IBM Growth Markets - Market Expansion Strategy, Branches in Secondary Cities

IBM is focusing on emerging markets and other countries in Africa, Asia, Latin America and Europe for future growth and it’s Growth Markets Unit which focuses on these 152 countries is driving growth (Revenue & Profit) in the recent quarters, is expected to continue to grow and contribute US$ 17 billion in incremental revenues, 30% of IBM revenues, outpace major markets growth by 8 points and drive margin expansion by 2015 (IBM 2015 Roadmap Objectives). In order to successfully achieve these 2015 objectives, IBM needs to expand its market presence in the Growth Markets which means opening new branch offices not only in the metropolitan cities, capital cities and big cities but also opening branches in the secondary cities or tier 2 cities in emerging market countries. IBM expects mature markets that consist of countries like US, UK, France, Germany, Japan, Canada, etc are not going faster enough as IT spending has reached maturity levels when compared to emerging markets and other countries where IT spending by both governments and industries is on the rise in recent years. IBM has been aggressively opening branches in the Growth markets and in 2011 alone 92 branches (31 face to face and 61 Virtual branches) in 13 countries were opened by the company and most of them in the secondary and tier 2 cities in emerging and BRIC countries (Brazil, Russia, India & China). IBM had been present in most of the countries for many decades but the company is expanding into new cities and towns in these countries as there has been increase in IT spending by the governments to automate systems and use IT to provide good governance and service to the citizens and Small Medium Businesses and Large Industries increased IT adoption.

IBM Branch set up involves setting up a physical office with office staff who will be the sales team, client support staff and the Branch staff also collaborate with IBM’s business partners, who are responsible for educating the public to use IBM products.  IBM branch opening strategy is more targeted to open branches in secondary and tier 2 cities where there is significant educated population with IT skills, Universities and Other higher centers of Learning, Growing Cities where Governments are investing in terms of infrastructure like roads, power, Special Economic Zones, etc, internet and telecommunications networks, presence of industries that are large, medium and small, and favorable government policies. Another major reason for IBM targeting the secondary and tier 2 cities is IBM strategy to support the small and medium-sized enterprises/businesses (SMB), considered one of the fastest growing segments and where IBM is seeing strong demand and potential growth in future. IBM SMB strategy is to offer innovative and advanced that were once exclusive for larger companies with larger budgets to small and medium businesses at affordable prices and easy to use. IBM is looking to offer various IT services in the secondary cities that are focused towards telecom, banking, public utilities, etc which will help the citizens, industry and governments in these regions to take advantage of the IT Infrastructure and services for their benefits. IBM is closely working with governments and public sector undertakings and is developing innovative products and service offerings that help them in providing good governance and citizen services easily. IBM Smarter Cities is one such initiative which is seeing increased adoption by many governments across the globe. Smarter Cities projects are running both in mature markets (1900 Projects) and growth markets (500 projects).

IBM is continuing its aggressive branch expansion strategy in 2012 and in first quarter of 2012 opened 76 new branches (33 face to face & 43 virtual branches). The branches opened highlight the fact that IBM is focused on improving its geographical foot print in secondary and tier 2 cities in India (15 branches), China (11 branches), Brazil ( 8 branches), Mexico (4 branches) Russia (3), Korea (6), and ASEAN countries like Indonesia, Malaysia (4), Thailand, Philippines in 2011 and 2012. IBM also opened branches in Middle East and Africa in countries like Angola, Senegal, Tanzania, Mauritius and Qatar. Growth markets being critical component of future growth for IBM, the company is hoping to expand its geographical footprint beyond the large and metropolitan cities will help in strengthening relationships with existing clients and partners, acquire new clients and provide innovative and affordable solutions and services in areas such as information management, IT security, cloud computing and business analytics. The branches also closely work with IBM business and training partners that educate consumers about various IBM offerings and also train local talent in terms of technical skills and certifications who can play critical role in further pushing the IBM products and service offerings to the customers. Geographic Market expansion is not only branch opening in secondary cities but also involves IBM commitment in the local city or town development by investing in people and infrastructure and working closely with governments, businesses and educational institutions.

