I recently attended TCS’ analyst summit in Paris. In this blog I examine the objectives that it set out at the summit and its latest financials, focusing on TCS’ investments and localization strategies for growth in Europe.
TCS’s push into continental Europe continues apace. Its Q3 results for the financial year 2014/15 (for period ended December 31 2014) shows revenue growth in constant currency (CC) of 6.6% in the region. The growth outpaced that of the U.S. at 2.1% CC, and the UK which declined by 1% CC.
Group-wide revenue in Q3 was US$3.93 billion, flat sequentially, up 2.5% CC, and up 14.3% year on year. The operating margin at 27% was marginally higher than Q2.
Investments in Europe
TCS has been targeting growth in major European countries such as France and Germany for some time. It has been investing in Europe, e.g., acquiring Alti, for €75 million in 2013. Alti, a French IT services and consulting business had annual revenues of €126 million at the time of the acquisition. It has a strong presence in the banking, financial services and insurance (BFSI) as well as luxury, manufacturing and utilities sectors. Following Alti’s integration, today BFSI accounts for nearly half (49%) of TCS France’s revenue. Alti also added 1000 consultants to TCS ranks.
Other TCS investments have included:
- The opening of a SAP innovation center in Paris in May 2014
- Hiring of local staff
- Investment in local facilities such as Lille and Poitiers.
TCS is aiming high in Europe. In France, Alti’s French market presence has already helped and led to major contract wins such as a GDF Suez contract, won in March 2014.
One aspect of TCS’ strategy for growth in Europe is its localization program. It is investing in more locally hired staff and is enhancing training and induction programs. For example, it has recruited 500 staff in France since July 2013. A local presence would help TCS allay concerns over offshoring, increase customer intimacy and allow it to tap into local knowledge and specialist skills.
Other measures include a focused programme on employer branding and a recruitment campaign to fast track local graduates. This is needed if TCS is to compete for top talent against bigger and better known brands in Europe.
Major contract awards that are helping TCS grow in continental Europe include:
- A multi-million, multi-year award by GDF Suez, won by Alti in March 2014. The deal pans across France, Belgium, and the Netherlands and is to rationalize and standardize CRM and billing applications
- A major IT infrastructure contract by Germany’s Bombardier Transportation awarded in October 2013. The contract includes Remote Infrastructure Management (RIM), managing newly commissioned data centers and SAP Basis support.
The picture is a little different in the UK where Diligenta policy run-offs continue to drag on revenue growth despite other major contracts such as the UK government’s NEST and the Disclosure and Barring Service contracts.
Diligenta revenue has declined for the past two/three quarters and is expected to continue to decline in the next two/three quarters also. Revenue from the new multi-million pound, multi-year contract with Friends Life, for its International operation, should start to make a difference soon. Friends Life is an existing client. Awarded in 2011, its closed book administration contract alone is worth £1.4 billion over 15 years to Diligenta. There is a potential risk to this deal since Aviva agreed to acquire Friends Life in December 2014. Aviva has an ongoing contract and a long- term relationship with WNS.
Excluding Diligenta, UK revenue grew but no growth figures were provided for Q3. In Q2 growth excluding Diligenta was 4.3% CC.
The Road Ahead
The investments and localization strategies are essential for TCS to succeed in Europe. Service providers with local/nearshore delivery capabilities will always find it easier to grow in continental Europe and this is true in many countries such as Switzerland, France, and Germany.
European investments and localization raise the issue of higher costs and the effect on the bottom line. TCS will have to draw on its productivity methodology, automation and other capabilities to ensure that margins remain high as it grows its local presence in Europe.
TCS also has to steer a path to growth through economic uncertainty in Europe. There is the spectre of a Greek exit from EU monetary union and default on its debt, a declining Euro against other major currencies and deflation.
The macro-economic conditions could create as many opportunities as threats in the market, given that uncertainty and the tightening of enterprise budgets often drive outsourcing and change and transformation programs.
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