First, take ‘bread-and-butter’ offerings such as BPO, Infra-management,
Testing and ADM. These need not be considered commodity businesses and
seen as necessarily detrimental to margins, as the managed services model,
allied with back-end efficiencies, can result in a decent margin profile. The
difference is not necessarily seen in what is seen by the client but: a) in how it is
priced (outcome-based or managed services) and b) in the vendor’s investments
in extracting back-end efficiencies through productivity-enhancing tools,
frameworks and solution accelerators (or ‘industrialization’ of delivery).
Second, vendors’ internal IP is what differentiates their execution and
allows them to price for outcomes and hence, their margins. Examples
include SLA-based and/or device-based pricing in infra-management deals,
transaction-based pricing in BPO (say customer billing as % of claims processed
for insurance claims processing in BPO) and ticket-based pricing in application
maintenance). It is easier to take managed services or outcome-based deals on
board but harder to make good margins on them. This is because vendors need to
have sound execution which aims at employee productivity, backed by good data
analysis that underlies the risk for various outcomes. Also, gains to the vendor
over time accrue from improved productivity of the workforce (and this is much
beyond the plain-vanilla lift-and-shift kind of work or pure labour arbitrage).
Making the workforce more productive through internal IP. Vendors’ ability
to make their workforce continually more productive through investments at the
back-end is a decisively differentiating factor. We believe that TCS is superior at
this execution game. Clients want their vendors to be able to offer productivity
increases year-in, year-out and not slacken after generating cost savings in Year-
1, Year-2. This requires ongoing investments in the back-end specific to the
client’s program. Or a dedicated investment program towards improving
productivity & developing solutions – not just front-end investments.
Third, bundled solutions – again another back-end play. The other emerging
play at the back-end is service integration (integrating BPO, infra-management,
apps, testing) on a single, consolidated platform which TCS does well. This
allows vendors to seamlessly offer bundled solutions without making piecemeal
adjustments to various points of the client’s IT architecture, be it applications,
business process, infra-structure, software, etc. Bundling takes care of this issue.
Fourth, making margins in emerging markets requires differentiated and
transplantable solution-based models (not the cost arbitrage-based onsiteoffshore
model of the developed markets). The government is a fairly large client
in developed markets and e-governance initiatives are common to several
emerging markets. Also, commonalities exist (in various emerging markets) in
industries such as power/utilities pertaining to leakages in distribution/generation
of power/energy. TCS makes the model transplantable to the extent possible by
leveraging its modular solutions developed for India for other emerging markets
(the key here is modularizing standardizable solutions offered as end-to-end
bespoke solutions or as part of a larger offering with a layer of customization).
Finally, non-linear models necessitate differentiation at the back-end. As
businesses battle the law of large employee numbers, how companies embed
non-linearity in their business models is a function of how much transformation
they do at the back-end (such as their ability to offer productized, standardized
solutions on cloud-based proprietary platforms on a ‘pay-as-you use’ or
‘subscription-based’ pricing models).
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Testing and ADM. These need not be considered commodity businesses and
seen as necessarily detrimental to margins, as the managed services model,
allied with back-end efficiencies, can result in a decent margin profile. The
difference is not necessarily seen in what is seen by the client but: a) in how it is
priced (outcome-based or managed services) and b) in the vendor’s investments
in extracting back-end efficiencies through productivity-enhancing tools,
frameworks and solution accelerators (or ‘industrialization’ of delivery).
Second, vendors’ internal IP is what differentiates their execution and
allows them to price for outcomes and hence, their margins. Examples
include SLA-based and/or device-based pricing in infra-management deals,
transaction-based pricing in BPO (say customer billing as % of claims processed
for insurance claims processing in BPO) and ticket-based pricing in application
maintenance). It is easier to take managed services or outcome-based deals on
board but harder to make good margins on them. This is because vendors need to
have sound execution which aims at employee productivity, backed by good data
analysis that underlies the risk for various outcomes. Also, gains to the vendor
over time accrue from improved productivity of the workforce (and this is much
beyond the plain-vanilla lift-and-shift kind of work or pure labour arbitrage).
Making the workforce more productive through internal IP. Vendors’ ability
to make their workforce continually more productive through investments at the
back-end is a decisively differentiating factor. We believe that TCS is superior at
this execution game. Clients want their vendors to be able to offer productivity
increases year-in, year-out and not slacken after generating cost savings in Year-
1, Year-2. This requires ongoing investments in the back-end specific to the
client’s program. Or a dedicated investment program towards improving
productivity & developing solutions – not just front-end investments.
Third, bundled solutions – again another back-end play. The other emerging
play at the back-end is service integration (integrating BPO, infra-management,
apps, testing) on a single, consolidated platform which TCS does well. This
allows vendors to seamlessly offer bundled solutions without making piecemeal
adjustments to various points of the client’s IT architecture, be it applications,
business process, infra-structure, software, etc. Bundling takes care of this issue.
Fourth, making margins in emerging markets requires differentiated and
transplantable solution-based models (not the cost arbitrage-based onsiteoffshore
model of the developed markets). The government is a fairly large client
in developed markets and e-governance initiatives are common to several
emerging markets. Also, commonalities exist (in various emerging markets) in
industries such as power/utilities pertaining to leakages in distribution/generation
of power/energy. TCS makes the model transplantable to the extent possible by
leveraging its modular solutions developed for India for other emerging markets
(the key here is modularizing standardizable solutions offered as end-to-end
bespoke solutions or as part of a larger offering with a layer of customization).
Finally, non-linear models necessitate differentiation at the back-end. As
businesses battle the law of large employee numbers, how companies embed
non-linearity in their business models is a function of how much transformation
they do at the back-end (such as their ability to offer productized, standardized
solutions on cloud-based proprietary platforms on a ‘pay-as-you use’ or
‘subscription-based’ pricing models).
Conclusion
Conclusion. To be sure, sales & marketing, consulting and well-architected
relationship management (or the ‘glamorous’ front-end) bring edge to the vendor
firm but a robust back-end brings credibility & meaning to the front-end. In
other words, an effective front-end appropriately opens doors, but without a credible
back-end story that incorporates the various elements of differentiation that we
discuss here, it would be difficult to go much further with the client or in a market.
Some proof of the pudding is seen in numbers: Despite Accenture’s revenues
(Accenture rated OW) being well over twice TCS’s revenues (in fact,
Accenture’s quarterly revenues were 3x TCS’s quarterly revenues less than
three years ago in June-2010), TCS has added more incremental EBIT (in USD
million) than Accenture across time periods
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