Case Study: IBM Growth Markets Strategy 2015 – Emerging Markets Strategic focus

IBM changed its corporate structure in 2008 by dividing its markets into Growth and Mature Markets moving away from the earlier geography based segmentation and this change is necessitated by the fact that emerging market countries have different Information Technology (IT) needs and usually IT spending grows more than twice as quickly as those countries’ gross domestic product. IBM Growth Markets Unit headquartered in Shanghai, China includes 152 emerging countries spread across Asia-Pacific, central and eastern Europe, Latin America, Middle East and Africa. China, Brazil, India, Russia (BRIC Countries) are the major countries that contribute significant revenues (40% of Unit Revenues) in this unit. IBM Growth markets make up 22% of IBM's revenue in 2011, and the company expects to increase that to 30% by 2015 as per its roadmap. In 2011, Growth Markets Unit revenue increased 19%, contributed 11% incremental revenues at constant currency compared to 2010, around 40 countries grew at double digits at constant currency and nearly 60% of growth markets revenues came from outside the BRIC countries. IBM's success in growth markets is essential part of the company's five-year strategy to add $20 billion in new revenue by 2015. IBM is also investing more than US$1 billion in growth markets for developing the business partners and also spending heavily on the marketing initiatives which are mostly co-marketing efforts with business partners to increase revenues.

IBM is making significant investments in more than 100 emerging countries in terms of building critical infrastructure; developing strategic industries and responding to massive demographic shifts, such as rapid urbanization and these emerging countries are expected to drive more than 60% of global GDP growth by 2015. Virginia Rometty as soon as she took over as IBM CEO in January 2012 appointed James Bramante as senior vice president in charge of Growth Markets Unit which highlights the importance of this unit in its 2015 strategy. According to IBM First Quarter FY 2012 results, Revenues from the growth markets increased 9% (up 9%, adjusting for currency) and 40 countries had double digit revenue growth at constant currency. Revenues in the BRIC countries - Brazil, Russia, India and China - increased 10% (up 11%, adjusting for currency). The Growth Markets are driving growth for IBM as mature markets are facing economic slowdown and the European Sovereign debt crisis is also having significant impact. To further enhance the growth markets revenues IBM is aggressively opening branch offices beyond the large cities and BRIC countries particularly in African countries.

IBM had been investing in BRIC countries for past many years and its investments in these countries and other emerging nations even during the Global Financial Crisis 2008 has been delivering consistent revenues and is fueling growth for the company.  IBM had set up R&D facilities in India, Brazil and China and these facilities are capable of innovation in the fields of natural resources technology, transportation and logistics, infrastructure and clean technology and also have significant number of employees working in these geographies. IBM is also working closely with Governments in BRIC and other emerging markets in range of projects covering infrastructure, energy, utilities, etc. The BRIC revenues are significantly contributing to the company’s overall profitability. IBM is investing heavily in Africa and it aims to increase its presence from 24 countries to 35 countries by 2015. In Africa, IBM is investing in areas like financial services and is working with five leading Kenyan banks on infrastructure projects and helping Safaricom, through a partnership with Vodafone; provide its M-PESA mobile money service to more than 15 million customers. Bharti Airtel is working with IBM to deliver next-generation mobile phone service across 16 African countries, from Ghana to Tanzania offering voice, data and digital services.

Growth Markets are essential part of 2015 road map and with mature markets slowing down, these markets have been driving both revenue and profitability growth since past few years and are expected to continue to fuel revenues in future too. But the current macro economic volatility due to European Sovereign Debt crisis is a major concern that is having significant affect on BRIC countries and other emerging countries along with US, Japan, UK and other developed countries. There has been cutting down of growth estimates for countries, reduce in spending increase in austerity and there has been rise in inflation, interest rates and fall in incomes for people. But IBM is well invested and prepared for facing adverse macro economic volatility and is expecting to keep up its growth particularly with boost from emerging countries IT Spending. IBM will maintain its 2015 financial roadmap with focus on four growth markets of analytics, cloud computing, emerging markets and "smarter planet" and will constantly shift to higher value operations, as well as drive new markets around new customers. 

