 42% from 30% in 2006. HCL had move to more fixed-price contracts as it offers more certainty in contract execution and revenue. Fixed-price contracts require greater planning in terms of resource allocation and utilization and definitive timelines of implementation and were more relevant in the turbulent times where clients of HCL are demanding output/outcome-based pricing with service-level agreements. In the last two years HCL has seen good traction in the fixed price deals and it is planning to do more such deals in future.


Discussion Points:
  1. Are the Indian ITO vendors doing well on the Fixed Price contracts front?
  2. How comfortable are clients with Fixed Price contracts and how to manage risk?
  3. What will happen to T&M Contracts in future?
  4. What is the optimal balance for T&M and Fixed Price contracts?


Sunday, November 27, 2011

Innovation & India Outsourcing Industry – Case Study of Top Indian Vendors (TCS, Infosys & Wipro)


Indian outsourcing companies realized that clients are more interested in innovation along with cost and process efficiencies.  Clients are interested in paying more for the transformational and innovation projects and product offerings. Initially it was sending technology workers to companies in the west for work onsite, then came the offshoring which is the traditional model of outsourcing based on the client needs and the latest third wave in Indian outsourcing is where companies design the platforms and systems that facilitate innovation and efficiency. But the fact remains that till now there has not been a disruptive offering from the Indian Outsourcing vendors. According to a 2011 Forrester survey, 41 percent of outsourcing clients cited lack of innovation as the biggest challenge with their existing IT services relationships.

Clients interviewed by Jan Erik Aase, (Sourcing & Vendor Management analyst-Forrester Research), identified three types of activities offshore vendors may try to pass off as innovation that failed to meet their expectations: innovation-for-pay (vendors creates a solution for one client and then licenses it back as a product to that client and the larger market), innovation for innovation's sake (emerging tech from vendor R&D labs that don't solve a customer problem), and administrative innovation (IT services buyers don't view process improvements, project management tools, relationship dashboards, and the like as real innovation). Clients want innovation relevant to their specific needs such as solve business problems, transformation in doing business, commercially viable solutions, creates competitive differentiation, improve market share, or have "an ROI with a multiplier of at least two”.

Innovation @ Top Indian Outsourcing Vendors (TCS, Infosys, Wipro)
Indian Vendors realize that Innovation is lifeline of business and is a critical factor for success in outsourcing industry. They know innovation is a complex process and is a vital component in their business strategy and in order to stay ahead, companies should increase the speed of innovation, be focused on the customer experience, understand their behavior, and co-create with customers and partners. Innovation has to be instilled into the organization at all levels and companies have done this successfully. The top three Indian outsourcing vendors have around 500,000 employees working in their organization for clients across the globe. They constantly innovate and improve the process efficiency there by leading to cost and other benefits for the clients. They work 24/7 for the clients and the innovation which most of the employees do on the day to day basis is called derivative or sustainable innovation.

All the three vendors are using their in house intranets, employee engagement and social media platforms for the idea generations. These platforms provide an opportunity to express their innovation ideas to the management. Managers and Leadership are being trained to act upon these ideas by the employees, evaluate them, commercial viability of the ideas and finally implement them and develop product and service offerings. Formal trainings for the employees include innovation and creativity. For the training programs they are employing third party consultants and experts and also tying up with the academics and other research institutions. Rewards and recognitions are provided for the employees who provided successful innovative ideas and Innovation is also part of the employees’ formal annual performance reviews. The vendors have invested on the training of the employees, provided them with necessary platforms and are investing and developing the ideas into final products and services.

Annual Innovation Events are being conducted where the employees are allowed to present their ideas, conduct demos not only to the management and leadership but also to the academic, clients, research, alliance partners and other stakeholders. These events bring together all the stakeholders of the innovation process and provide a platform to discuss and debate on the various innovations. All the vendors have tied up with the academic organizations, consultancies and other specific research organizations and do work with them in developing the innovative offerings. Wipro Technologies and Knowledge@Wharton together started conducting this tournament in 2010 which selects the most innovative managerial "tools" that companies can use to improve their business by increasing revenues, reducing expenditures and improving customer experience

TCS and Infosys have setup exclusive Innovation labs and these labs TCS Innovation Labs and Infosys SETLabs have been in existence for the past 30 and 20 years respectively. These labs has developed several process frameworks, methodologies, service platforms and work with standards bodies on future technologies, share best practices and maintain peer relationships with academic bodies, industry forums, conferences, and journals. Around 600 and 800 associates work in the R&D in the TCS and Infosys labs respectively. Wipro on the other hand provide third party R&D outsourcing services to their clients and they dominate this market. Infosys' SETLabs incubated the Innovation Lab in collaboration with Prof. Venkat Ramaswamy in 2005 as part of its research and innovation capability.

