High UK exposure may pose risk for TCS

MUMBAI/BANGALORE: With the UK government's contracts worth over $1 billion in the pipeline, Tata Consultancy Services (TCS) is exposed to substantial risks of project delays and anti-offshoring sentiments, according to local experts and rivals. Such projects also bring along single-digit margins and could impact profitability, unless there is significant work delivered from offshore.

Last week, the UK Personal Accounts Delivery said it decided to award a deal estimated at £600 million to TCS to administer the National Employee Savings Trust (NEST) scheme, a pensions scheme, for a 10-year-period in two phases. The decision has attracted sharp criticism from the Conservative party, which is opposing the decision taken close to the general elections.

“Our review of NEST (should we win the elections) will not be constrained in any way by contracts that have been signed,” Nigel Waterson, shadow minister for pensions, who is leading the opposition against the decision, said in an e-mail reply to ET.

The UK Personal Accounts Delivery Authority (PADA) responded to an e-mail from ET indicating it proposes to go ahead with signing the contract after the requisite waiting period, known as the ‘standstill period’.



“PADA has found a supplier that will deliver a great service to NEST members at a great price. Signing the contract now provides value for money by securing the terms and conditions established during competitive dialogue. The government made a commitment not to enter into long term commitments at this point in the electoral cycle. The contract we are proposing is entirely consistent with that,” the e-mail said.

TCS does not break up revenues from the government sector but analysts said that it has the highest exposure to government projects among its Indian peers. “Globally, government contracts are awarded on an E1-L1 basis, which means the best terms and the lowest prices. Returns are lower but the good news is that these are usually long-term contracts,” said Siddharth Pai, partner and managing director, TPI India. TPI, which acts as sourcing advisor to a large number of IT deals globally, is also hired by governments and public sector undertakings to advise on sourcing strategies.

John O’Brien of UK-based Ovum Research cautioned of significant risk with the high profile government contracts that TCS has been winning. “For wider India-based offshore service providers, these contracts are significant and a lot is riding on them,” he said. Indian service providers are now venturing more aggressively into government contracts in the US and the UK markets, and Mr O’Brien said vendors, such as TCS, should exercise caution and pragmatism while serving government customers. “Some of the lessons from the past experiences mean that they shouldn’t over promise, another danger is that these contracts are very high profile,” he added.

In addition, to the typical challenges such as lower returns and an onerous procurement process that go with most government contracts, offshore providers also need to establish they are providing sufficient local employment in the country, said Mr Pai. “There never was a significant amount of work done offshore in government contracts and there never will be, because of a number of reasons including security,” he added.

Multinational rivals, such as Fujitsu and EDS and CSC, have also had their share of troubles while dealing with government contracts. “Millions of dollars are written off by suppliers dealing with these contracts because of cost overruns, changing administration and too many other interventions. While TCS has demonstrated successful bidding, it’s a journey not many offshore centric players focussed on high margins and that are risk averse may want to take,” said a senior executive at one of the UK-based tech firms working with the local government.

In February this year, UK’s department of work and pensions took away a contract from EDS and awarded it to rival Fujitsu. On its part, Fujitsu had exited nearly $1 billion National Health Services (NHS) contract after the costs became excessive.