IBM 2015 Road Map continues the drive to higher value—with the expectation of at least $20 operating (non-GAAP) EPS* in 2015.Key objectives for 2015:

Þ      Software becomes about half of segment profit Þ      Growth markets approach 30 percent of geographic revenue Þ      Generate $8 billion in productivity through enterprise transformation Þ      $70 billion of capital returned to shareholders Þ      $20 billion in spending on acquisitions * Excludes acquisition related and non operating retirement related charges

Source: IBM Annual Report 2011

Discussion Points:

1. What will be the affect of European Sovereign Debt Crisis on IBM revenues?
2. Will IBM be able to keep up its Growth Markets revenues and profits?
3. With BRIC countries slowing down what will be the affect on IBM growth?

Blue Ocean Strategy – Amazon Kindle Fire creating its own market

Kindle Fire is multi-touch screen tablet version of Amazon’s most famous e-book reader Kindle. Kindle Fire is also a classic example of Blue Ocean Strategy adoption by Amazon and Blue Ocean Strategy is creating uncontested market space and defining own set of boundaries to avoid competing with others. Kindle Fire is a 7-inch multi-touch display with IPS technology, runs on Google's Android operating system, with a price tag of US$199 and have access to the Amazon Appstore and digital content like streaming movies, TV shows, and e-books. Compared to the market leader Apple iPad, Kindle Fire is a sort of low end device as it lacks camera, GPS, storage capability, high end graphical display, powerful chip, etc. Amazon’s Blue Ocean Strategy is that it tries to define its own market by targeting the non-iPad users, users who cannot afford iPad, users looking for other Android based tablets and making the competition irrelevant by making the device as a media consumption device empowered by Amazon’s media platform that has huge content like music, movies, videos, books, etc. Kindle Fire differentiates itself from iPad and other tablet devices by focusing not on high end features but with simple and focused features that offers its users a unique experience and affordability. Also Kindle Fire is light weight, durable, good battery life and easy to use.

Amazon.com offers Kindle Fire at a lower price as it eliminated many costly feature like the camera, 3G, GPS, Bluetooth, etc but it offered its customers other features like its own developed web browser Silk that serves the web pages quickly using the network speed and computing power of the Amazon Elastic Compute Cloud (Amazon EC2) and the datacenters that host Amazon EC2 are run by Amazon. Low storage is compensated as the users can store their data on the Amazon EC2 Cloud, and Amazon has huge content like books, music, movies, videos, TV Shows, etc that users can easily download and play it on the device. Kindle Fire is being sold by Amazon at close to its cost and at a slight loss but it is hoping to make money through selling the content that includes 19 million songs, books, movies, applications, etc. Since Kindle fire is closely tied to the Amazon Ecosystem like Amazon.com store, cloud, content and it will be hugely beneficial to the marketers and content providers to sell their offerings easily, target customers with specific offerings, to interact and understand the consumer behavior through this. Kindle Fire also helps in increasing its core business which is e-retailing as the device provides an easy access to the store where customers can buy and sell anything and everything.

According to IDC, Amazon sold about 4.7 million units of Kindle Fire during the fourth quarter of 2011 and the device was shipped to customers from November 15, 2011.  The device has boosted Amazon revenues in the first quarter of 2012 and also helped the company to double its market share of the Android based tablets market and capture more than half of the US market for Android based tablets. Kindle Fire is equipped with Web surfing, e-reading and video streaming activities that most consumers want and Amazon hopes that the device sales will help to increase digital media sales to eventually contribute a larger percentage of revenues of Amazon total revenues and the device will also helps in connecting and transacting with consumers on various other fronts. According to a study conducted by RBC Capital analyst Ross Sandler of 216 Kindle Owners, Amazon can expect to make $136 per Kindle through the life of the tablet and e-book sales will contribute most of the part. Study also found that 80% of Kindle Fire owners bought an e-book, and 58% bought three or more e-books and Sandler believes that the average Kindle Fire owner will spend $15 per quarter on e-book. Over 60% of Kindle Fire owners bought an app, and almost 50% bought three or more and Sandler believes that Kindle Fire owners will spend $9 per quarter on apps for the life of the device.

