TCS’ 2014 Growth Plans Leave Room for Negotiation Success

Natarajan Chandrasekaran, TCS’ CEO, made it clear during TCS’ recent Q3 earnings conference call that the company is still doing well despite a revenue slowdown that is primarily attributed to a weak Indian market. With the exception of the Indian market, India’s leading outsourcing company has seen growth in all key markets, with total revenue growth of 16.6% year over year. International revenue grew 3.8% in dollar terms and net income reached $858 million for the quarter, a 31.7% growth year over year. In the US specifically, revenue was up roughly 2% year over year. By all accounts, such growth was primarily driven by a strong international demand, combined with TCS’ ability to limit the impact of the weaker Indian demand through TCS’ diversified market presence and services portfolio (i.e. IT solutions and Services, Engineering & Industrial Services, Infrastructure Services, Global Consulting and Business Process Services).

From a staffing standpoint, TCS has been aggressively hiring and plans to continue to hire at this accelerated pace. TCS hired 5,463 net new employees (trainees and laterals) in the quarter and indicated their hiring target has been increased by an additional 5,000 employees, taking the total hiring target for the current financial year to 55,000 employees. TCS is further extending its employee base in 2014 in order to meet the increased demand they have forecasted as part of their 2014 outlook.

TCS anticipates a large part of its growth to come from the market’s expanding adoption of digital technologies. The growing importance and demand for these technologies in the market is a key driver for TCS’ continued investments in the Big Data, Cloud, Mobile and Social digital technology segments. During the earnings conference call, N Chandrasekaran reinforced his trust in the Digital segment and characterized it as the “next big driver of growth”. TCS has made “huge” investments in the Digital space and UpperEdge expects its business development team to be very aggressive in pushing these newer offerings to prospects and existing clients. We expect TCS to offset the aggressive sell into digital technologies by being disciplined in its more “mature” key segments such as outsourcing by maximizing the revenue streams of its existing clients during renewals and upsell activities.

What we see happening in 2014:

1.    Increased wages

• The risk of high attrition in a competitive environment has driven TCS to significantly increase its Indian based wages, especially the more senior / skilled resources.
• Employee retention is a priority and TCS will continue to incentivize performing employees with increased compensation, bonuses and other benefits.

TAKEAWAY: Wage increases are placing pressure on TCS to seek rate increases across the customer base. UpperEdge has already observed this behavior during current renewal discussions. In addition, we are also observing higher than expected rate card submissions as part of competitive RFP events. Given the continued pressure of wage inflation, it is critical for companies to negotiate long-term rate locks and caps as well as volume based incentives.

2.    Aggressive push within the US market

• TCS communicated a conservative growth estimate for the Indian market which means they expect to capture the majority of forecasted growth from the US and other international markets.
• Given the significant level of investment that TCS will be making in delivery improvements as well as overall innovation in 2014, especially with regard to the Digital Technologies segment, TCS will have an increased level of pressure on ensuring they secure renewals and new accounts in the US market (not just with Digital Technologies but across the entire TCS portfolio of services) to maintain and achieve projected growth.

TAKEAWAY: TCS’ focus on the US market will result in an aggressive TCS’ approach to securing renewals, committed volume based structures and upsells for additional services. We recommend all organizations have a well-defined sourcing plan that has been communicated and understood by all decision makers in place. Having this, along with a competitive environment (where possible), will help counteract an aggressive TCS sales force and, if done correctly, will ensure a best-in-class deal is achieved with TCS.

How to best maximize your potential and current TCS relationship:

• Identify your upcoming IT service needs (e.g. IT Infrastructure Services, Application Development and Maintenance, Business Process Outsourcing, General IT Consulting) well in advance of any sourcing event or renewal date and schedule informative IT roadmap sessions with TCS to understand where TCS could meet your needs and support you moving forward.

• Approach your negotiation or renegotiation from a partnership perspective, and use your IT roadmap sessions with TCS to bring any downstream opportunities that may arise to TCS’ attention. Use the long term opportunities as leverage to ensure you achieve a best-in-class arrangement upfront. Let TCS know that if TCS does the right thing now, it will go a long way when downstream opportunities become “real”. Remind TCS that having protections and best-in-class pricing in place upfront for such downstream opportunities could potentially shorten any future sales cycle and reduce the likelihood of a sourcing event that would introduce TCS’ competition to the table.

• Leverage immediate initiatives to negotiate or renegotiate your current TCS global rate card to include highly compelling rates for resource roles/types associated with all the towers of service offered by TCS. Included in this should be well defined rate protections. Having a global rate card that includes negotiated resource rates associated with downstream opportunities will provide you with the necessary transparency and cost certainty upfront that will be difficult to achieve should you wait to negotiate at a later date.

• When possible, evaluate competing service providers inside or outside your current portfolio of providers to ensure a competitive landscape, and make TCS understand they have to continue earning your business. Given TCS’ growth plans, TCS will be pressured to maintain their existing revenue streams and cannot afford to lose your business or lose market share to a competitor.

If you would like to learn more about how UpperEdge has helped companies negotiate with TCS, or if you have any comments and questions, please do not hesitate to contact yjsellez@upperedge.com.