Frameworks are used by these vendors like TCS adopted Professor Clayton Christensen Innovation frame work and Co-innovation network with Clients and other stakeholders, Infosys adopted a Co-Creation framework based on the book published in 2004 “The Future of Competition: Co-Creating Unique Value with Customers" by Prof Venkat Ramaswamy and management guru the late C K Prahalad. Co-creation is the practice of developing systems, products, or services based upon innovative ideas from stakeholder experiences, that enhance strategic capital, increase returns, and expand market opportunities.

Wipro’s Innovation initiatives were developed based on a study of innovation methods in companies like Nike, 3M, and Home Depot that were reputed for their innovative practices and Applied Innovation which is the ability to infuse newer ideas and newer ways of doing things into all parts of the organization, and improve business outcomes, often without major disruptive change. Wipro Technologies, Innovation Evangelism happens through a series of vehicles that include: Wipro’s Innovation Camp, Innovation Bazaar, Story Book on Innovation, Systematic Creativity Workshops, and Inflection Point newsletter, etc

Despite all these efforts and investments India Vendors have innovated products which are more of sustainable kind and platforms that are mid range platform innovation but they are not able to innovate a disruptive offering. They have involved the employees and managers, provided tem with necessary infrastructure, established labs with exclusive focus on innovation and creation of new products, employed PHds and highly qualified people in these labs, provided with necessary infrastructure and other technologies in the labs, collaborated with all the stakeholders like clients, industry groups, research and academic organizations etc. Co-Creation with the stakeholders and forming strategic alliances with product companies and technology startups and investing significant amounts of money and resources are the major strategies adopted by these vendors. But success still eludes them.

Clients too have to make serious investments to profit from the vendor’s innovation strategy. Clients should treat the vendor not just as the cost reducing and process efficiency improvement partner but have to look at the vendors as strategic partners for the business growth. Clients should provide the vendors with the overall organization business strategy and make them understand that their role is not only limited to the IT department but also towards the overall organizational performance improvement. They should foster such relationships with their vendors and look for vendors with good innovation culture and strategies in place. It will be a win- win situation for the vendors and clients if they work collaboratively towards developing the innovative products and services.

All the players in the Indian Outsourcing industry realize the fact that only way to survive in this highly competitive outsourcing industry is to constantly innovate products and services that are relevant to the clients and lead to revenue growth to both of them. Innovation is highly complex and critical process that need significant amount of resources like monetary investments, technologies and highly skilled and trained professionals. The innovation Return on Investment is essential factor for both clients and vendors and they have to work together for this.

Further Reading:


Tuesday, November 1, 2011

India Outsourcing Industry 2011 – Focus on Healthcare vertical for Growth


Healthcare has become focus vertical for majority of the Indian IT Vendors. Most of the IT/BPO companies like Cognizant Technology, WNS, TCS, Firstsource Solutions, Genpact, Mahindra Satyam, Pacific BPO, CBay Systems, etc already cater to global healthcare industry. Infosys is looking at Healthcare vertical as one of the critical vertical for future revenue growth. Indian IT vendors have been slow in tapping this vertical as major focus earlier was on BFSI and Manufacturing. Indian IT vendors are making use of technology as a platform and offer their service offerings.

US is major market

US healthcare reform announced by President Obama provides a huge opportunity for Indian IT vendors and the policy focuses on controlling healthcare costs and provides universal coverage. The US healthcare bill, valued at US$ 940 billion, will provide healthcare coverage to 32 million Americans over the next 10 years. Currently US healthcare is estimated at $2.5 trillion, which is projected to grow to $4.6 trillion by 2020. Major opportunity for Indian Outsourcing vendors lies in revenue cycle management, electronic medical/health records (EMR/EHR), billing & coding and medical transcription. According to ValueNotes, EMR/EHR is a $20 billion IT outsourcing opportunity. Revenue cycle management (RCM) is a $50 billion market in the US.