Kindle Fire has boosted Amazon revenues in first quarter 2012 and according to the company it remains the best selling, most gifted, and most wished for product on the site. Amazon also announced that in the first quarter 2012, 9 out of 10 of the top sellers on Amazon.com were digital products – Kindle, Kindle books, movies, music and apps and it highlight the importance of Kindle Fire, as it provides Amazon with a device to handle the shift from physical media products, like books, DVDs, video games and CDs, to digital versions of such content. The rise in North America sales of digital content where Kindle Fire is exclusively sold is another testimony of how Kindle Fire is going to drive sales of digital content and ultimately revenues in future. With such positive response Amazon is looking to add more digital content to its inventory and also looking to expand the sale of Kindle Fire in other countries. With more and more tablets being sold in future, Amazon can through its Kindle Fire and huge digital content inventory expects to increase the sales of both the device and content and significantly increase its revenues.

Amazon Kindle Fire - Blue Ocean Strategy – Four Actions Frame Work – ERRC Grid

Big Data 2012 – Big Growth in near future, is it Hyped?

The rise of Information Technology had led to capture of massive amounts of data about consumers, their behaviors, markets, competitors, etc and data collection, storage, analysis is further fuelled by the falling prices of networking equipments, databases, storage devices, development of advanced analytical software and rapid rise of cloud computing and social media. Banking, Financial Services, Insurance, Retail, Manufacturing, Telecom, Automobile, etc industries have been collecting data about customers, markets, competitors, etc since many years and this data collection is more digitized with the help of sensors, transaction software, mobile devices, social networks, etc. The explosion of the data in the past few years have led to coining of the term "Big Data" which refers to data sets with size ranging from terabytes to petabytes and are often very difficult to handle and requires advanced storage, analytical and hardware technologies for collection, storage and real time processing so that data can be effectively utilized in day to day operations and organizational business strategy development. Big data requires significant amount of investments in terms of technology infrastructure, advanced software tools, recruit highly talented and skilled professionals and changes to the enterprise IT policy and strategy.

Big data is critical for businesses and organizations as it can create tremendous value in terms of accurate and usable information for better decision making and formulate strategies, improve the performance in terms of productivity & profitability, understand consumers, their behaviors, needs, markets and develop products and services accordingly. To survive in the volatile and highly competitive business environment, businesses ranging from small to large see capturing and analyzing big data as a key differentiator in the market and are investing in tools and technologies that help in capture, storage and analyze in real time which will improve the decision making of the management and ultimately lead to the organizational growth and profitability. Employees in these organizations too can improve their performance and productivity with the help of big data. Despite having such a huge potential big data is seeing slower adoption as the tools, technologies and devices are still being developed and there are some issues like privacy, security of data, intellectual property issues, investment of significant amount of resources be it monetary and technology infrastructures, etc. Business Organizations are looking ways for making sense of the huge amounts of data that they are collecting and storing and are looking for tools and technologies that will help them do so and are willing to invest.

IDC forecasted the market for big data technology and services will reach US$16.9 billion by 2015 from US$3.2 billion in 2010 i.e. CAGR of 40%. According to IDC big data projects are those projects that involve two or more data formats, involve collection of more than 100 terabytes of data, smaller data sets that grow by more than 60% a year and involve high speed real time data streaming and analysis. Businesses are focusing more on the value in terms of improving operational efficiencies and innovation that the big data is going to generate for them and there has also been a rise in the appliance sales, cloud computing and outsourcing deals involving big data. Major IT vendors and many startups are developing new products and technologies and there has been significant M&A in this space where large IT vendors are acquiring the smaller players and startups and integrating them into their core offerings such as database solutions, analytics, etc. IDC report also highlighted the shortage of data technology and analytics experts which will hinder the aggressive adoption of businesses. Big data software and services, infrastructure technologies and storage will see strong growth till 2015.

