Posts Tagged ‘IT’

The retail banking sector’s IT systems need an overhaul to become more customer-centric

October 22nd, 2014

This article discusses some of the risks and opportunities facing the retail banking sector looking to transform their legacy technology platforms, based on Bird & Bird’s in-depth experience advising banks on transformational projects. It also sets out a recommended approach to help to overcome some of the legal and operational bottlenecks banks may encounter when undertaking such projects.Outsourcing35

In recent months problems with banks’ IT systems have been exposed as Lloyds and RBS customers have experienced difficulties ranging from being unable to withdraw cash from ATMs to the failure of their debit cards. Part of the problem originates from a chronic under investment in IT that has left banks with legacy systems that cannot cope with new demands.

There is a growing acceptance that there is a technological revolution coming in the financial services sector and unless banks adapt their legacy IT infrastructure to meet this change they risk becoming obsolete.

Many banks have IT systems predicated on an out of date branch-based and batch-orientated business model. The assumption (perfectly legitimate in the 1960s or early 1970s when the systems were developed) was that customers accessed their account via a branch and banks closed in the afternoon and had until the next day to update systems and so data was processed overnight in batches. How things have changed!

New digital entrants are emerging

Against this backdrop, the spread of digital technologies is changing the way customers interact with their banks. They are used to the customer-focused platforms of online retailers such as Amazon and Apple and expect a similar service in the banking space. Following the banking crisis and the wave of disaffection with the incumbents, new digital entrants have emerged looking to disrupt the status quo through leveraging new technologies to provide a service that is more aligned with this mind-set; offering online, customer-focused, 24 hour systems. For example, Atom Bank, the UK’s first “digital bank” is expected to launch in mid-2015 and Wells Fargo plans to pilot a new system that enables its customers to sign into their banking application by using voice and facial recognition systems on their mobiles. There is a growing acceptance that there is a technological revolution coming in the financial services sector (in the same way that it has already occurred in the music, insurance and publishing industries) and unless banks adapt their legacy IT infrastructure to meet this change they risk becoming obsolete.

Transformation projects

IT transformation projects come in a variety of shapes and sizes as each bank’s issues will be different.  For example:

big bang approach: the aim is to replace the relevant legacy technology with a new system. This is expensive and risky given the scope of such projects and in our experience can take a minimum of 5-6 years to complete. But, the results can be far-reaching. Nationwide, following the implementation of their real-time SAP banking platform, stated that they believed the platform had equipped them to become the number one financial services provider for customer service;
build and migrate: the bank will set upa new branded line of business using the latest technologies.  Once the line of business is up and running and profitable it acquires the books of business (e.g. mortgages, current accounts) from the host bank and the old banking system underpinning the host bank is wound down by natural attrition as accounts expire and customers are encouraged to move to the new brand; and
hybrid: another option is to retain the legacy back end and build new front end channels that leverage new technologies (e.g. Barclay’s PingIt mobile payment service) to meet customer demand and communicate with the legacy core banking systems via interfaces. This will provide the benefits of new technologies whilst saving costs and complexity as the core banking backbone remains. Over time, as business processes are streamlined and new technology developed to augment the front end customer-facing systems, the bank will look to transform its core banking system.
Whatever the option, there will be risks and our recommended approach section below can help reduce them.

The core drivers for IT transformation projects

Many banks appear to be complacent as to the threat of new digital entrants. They have seen this all before and survived; whether it was the threat of the internet banks such as Egg or the emergence of the building societies. So what has changed?

Dramatic changes are happening in the financial services sector driven by new technologies, regulation and consumer behaviour and this is highlighting the unsuitability of banks’ legacy IT systems. This has been exacerbated by the loss of the ownership of the customer as new regulations in the UK have made it easier for customers to switch current accounts. Banks will need to refresh their systems to adapt to an increasing customer—focused industry or risk losing business and becoming redundant.

