Did TCS Discover a Time Portal Back into the Days of Mega-Deals?

The last few weeks have been dizzying for TCS, with headline announcements to make the entire technology services industry sit up and take notice. First, in December, it announced the biggest industry deal ever—a $2.25 billion outsourcing contract with its long-standing client Nielsen. TCS then fast-followed and topped this news last week when it announced a new agreement with Transamerica for over $2 billion, stating that this is the largest deal TCS has ever signed. Unless the service provider opened up a time portal back to the mid-2000s when mega-deals were more common, how do we as an industry explain and unpack these? Let’s take a deeper look into the nuances and implications of both of TCS’ announcements.

The Nielsen Renewal Is a Lesson in “Give a Little, Get a Little”

Nielsen had been a TCS client since 2007, but the terms of the television ratings measurement company’s renewed contract have changed significantly. The outsourcing contract, according to Nielsen, has been extended by five years, from 2020 to 2025. However, Nielsen has committed to spend $320 million per year from 2017 to 2020, $186 million per year from 2021 to 2024, and $139.5 million in 2025.

It’s a relief for new CEO Rajesh Gopinathan to retain the business, but the diminishing future returns from the deal are a sign of things to come for the entire IT and BPM services industry. Simply put, clients like Nielsen are expecting to have the same services for less money in the future because of promised efficiencies from providers like TCS in the digitization and automation of services, leading to fewer staff required to manage the work. The net result is that all of the leading providers are refocusing their futures on maintaining profit margins as revenue growth is flattening—and already in negative territory in some areas.

Transamerica Is As Much About TCS Building Out Its US Insurance Business As It Is About the $2 Billion + Carrot

According to the new agreement with Transamerica, TCS will add a whopping 10 million policies to the 17 million policies already being administered under the TCS Bancs platform. These include Transamerica’s life insurance, annuity, supplemental health insurance, and workplace voluntary benefits products. TCS will be rebadging approximately 2,200 employees that work in offices across several US cities, prominently in Iowa where Transamerica is headquartered. The deal is expected to lead to annual run-rate savings of ~$70 million initially for Transamerica, growing to $100 million over time. Rajesh has stated that the deal has “a big transformative component at the beginning and then it has a long operations segment,” adding that TCS’ digital capabilities will be leveraged.

When studying this deal, TCS’ current competitive positioning in insurance operations becomes critical. The service provider has grown its presence in the US by primarily working with property and casualty carriers on pure-play business process work. So far, the specialized third-party administration (TPA) market for life and annuity (L&A) had remained elusive. TCS’ experience and platform capabilities were suited for the UK, where it operates through its Diligenta brand to service clients such as Friends Life. In the latest HfS Insurance-as-a-Service Blueprint, we called out TCS as a leading provider but highlighted the gap in its US delivery network, noting that “clients would like to see TCS expand its delivery presence. The service provider has a large footprint in India and the UK, and needs to develop its nearshore and onshore presence in North America in the next two years as it grows this client market.”

Exhibit 1: HfS Blueprint Grid: Insurance As-a-Service 2017—TCS’ New Positioning

Source: HfS Research, 2018

TCS has spent a considerable amount of time in customizing its platform and investing in product knowledge for the US L&A market, and it has just found its way in—with Transamerica. With a US operations base for L&A, employees with broad product knowledge, an adapted platform, and a marquee client, TCS is now presumably setup for success. The Transamerica deal has accordingly had an impact on TCS’ positioning on the HfS Blueprint grid. TCS was already in the Winner’s circle, but is now catapulted to the right on execution, especially for L&A (see Exhibit 1). Having said that, overall market success will depend on whether TCS can pull this one off with sustainable margins, which has been a challenge with Diligenta in the past. The deal promises increasing savings year over year to Transamerica, meaning TCS will have to ramp up automation and digital capabilities, just like the Nielsen contract.

Will Mega-Deals Like Nielsen and Transamerica Be the New Norm—for TCS and for the Rest of Its “WITCH” Cohorts?

The Transamerica announcement must be viewed on its own merit rather than as part of a larger trend returning to large-scale deals. TCS needed a solid base in the US for the insurance TPA market, and this deal brings it significant presence and local insurance talent within life and annuities. Also notably, this is a platform-based services-transformation mega-deal, which TCS has been known to orchestrate, as it did with Friends Life in the UK in 2011. The challenge for TCS will be in bringing the smart use of tools including intelligent automation and analytics into its new US operations base and finding value for Transamerica in new ways that the market now demands—not just rebadged employees and platform conversions. The service provider has been commended in our recent Blueprint for its progress in driving better member experiences for insurance carriers and aggressively embedding automation across the services value chain to improve quality and performance over time. We expect TCS to bring the full force of this collective insurance experience to make the Transamerica engagement successful in coming years.

Similarly, the Nielsen deal, while huge, is typical of what is going on when it comes to profitability for the providers—it is driving firms like TCS to invest in their own automation and digital capabilities so they can deliver the same services with fewer staff in the future. Hence, there is both short and medium term investment needed to stay in the game and reap similar profits in the longer term.

The old days of consistent, back-to-back mega-deals aren’t coming back in a hurry, but when we do see them, it is these other factors that are leading the discussion. The two broad trends we can infer from these deals are:

1. Some clients are developing more trust with their long-term partners to give them a larger piece of the pie; and
2. The cost/benefit of using a sole supplier across a broader set of processes to take advantage of the economies of scale and the provider’s willingness to invest in digitization.

If the client is willing to double-down on their trusted relationship, the provider (in this case TCS) is more willing to make larger investments and take more risk with them. This could be a big positive for the leading India providers, which have decade-long, trusted relationships with large global clients.

Bottom Line: The mega-deal is alive in today’s digital market, but it comes with an increasingly complex set of promises and investments for trusted clients—ones that TCS is willing to make.