Deloitte forecasted that by end of 2012 90% of Fortune 500 companies will start on big data initiatives and market penetration will increase leading to US$1-1.5 billion in revenues. The industry is still at its infancy and existing traditional databases and tools are meeting the client needs. Adoption of big data technologies is also not equal across the industrial verticals and most of the adoption is seen in Internet companies, BFSI, retail, etc. The industry also needs to focus on developing talented big data professionals in near future and businesses have to include big data in their enterprise IT and business strategy. According to Wikibon Research, big data is a US$5 billion market early 2012 and is expected to reach US$50 billion by 2017 which is CAGR of 58%.  IBM is the market leader followed by Intel, HP and Oracle. Big data pure player category (players who get more than 50% revenues from big data related) includes players like Vertica, Aster Data, Splunk, Greenplum, etc. Pure players are at the fore front of innovation and larger IT players are acquiring these players and integrating into their product offerings which also highlights the fact there is going to be lot of consolidation in this market. Wikibon also believes big data is the new definitive source of competitive advantage across all the industrial verticals. For the big data technology and services to achieve the projected growth in future, major as well as smaller players have to develop innovative products and service offerings that will generate significant business value for the clients.

Despite the positive picture being highlighted by major research firms and major IT vendors there are certain issues that are of concern like securely storing the large data sets and protecting the privacy of the customers, regulatory policies, large amounts of investments in terms of monetary, technology and human resources, and integrating the big data technology and services into the organizational IT infrastructure and using it in the decision making. Data crunching and collection is being done by the businesses for the past many years and there are database technologies and tools that collect, store and analyze data at a comparatively lower levels exist. But the amount of data had exploded in the recent past due to mobility, cloud computing, commoditization of IT and social media that led to the big data technology and services. Businesses are looking for more Return on investment from the big data initiatives and use cases have to further evolve to convince them for increased adoptions. The amount of data, types of data and complexity of data and tools, technologies have forced the businesses to either take external help or outsource. Utility of the analysis of big data and its use in the decision making is also a major area of concern as the businesses may not be in a position to utilize it. Since big data requires significant investments management need to be convinced in regards to the business value in terms of profitability, customer satisfaction, etc that the big data is going to provide and its role as a key differentiator from the competition.

Vendors, clients and other stakeholders need to invest in developing the talented professionals who are trained in the big data technologies as this is one of the major areas of concern for the business adoption. The adoption has to be increased in the existing industry verticals and the new verticals too have to increase their adoption. Also the macro and micro economic environment should also be conducive so that clients can invest in such technologies and the current volatile economic environment is a major concern. The rise of cloud computing, social media, artificial intelligence, machine learning and natural language processing, etc will definitely drive the adoption of the big data technologies. There has been a lot of startup funding and larger IT vendors too are investing in the development of big data technologies and with significant M&A occurring in this industry the consolidation will be more advantageous for the customers. Finally high end analytics based on the advanced statistical techniques, data mining, etc provide the relevant intelligence for the effective decision making by the management and this should lead to organizational growth and profitability. Analytics software should make sense of the big data that is highly complex, involves multiple formats and the output intelligence has to be reliable for the businesses in the decision making. Industry specific solutions and cost effective tools technologies based on cloud computing is the requirement of many clients. Outsourcing Vendors are also playing a key role in pushing big data technologies and services as they are looking at these offerings as non linear revenues which will generate high revenues and margins but they have to recruit talented big data professionals and train them. Overall big data is going to see increased adoption in 2012 and is expected to achieve the forecasted targets.

                                    Wikibon’s forecast for the Big Data market 

Source: http://wikibon.org/wiki/v/Big_Data_Market_Size_and_Vendor_Revenues

Wikibon’s Top Big Data pure-play vendors

Source: http://wikibon.org/wiki/v/Big_Data_Market_Size_and_Vendor_Revenues

For Total 2011 Big Data Revenue by Vendor – Please visit http://wikibon.org/wiki/v/Big_Data_Market_Size_and_Vendor_Revenues