Medical transcription business is estimated to be worth $25 billion annually and growing at around 15%. According to CBay Systems the size of the US medical transcription (MT) industry is estimated to be approx. US$17 billion for the year 2011 and is expected to reach US$21.2 billion by 2014. 67% was in-house while the remaining 33% was outsourced. CBay also expects the MT industry in India is expected to touch US$1 billion in 2014 from US$ 435 million in 2009. According to ValueNotes, the MT boom phase is over. Speech recognition technology, being used by most healthcare providers has resulted in shrinking the requirement of a medical transcriptionist’s skills to 10-15% of its original requirement. Medical transcription started in India 15 years ago and India is one of the primary locations and there are number of companies providing end to end medical outsourcing services in India.

Rising Indian Domestic Healthcare Sector

According to a report titled, “India’s New Opportunities- 2020” prepared by the All India Management Association, Boston Consulting Group and the Confederation of Indian Industries (CII), the Indian healthcare sector is poised to reach US$ 280 billion by the year 2020, thereby contributing an expected Gross Domestic Product (GDP) spend of 8 per cent by 2012 from 5.5 per cent in 2009. A US$ 36 billion industry in 2009 and growing at 15 per cent compound annual growth rate (CAGR), the Indian healthcare industry will reach the market value of US$ 280 billion by 2022. Indian IT vendors have to look for growth opportunities domestically as the US and European Markets are struggling to overcome the economic slowdown and European Debt crisis. The domestic opportunity may not offer huge profit margins as healthcare in India is mostly government owned but the rising private participation and Public and Private Partnership model is a good sign. State governments across the country have announced specific healthcare schemes sponsored by them for citizens and these schemes need to be monitored and properly implemented.

Indian Top IT Vendor focus on Healthcare Vertical

TCS has started looking at the healthcare vertical since 2009 and has seen annual revenues of US$ 395million in the vertical in 2010. TCS’ Q1 2011 Healthcare and Life Sciences revenue was at US$ 119 million. TCS has been gaining traction in this vertical.

Infosys does not report the healthcare revenues separately which highlights the fact that the company does not have much exposure in this vertical. To overcome this, company is looking for acquisitions in this vertical in US and Europe. Market rumors indicate the company is looking to acquire the Thomson Reuters Health Care vertical business in US.

Wipro healthcare vertical revenues for 2010 were US$429 million. Wipro is looking at healthcare as momentum vertical for growth and is planning to expanding its relationship with seven existing healthcare clients and looking to add at least two new clients on a quarterly basis.

Cognizant is the undisputable leader in healthcare market with more than US$ 1.17 billion in revenues. Cognizant owns IMS Health, which has a strong base in the healthcare practice. Cognizant provides solutions to 27 of the top 30 pharmaceutical companies; nine out of the top 10 biotech companies; nine out of the top 10 US health plans and 12 of the top 20 medical devices companies.

HCL technologies annual revenues from healthcare vertical in 2010 were US$252 million. Healthcare Informatics’ magazine has ranked the ‘Healthcare Practice’ division of HCL Technologies as the 39th largest healthcare company by revenue in the US in 2011.

Smaller players in the market like Firstsource, Genpact etc and pure play MT players like CBay, Pacific BPO also are focusing on Healthcare BPO market. These players have realized that the growth lies in the other than MT market i.e. Revenue cycle management, electronic medical/health records, and coding. These players are also competing with the bigger players in the market for the revenue share.

Healthcare vertical – Growth Driver

Indian IT vendors have to look for growth opportunities in healthcare as the US and European Markets are struggling to overcome the economic slowdown and European Debt crisis and the growth drivers till now BFSI & manufacturing verticals are slowing down due to the slowdown and debt crisis. Apart from the US healthcare policy, healthcare spend is also expected to increase in UK and India which also presents a growth opportunity. Mergers & Acquisitions are expected in this vertical as many big players in the Indian IT industry like Infosys are looking to acquire for jumpstarting revenues in this vertical. Other players like TCS, Wipro and HCL are focusing to increase their presence in this vertical and planning to add more clients in the coming quarters.

The ICD 10 conversion change by October 2013 is expected to impact the medical coding industry and is likely to spur a great demand for outsourcing and most of it may come to India. Technology helps in providing integrated solutions for the client’s healthcare needs, decrease healthcare costs, and improve efficiencies and Indian IT vendors with long experience in using such technology platforms are in a good position to provide the necessary services to the healthcare industry.