A bit more detail on the key reasons driving IT transformation projects:

new technologies: as much as 10% of a bank’s revenue can be spent on maintaining a bank’s IT systems and that is driven largely by the complexity of the legacy infrastructure.  Banks can save money by replacing the multiple technologies and interfaces they have built up over the years with a coherent, singular banking framework for technology. Technological investment can also increase profitability for affected banks through capital investments in cheaper software that automates business processes to replace more expensive labour;
regulation: increased regulation and political and economic uncertainty have led to lower returns and an increase in overall costs as legacy technology struggled to cope with new regulatory requirements;
consumer behaviour: banks’ customers are evolving with the technological landscape and are demanding mobility, transparency and greater access through a variety of alternative distribution channels (e.g. mobiles and tablets). Banks are having to respond with a shift towards customer-centric IT architecture to meet these demands; and
competition: technology start-ups, retail companies and telecommunications providers have all entered the financial services sector and are challenging the traditional players. Banks are investing in technology to offer products and services that seek to differentiate themselves from these new entrants, or at least keep pace with them.
Contracting options

There are two main contract structures that can be adopted for an IT transformation project:

single services agreement: one supplier contracts with the bank and takes responsibility for the end to end delivery of the project; or
multi-vendor framework: multiple suppliers working together under separate contracts to deliver the project.
Single services agreement

This structure reduces operational and legal risk for the bank as it employs a “one throat to choke” model. The contracting supplier will provide some of the services directly to the bank via the prime contract and then subcontract other elements to specialist third party service providers, but will remain liable for the end to end delivery (including the performance of its subcontractors). In the event of a default, the bank has the benefit of only having to seek redress from the contracting supplier.

The risk for the supplier is that it is liable for the successful delivery of the entire project. This enhanced risk may translate into higher costs which may deter some banks. However, the size of the liability exposure for the supplier may mean it is still reluctant to take on responsibility notwithstanding the financial upside.

A practical example: the supplier’s liability under the prime contract with the bank may be significant (e.g. a percentage of the fees paid or payable for the entire project, such as £100m), but it is rare for it to be able to replicate the liability structure agreed in the prime contract in its subcontracts (in particular the level of the liability cap which may be a smaller figure, such as £1m). The risk to the supplier is that the subcontractor defaults on its obligations under the subcontract causing a breach of the prime contract by the supplier. The bank would recover its losses from the supplier under the prime contract up to the £100m cap, but the supplier would only be able to recover up to £1m of the damages paid to the bank from the subcontractor under the subcontract.

Multi-vendor framework

This may be deployed where the bank has been recommended a number of IT solutions from various suppliers who will then, for example, implement each IT application and then the bank may use a system integrator to ensure all the different applications can communicate with each other.

The risk to the bank in a multi-vendor framework derives from there being multiple suppliers implementing each IT application together with a systems integrator trying to integrate these applications. Each supplier will have a separate contract with the bank.

In such a multi-vendor environment, a default may occur but it may not be solely caused by one supplier: it may be a breach that is caused by a number of suppliers (e.g. supplier X failed to provide a deliverable to supplier Y who then defaulted in its contract with the customer). This can lead to unhelpful finger pointing between suppliers as neither party wants to admit responsibility. This can lead to delays and an inability of the bank to easily identify responsibility for defaults and seek redress (when compared to the single services agreement model).

A way forward

Set out below are a few of the legal and operational bottlenecks that can be encountered and some of the solutions available to overcome them.

Ensure there is business buy-in

Projects often fail when there are uncoordinated IT decisions being made by individual business units which contribute to a fragmented implementation. Time spent planning is never wasted!  The project team and executive sponsor must be carefully selected and clearly communicate the purpose of the project to all the bank’s relevant business units and stakeholders, including CIOs, so that they are aligned with its goals and provide support where required to drive the IT transformation forward.

Do your due diligence and stay flexible

The bank needs to understand the old ecosystem and how it will interoperate with the new system and identify whether the old ecosystem is satisfactory or whether it should be replaced. This requires careful due diligence of the current environment. If the old ecosystem is not fit for purpose then outsourcing the project will not improve the situation, it will merely result in the customer outsourcing its problems to another party. The software architecture chosen must also have sufficient flexibility to adapt to changes in scope post contract signature – many IT projects fail because the specification agreed at the start was too rigid and could not evolve with changing requirements.