Case Study – TCS to announce its Non Linear Revenues Separately

Tata Consultancy Services (TCS), India’s largest IT Company had announced that it will show its non linear revenues separately for the Fiscal 2012 which will be a benchmark for other Indian IT vendors. In June 2010, CEO N Chandrasekaran announced that TCS is targeting to get 10% of its incremental revenues by Q4 of FY 2012 from non-linear models. Non Linear revenues have been a focus area for the Indian IT Vendors since past few years and all the Indian IT vendors are looking to delink revenue growth with employee headcount growth. TCS has close to 2,50,000 employees with 2012 fiscal revenue target of US$ 10 billion and strategy to increase employee headcounts for incremental revenues is risky as managing, training, and hiring such huge number of employees is difficult and requires significant monetary and human resources which is not cost effective. Non Linear revenues also help in increasing the revenue per employee, employee productivity, and also the operating margins as non linear models help vendors to charge higher prices for the services. Top Indian IT Vendors have adopted following models Intellectual Property/Products, Cloud Computing, Platform BPOs, Non Linear Pricing Models, Delivery Accelerators, Branding of  products and services/solutions and Merger & Acquisitions to increase the non linear revenues.

TCS core banking software BaNCS, which is a complete suite of business solutions covering Core Banking, Compliance, Islamic Banking, Channels, Payments, Treasury, Corporate Actions, Securities Trading, Securities Processing, Market Infrastructure, Private Banking, Wealth Management and Insurance, is at the heart of its non linear strategy and its acquisition of Sydney-based Financial Network Services (FNS), a leading Australian core banking solutions vendor for approximately US$ 26 million in October 2005 which at that time had the core banking solution installed in over 115 banks spread over 35 countries with clients that include Tier I and Tier II banks in emerging markets in Europe, Asia, Australia and Africa also fueled revenues from this segment. In September 2011, TCS launched new version of BaNCS 12.0 for the banking and capital markets with an advanced Multi-Entity support that allows a single installation to support customers units across geographies, providing cross entity customer transactions with configurable business restrictions. Over 50 enhancements like spanning syndication, Project & Contract Finance, membership module for credit unions, etc have also been added and the core banking software is installed in 240 financial institutions in over 80 countries. The product also won major accolades from clients and industry experts and always figured at top of the category. TCS offers other technology products in engineering, Life sciences, healthcare, etc but revenue contribution to total revenues is in single digit and mostly contributed by BaNCS. As part of its non linear revenue growth strategy TCS is focusing on developing new products and further upgrade the existing ones.

Platform BPO solutions which is bundling of IT, BPO and consulting is another major focus area for non linear revenue growth. TCS started its platform BPO unit in April 2008 and it has platform offerings in the areas of Human Resource, Finance & Accounting, Procurement and Analytics and it has more than 20 clients on Platform BPO. Diligenta, a subsidiary of TCS with its insurance services platform assumed administration responsibility for 3.2 million policies for Friends Life, a provider of pensions, investments and insurance in UK from March 2012 and the deal is worth $2.2-billion (Rs 10,800 crore) over a 15 year period. The deal is transaction-based and TCS Diligenta will charge the client a fixed monthly fee per policy and migrate policies of Friends Life to TCS BaNCS Insurance, a globally recognized insurance platform over the next 2-3 years. TCS is seeing good traction for its Platform BPO offerings in Europe, North America and India. TCS has changed its branding strategy in 2007 and launched a new campaign called Experience Certainty on which it had spent close to US$10 million dollars and even today the company uses this branding which had been very successful. Delivering as promised with higher level of certainty and not promising anything they can’t deliver is the basis of the message.

TCS in early 2011 launched iON product solution that uses cloud computing technology to deliver on-demand services to small and medium businesses. TCS said it expects revenues from the product to cross the $1 billion mark in five years and targets to add 1,000 in one year. Till January 2012, TCS added more than 440 customers in its cloud-based small business line and it expects the product line will contribute to the overall revenues over the period of time as more and more clients are added. TCS iON is focused on the Indian market only and is partnering with 100 system integrators across the country that provides the cloud ecosystem. The offering is based on the pay per use model and SMBs need not invest in IT Assets and can leverage the technology in their business as iON addresses all the SMBs technology needs which range from business solutions like HR, finance, inventory, sophisticated domain-based ERP solutions as well as basic applications like email, document management and website services. TCS is targeting SMB companies with a turnover between Rs 10 crore to Rs 500 crore and with 10-1,500 employees. TCS is betting big on the SMB cloud platform as major source of non linear revenues.

