Wednesday, 22 October 2008

TCS inches closer to opening the ‘Pearly’ gates

(By Anthony Miller) TCS management echoed the sentiments of Indian peers on today’s Q2 results concall (see here) with all the usual caveats around a very uncertain market with great opportunities. But I was more interested to hear about TCS’s progress at Diligenta, its UK Life & Pensions BPO subsidiary built on the £486m, 12-year Pearl deal signed back in April ’06. Diligenta is meant to spearhead TCS’s attack on the UK L&P BPO market with the aim, presumably, of loosening Capita’s stranglehold on this fast-growing sector. But since then, TCS has only signed one further L&P deal, with Sun Life of Canada, and this remains on its own platform.

Management told me they are on track migrating the dozen or so Pearl processing platforms (it was, after all, a business built on acquisition) to TCS’ proprietary benefits administration package, IIMS, which itself had to be extensively customised for the UK marketplace. TCS aims to start marketing the IIMS platform “aggressively” in Feb. ’09. Meanwhile, TCS appears to have made progress dragging up Diligenta’s margins into double-digits and I’m guessing they are now more or less in line with Capita’s L&P margins (c12%). I doubt TCS will do any better than that as all the core Pearl work remains onshore. It’s the elusive ‘add-on’ business that is meant to tip the scale for TCS as, in theory at least, new contracts will be run offshore.

Will it be worth the wait? Well, I think they’ll struggle. TCS has a few UK L&P companies using their IT services but, even assuming the IIMS platform is ‘fit for purpose’ early next year, whether these firms will want to put all their eggs in one basket is moot. May be TCS’s best bet is to go after Liberata’s clients now that their loss-making L&P business is under new management at HCL (see Liberata hits HCL's margins and related articles). I do think there's business out there, as in the current climate insurers will be scrutinising their back office costs even more closely, especially for closed-book policy administration. But Capita has built up such a commanding lead (already £380m over the past 12 months), it will be hard for TCS to catch up any time soon.
Oh, and just for the record, TCS generated $1.2bn in UK sales these past 12 months, putting it within a gnat's crotchet of a spot in the elite UK IT services Top Ten. Anyone taking bets it won't get there?

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