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TCS: Making the right moves - Views on News from Equitymaster
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  • Sep 5, 2001

    TCS: Making the right moves

    Tata Consultancy Services (TCS), Rs 31 bn software giant has set for itself to become a Global Top 10 consulting firm. As a part of this strategy the company recently entered into two areas that will definitely give it the edge.

    TCS joined the list of select Indian companies that have shown interest in the area of Bioinformatics. For an introduction to Bioinformatics please follow this link. Also, it has become one for the first companies from the software sector to bag an strategic IT outsourcing project.

    In August 2001 the company entered into a multi-year collaborative agreement with the Centre for DNA Fingerprinting and Diagnostics (CDFD). TCS and CDFD plan to work together in the area of bioinformatics and genomics. Last year with the mapping of the human genome, scientists broke the human genome down into a digital code of 3.1 billion chemical bases. The pace, at which biological data is being generated, would definitely require computers and software to manage the flood of information. As pharmaceutical companies use bioinformatics for drug discovery this opens up a very big market for the software companies who will provide these companies with tools to manage and manipulate huge amounts of information.

    TCS plans to cash in on this opportunity. Targeting the pharma vertical makes sense for the software companies on two counts. Firstly, the spending in areas like bioinformatics and genomics is likely to be from the R&D budgets of the pharma companies. Consequently, budgets would be insulated from market conditions to a certain extent. Also, the pharma sector is relatively recession tolerant. The other companies that have shown an interest in this area include Satyam Computers.

    TCS has achieved a significant milestone by bagging a 10 year-long contract for outsourcing complete IT requirements from Tata Chemicals. This is a first of its kind in the country. Tata Chemicals will no longer have an IT/MIS department. Some of the existing employees have been absorbed by TCS decreasing Tata Chemicals manpower by 20 odd employees and TCS will depute a CIO (Chief information officer) to the company. TCS provide basic IT applications and infrastructure along with high-end technology solutions to Tata Chemicals. The software giant plans to earn about Rs 180 m to Rs 200 m in a span of three years from the contract.

    No doubt, IT outsourcing is a trend that is slowly gaining popularity. The service offerings vary from hosting software, storing data, managing hardware and network infrastructure. However all these services are usually not offered under a single roof resulting into a situation where corporates have to deal with a many IT vendors. However, Tata Chemicals has taken a bold step and shown the way to other organisations. The total outsourcing makes the task a lot easier for Tata Chemicals as it has to deal with only one vendor, TCS. TCS in turn can outsource functions like data storage to other vendors if it chooses to. The advantage for Tata chemicals is that it does not have to bother about its support functions and can concentrate on doing its core business.

    To win strategic outsourcing projects of this nature, software companies need to have a sound understanding of the business of their clients. It is the outsourcing partners initiative (in this case TCS) that its clients have the best of technology solutions for real time and qualified decision making. Consequently, software industry is looking people domain knowledge.

    The major case against strategic outsourcing is the organisations concerns about data security. Organisations are just not comfortable about an outside party having total control over their data. TCS had a big advantage in terms of intangibles, as it is a same group company. This is one hurdle that IT vendors will have to overcome to get business in this area. Almost all the software majors are eyeing this market, as the length of the contract tends to be typically very long thus brining in reliability in cash flows. The list of interest parties in this area includes Infosys.

    No doubt these moves by TCS are one that will give the company a big start ahead of others. The biggest advantage that TCS derives from the outsourcing contract is that not only will it gain the relevant work experience but also can use this as a reference account for more business. All this makes the wait for the company’s IPO more agonizing.



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