TCS adopted outcome-based pricing in 2006 in some of its deals and a project from Ministry of External Affairs India to automate passports, which it won in 2008 and was one such deal where in TCS is paid a combination of project fee and an outcome fee based on number of applications it process. But TCS is adopting caution in signing such deals as there are risks involved in achieving the agreed goals. Even the TCS Diligenta Deal of Friends Life is also based on outcome based pricing. TCS also developed Solution accelerators based on the existing third party tools and technologies which also include processes and systems that capture client needs quickly and deliver the necessary solutions. TCS has over 50 centers of Excellence that track the domain technology trends and partnered with Oracle, SAP, Microsoft, etc to develop the solution accelerators like BaNCS which is a comprehensive Financial services solution, TCS SOLAR framework which is a service oriented framework for Business Intelligence and Performance Management Solution and TCS Code Generator Framework which speeds up new application development, etc through reuse of codes.

Mergers & Acquisitions wise TCS acquired Super-Valu Services India, the captive IT/BPO unit of Minneapolis-based grocery retailer SuperValu Inc which focuses on IT infrastructure, applications and business and corporate services for its parent company for over US$100 million. TCS UK Subsidiary Diligenta acquired Unisys Corporation’s insurance business Unisys Insurance Services Limited in 2010 in lieu of which the company received business worth £250 million (Rs 1,800 crore) for the next six years. In 2008 TCS acquired the back-office operations of Citigroup for $505 million (over Rs 2,400 crore) and Citi also signed an agreement with TCS to provide process outsourcing services worth $2.5 billion (around Rs 12,000 crore) over the next nine-and-and-a-half years. In November 2006, TCS acquired 75% in its Swiss partner, TKS-Teknosoft (TKS), for CHF 100.5 million or around $ 80 million and got management control of the company, distribution rights in Europe for the Quartz wholesale banking product and two new products, Alpha (for private banking) and e-Portfolio (for wealth management). In 2006 TCS has acquired TCS Management (formerly called Total Communication Solutions), a privately owned consulting firm in Australia for an upfront cash payment of $1.3m and performance payment of $11.5m over five years.

In November 2005, TCS has acquired Chile-based Comicrom specialized in banking, pension and cheque processing business in Latin America for US$23 million. In October 2005, TCS acquired Sydney-based Financial Network Services (FNS), a leading Australian core banking solutions vendor for approximately US$ 26 million in October 2005 which at that time had the core banking solution installed in over 115 banks spread over 35 countries. TCS fully owned subsidiary in Sweden, TCS Sverige AB acquired Swedish Indian IT Resources AB (SITAR) in May 2005 for US$4.8 million. In May 2004 acquired Phoenix Global Solutions which has expertise in insurance for US$13 million. Also acquired Aviation Software Development Consultancy India Ltd in May 2004 and Airline Financial Support Services India in January 2004 and both have expertise in Airlines and Hospitality industry. TCS acquired CMC limited which is a domestic IT services company for US$ 34 million in 2001. TCS M&A strategy has been to acquire players with niche expertise, strengthens its core BFSI offerings, and gives them entry into geographies where there is potential to grow. Recent acquisitions are expected to play a key role for non linear revenues.

The time has come for TCS to announce the results of its various non linear initiatives as promised by their CEO in 2010. Accordingly TCS has announced that they will show their non linear revenues separately from next quarter. TCS is expected to add 60,000 employees in the Fiscal 2012 and typically for every US$1billion revenues Indian IT vendors add about 20,000-25,000 employees. TCS is expected to close the Fiscal 2012 with revenue of around US$ 10 billion from the previous US$ 8.2 billion. Simply declaring non linear revenues is not enough TCS have to show that such revenues are contributing to internal gains like increase in operating margins and employee productivity. Non linear revenue models also have significant risk associated as the failure will directly have impact on the revenues and profitability and Indian Vendors should convince the employees, customers, investors, and other stakeholders that they are fully prepared for the non linear revenues growth. TCS is going to set a benchmark for the overall industry in terms of non linear revenues.

Discussion Points:

1. How can TCS increase its Non Linear revenues?
2. What are the risks involved in Non Linear revenue models and how to tackle them?
3. What should be the appropriate Linear and Non linear revenue mix for TCS?
4. Will TCS investments in iON, BaNCS and Platforms drive the non linear revenues?