TCS using UK as BPO Expansion Strategy

TCS uses the UK as a BPO expansion strategy template
Tata Consultancy Service's UK division, the flagship for its BPO services business, provided a strategic update on BPO last week. TCS generates $680 million in annualised revenues from its BPO division - with more than $250 million coming from its $2.5 billion, nine-and-a-half-year deal with Citigroup, taking its global BPO delivery capability to 27,000 and boosting its financial services BPO expertise.

The template for BPO expansion
The UK, accounting for 29% of revenues, is TCS's most important market because it contains prominent clients on platform BPO deals: Pearl Group on TCS's BaNCS financial services software; media business Emap on its finance and accounting platform; Deutsche Bank on TCS investment reconciliation utility Aspire; and IATA using a proprietary data extraction hosted solution.

These impressive deals were won thanks to its focus on building a domestic business development team in the UK that can engage at a senior level with clients. TCS has also acquired onshore delivery capability. Heartened by its success, the company wants to replicate this model in the US and continental Europe.

A cautionary note on platform BPO
TCS should be proud of what it has achieved in the UK BPO market. Against its many doubters, it has managed to develop and begin the rollout of its BaNCS-based life & pensions (L&P) platform after three years of development. Though this software is the keystone for generating operational and cost efficiency in L&P BPO, the company has already achieved profitability with the Pearl operations through better people and process management, thus proving its non-IT-related BPO management skills. The platform BPO deals with Emap, IATA and Deutsche Bank further support TCS's commitment to its software-led BPO approach.

However, TCS is also more aware of the challenges of selling platform BPO and, in our view, slightly de-emphasising this part of its strategy as it contends with the realities of the market. For the vast majority of BPO clients, a transition to a new software platform is not appealing. There are more contractual complexities and a broader range of stakeholders (internal and external) involved in negotiations. In most cases, BPO clients look to achieve quicker and larger cost savings through offshoring of delivery staff, leaving any significant IT transformation out of the picture.

Indeed, two of the deals came in unique circumstances. Emap was looking for a new finance and accounting platform, as the part of its business that owned the system had been sold off by its parent. Pearl Group was a strategic deal in which TCS took on the risk of IT transition, treating this as an investment that enabled it to develop a UK platform it could resell to additional L&P clients. As further proof of the difficulty in selling a platform proposition, Sun Life of Canada, TCS's only other UK L&P client win since Pearl, chose to stick with its existing platform rather than use TCS's BaNCS.

Replicating the UK model will be challenging
Mirroring the UK success in new countries will involve significant investment in local sales and delivery teams. The UK is one of the fastest-growing BPO markets, and TCS has already had to invest considerably to kick-start its BPO business there. Achieving the same in the slower-growing continental European markets, such as Germany and France, will arguably cost more.

It's worth noting that, despite its UK success, we estimate TCS's global BPO revenues to have grown by 5% organically - which is hardly groundbreaking. Most of this growth has come from winning smaller deals that rely more on offshore provision than IT platform expertise. TCS is doing the right thing by investing ahead of the curve in platform BPO, but it's going to be a long slog before these investments bring significant returns globally. We expect organic growth of the BPO business to be steady rather than stellar over the next two years.