​What the TCS and Nielsen $2.5 billion outsourcing deal means for Indian IT

Winning this mammoth deal while transitioning to a new CEO amidst a time of great industry tumult is a huge accomplishment for the Indian company.
Written by Rajiv Rao, Contributing Writer

A few weeks ago, the global IT industry was gobsmacked by the announcement that India's largest IT outfit, Tata Consultancy Services (TCS) had just landed a whale of a deal, a $2.25 billion outsourcing contract that is one of the biggest in recent history.

The deal, 50 percent of which consists of a digital transformation prerogative, is a renewal of TCS's earlier engagement with Nielsen. It first awarded a $1.2 billion, 10-year contract to the Mumbai-based company in 2007, and later expanded the contract in 2013 by extending it to 2020 and more than doubling its original value to $2.5 billion.

Now, however, under the terms of the new contract, TCS will be assured of getting paid $320 million in business from Nielsen every year, beginning 2017 through 2020, $186 million every year from 2021 through 2024 and $139.5 million in 2025 along with three one-year renewal options granted to Nielsen.

This is almost unreal and crucially significant to Indian IT for many reasons. The first is the widespread impression that Indian IT has been slow to change itself in this era of digital transformation, still reluctant to wean itself off the teat off infrastructure maintenance and application development work.

There is no ambiguity about this slow pace. Between twenty to twenty-five percent of Indian IT's revenues currently come from digital, and the traditional business is already declining at a rapid pace.

"At present, digital accounts for 20 per cent of our revenue, and that is primarily where our growth agenda is. Over time, it will become 80 per cent," TCS CEO Rajesh Gopinath said to Business Today.

Instead, rivals like Accenture get 54 percent of its business from digital. Yet, that -- or the possible perception that because of the delay in switching business models Indian firms are not front-runners in this new era -- has not prevented TCS from being go-to guys for large deals.

The reality is that multi-billion-dollar deals such as this are rarities today in terms of both dollar size and duration. Instead, customers seem to want to funnel savings back into achieving operational efficiencies. Mint's research unearths just one $1 billion deal a year since 2014.

What the Nielsen deal then means in these tough times is that it is Indian companies who are battling with companies like Accenture and IBM, in addition to each other, still have old clients who prefer to stay with them. Part of the reason may be pricing, but part of it undoubtedly has to do with comfort levels, trust, and tech ability.

"This is a milestone contract given not only the depth of the contract but also the breadth of services," said Ray Wang, founder and CEO of consulting outfit Constellation Research in Mint. "TCS did a good job of managing longer-term costs and gaining some cost efficiencies while renewing a longer contract. There is also upside in the long run as this is more of a strategic partnership than outsourcing contract."

Another outcome is the tacit endorsement of TCS's model towards digital excellence which involves no acquisitions either of firms or of talent. By comparison, Accenture spent $1.7 billion for 37 acquisitions over the past few years.

This brings us to talent. The Nielsen deal may eventually turn out to be an outlier for TCS but one thing is for sure, there was no way they would have impressed to win this kind of deal if it wasn't for the careful stewardship of their former CEO Chandrasekaran who is now managing the bigger Tata mothership and leaving TCS in the hands of his successor Gopinath who just recently took over.

As Mint notes, it takes a year-and-a-half for these contracts to close which means that Chandrasekaran initiated the deal and executed its ultra-smooth transition while Gopinath made sure there were no hiccups when he took over the reins of TCS.

As a comparion, witness the bizarre, unending, and unseemly fracas dogging Infosys over the past year thanks to the internecine war waged between its founder Narayana Murthy and his protégé Vishal Sikka dragged in from SAP to transform the company. One casualty being a disgruntled Sikka, who quit in the summer of 2017.

No wonder that Infosys is at the bottom of the heap in rankings for 2017 generated by Everest Group, well below TCS.

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