The euro zone may be down. For Indian information technology (IT) services players, though, it is looking like a continent of contracts.
Tata Consultancy Services (TCS), the country's largest IT services provider, signed one of its biggest-ever deals - worth $2.2 billion - with UK-based subsidiary pension provider Friends Life. Also, there is news that TCS is in talks with Lufthansa to take over a substantial stake in the German airlines's IT business unit, Lufthansa Systems.
If the deal goes through, TCS could well get a large win in the euro zone. People in the know say the deal could be in the range of $2 billion. More importantly, it will give a strong base for TCS in Europe. Over the last few months, while the uncertainty in the euro zone has kept the industry on tenterhooks, most of them have managed to grow well.
TCS is among the few Indian IT players that have taken early bets on Europe. While it started with the UK, the 1968-founded company is now eyeing the European region in a more strategic manner. Europe constitutes 25.6 per cent of its business as of September 30. Of this, UK is 15.5 per cent and Continental Europe 10 per cent.
Others such as Infosys, Cognizant, Wipro and HCL Technologies, too have grown fast in the region. For instance, at the end of the September quarter, Infosys signed on 10 new accounts from Europe. For all the top players, Europe contributes 25 per cent to their revenue. For Wipro it was 28.8 per cent, Infosys it was 20.5 and for HCL Technologies it was 26.6 per cent as of September.
What is interesting is the strategy of each of these companies. Almost all have focused on UK and have taken an inorganic route to expand in Europe. In the case of TCS, while it did an acquisition, it also invested in creating a platform that allowed them to create a platform approach. As for Wipro and HCL, both have opted for an inorganic route.
"If you look from the size perspective," says an analyst from a leading brokerage firm, "we think TCS is in the best position to grab maximum market share. It has invested with a long-term perspective forgoing margins".
Diligenta vice-chairman and MD Pheroz Vandrewala, who is a director on TCS board, accepts the company's move to invest in a platform was then seen with scepticism. "It has taken us four years to come up with a platform and also fits into our non-linear approach. But these success will now allow us to tap the European insurance market as well," he adds. With these wins TCS is now looking at similar deals in Europe and US.
A recent report from Deutsche Bank and Value Leadership Group states Indian players have managed to garner market share from MNC players, while TCS has emerged as a preferred vendor to some of the top European banks. Reason: TCS's "range of offerings and willingness to partner with clients even on seemingly difficult engagements".
The shift towards Indian vendors is evident in some of the wins that many of the vendors have managed recently. Mid-cap firm Hexaware Technologies signed a five-year $250 million deal with an existing UK-based client. BPO firm WNS extended its deal with British Airways.
Analysts tracking the client side business say for winning large transformation deals IT firms will need to make upfront invetsments. "In the case of TCS, the wins are the validation of the strategy that certain investments should not be seen on quarter-on-quarter basis. You have to see the long-term game. TCS started investing in 2005 in Diligenta. It was only in FY11 that it became profitable. Now it is getting the larger deals that the company was focusing on," said an analyst.
In fact, the company's biggest bet under its non-linear initiative and platform-based offering started in UK. In 2005, TCS established Diligenta under the perview of the Financial Services Authority. This focused clearly on the insurance market in UK. In 2006, the company bagged from Pearl Assurance Group a deal for $847 million over 12 years, and entailed servicing four million policies. This also meant creating a new platform for Pearl. In 2010, Diligenta successfully migrated two million policies on the new platform. Meanwhile, it also started getting deals. So far, the platform serves four clients and with the recent $2.2 billion-deal from Friends Life, it will manage 8 million policies.
"More or less, all of the IT firms have entered Europe (including UK) market through an acquisition," notes Pralay Das of Elara Capital. "But it is only TCS and HCL Tech that have made some real impact due to these acquisition. What works in case of HCL is that Axon gives them a really strong platform in approaching European clients. In the case of TCS, while they took over Pearl's contact centre they went on to invest in creating a platform in a focused manner. Eventhough the latest deal will take some time to be margin-accretive, they surely have showcased that they have scale and have a better chance of winning such large deals in future."