TCS's Billion-Dollar Breakthrough
In a deal that analysts predict could shake up the global IT services industry, Indian software and services provider Tata Consultancy Services (TCS.BO) on Oct. 18 announced that it had signed a 10-year contract with Nielsen, the Dutch group that owns TV ratings powerhouse ACNielsen as well as Billboard, Adweek, and The Hollywood Reporter, to integrate the company's systems and run some of its human resources and finance systems. The contract is worth $1.2 billion, making this the biggest win ever for an Indian company.
Crossing the $1 billion threshold is a breakthrough for TCS. Typically, Indian companies do best in much smaller deals, in the range of $50 million to $200 million, says Ashwin Mehta, an analyst with Ambit Capital in Mumbai. With a few exceptions, the giant deals have largely been the domain of multinationals like IBM (IBM) and Accenture (ACN), which have more experience and exposure globally.
Over the past few years, Indians have been slowly making inroads with larger deals. In September, 2005, TCS signed an agreement with Dutch bank ABN Amro worth $240 million over five years. In January, 2006, HCL Technologies signed a five-year deal for $330 million with DSG International, a British electronics retailer. And last December, Tech Mahindra signed a five-year, $1 billion deal with the BT Group. However, since BT is one of the joint-venture owners of Tech Mahindra (along with Indian industrial group Mahindra & Mahindra), the $1 billion record had a bit of an asterisk feel to it.
Good News for Indian Tech Overall
There are no doubts about the TCS win, though. This deal promises to smash the barrier that had been holding back Indian companies. The size of the deal and the likelihood that TCS won out against IBM and Accenture puts the company (and possibly other Indians, too) into another league, says Mehta. "It's a big enough win that it will open the eyes of a lot more clients in terms of deals happening out of India," he says. "This gives India much greater credibility."
The win couldn't come at a better time for TCS and the rest of the Indian industry. For months, investors have been driving down the share prices of India's biggest software and services companies. The big concern: The sharp appreciation of India's currency, the rupee, against the dollar is hurting the competitiveness of top companies like TCS, Infosys INFY, and Wipro (WIT) that do the bulk of their business in the U.S. The rupee has risen about 20% during the past year, and that's making it more expensive for Indian companies to serve their American clients from cities such as Bangalore.
In order to reduce their currency risk and expand their ability to tap talent globally, Indian companies have been expanding worldwide. TCS has been among the fastest movers, establishing operations everywhere from the U.S. to Vietnam to Chile. The company opened its first center in Hungary, for instance, in 2001 and today has more than 5,000 people in Latin America.
Approaching a Global Scale
TCS also has been a leader among Indian companies looking to win more business from multinationals operating in China. It has more than 1,000 employees working in centers in Beijing, Shanghai, and Hangzhou. "Things are going very well in China," TCS Chief Executive S. Ramadorai told BusinessWeek in an interview last month, adding that the company plans to have 5,000 people in China "in the next three to four years." According to Ramadorai, between 25% to 30% of TCS's 95,000 employees are based outside of India.
Some analysts say that Ramadorai's strategy to expand aggressively beyond India will be an important factor in landing more big-ticket contracts. "They probably won the [Nielsen] deal because, among the Indian companies, they have the widest delivery network," says Harit Shah, an analyst in Mumbai with Angel Broking. "IBM and Accenture already have a global presence, and Indian companies need to replicate that." TCS, he says, has made the most progress in reaching the sort of global scale necessary to compete for the big deals.