Find the right supplier

The success of the project will be dependent on the quality of the supplier. An IT transformation project is complex and will pose multiple challenges for the supplier who will need to understand the bank’s business requirements and culture and provide an effective solution to implement.

Make sure your contract protects you

The contract must be drafted to maintain legal and operational accountability whether the bank adopts the single services agreement or multi-vendor framework approach.

Given the cost implications and risk appetite of suppliers, in most circumstances the structure will involve a variation on the multi-vendor approach. However, there is the risk of loss of legal and operational control due to finger pointing between the suppliers.

One way to mitigate this risk is for the bank and all relevant stakeholders to enter into a collaboration agreement that is separate to the IT agreements. The collaboration agreement will describe the suppliers’ obligations therefore providing the bank with contractually enforceable rights against them in the event of default.  Such an agreement should cater for:

inclusive governance regime: the suppliers should be required to notify each other of issues or defaults.  In the event of a default, the suppliers must meet to determine who is at fault, creating a forum for all interested parties. If this cannot be agreed the dispute should be escalated through an agreed procedure and immediately notified to the bank, thereby accelerating the resolution of issues; and
collaboration: an obligation on the parties to work together, share reports and provide assistance with other suppliers that interface with the services.
Key points for inclusion in your contract

Below is a (non-exhaustive!) list of some of the issues to consider during the negotiation of the contract which will make the transformation process much easier to manage:

data migration: transformation projects will involve the migration of data held in multiple legacy systems. Without careful planning and understanding of the data structures in the existing system, the migration plan can be executed incorrectly and this can lead to bottlenecks in the timetable and additional costs.

governance: major projects involve multiple stakeholders with differing interests and methodologies.  The project will need to be backed by a senior member of management and an experienced project team that can drive the process forward and have access to the executive committees in the event of key issues arising.

incentivise performance: termination for underperformance is a nuclear option given the costs associated with re-procurement (even if such costs can be recovered under the terms of the agreement). It is important to include ‘teeth’ in the contract to incentivise performance. This can include service credits for failure to meet agreed levels of performance or the payment of liquidated damages for missed milestones.

group companies: where the project is a global implementation that will benefit banks’ affiliates it should be made clear that they can take the benefit of the services. This can be done by making the affiliates contracting entities, requesting that the bank signs the agreement as agent on their behalf or by stating that the affiliates have rights as third parties to receive the benefit of the services and potentially exercise rights under the agreement.

continuity of service: if the service fails then this will potentially lead to lost profits, reputational damage and potential claims from third parties (e.g. fines from the regulator or the bank’s customers).  The bank should consider building in protections to ensure continuity of service such as audit rights to monitor performance, business continuity and disaster recovery services, exit assistance, source code escrow and a parent company guarantee.
Too big to fail, too big to manage

Disruption within the retail banking sector brought on by changing customer demands means banks will need to invest in IT to improve the quality of their service and update their systems. There is no one size fits all solution to the problem: replacement of IT infrastructure and even the build and migrate model are highly complex and risky endeavours, but are important projects if the banking sector wants to remain relevant.

Overseas, innovation is taking place. Polish banks such as Bank BPH have introduced high-tech ATMs that identify their customers by scanning the vein patterns in their fingertips. In Spain, CaixaBank has announced a “wearable banking” application that permits its customers to follow the stock markets and convert currencies using Google Glass or their smartwatches.

No bank is too big to fail.  But, some banks have perhaps become too big to manage and this has led to a certain amount of inertia and lack of clarity on how best to undertake the necessary transformation journey.  Banks have also tended to view transformation too narrowly, focusing only on the front-end features and not thinking about how these changes will impact the back-end and internal processes. This has led to incomplete transformation projects where front-end systems are replaced but the back-end systems remain untouched and struggle to keep up.

Banks need joined up discussions to decide what changes are required at the front end to meet customer demands and how the back end will need to transform to deliver these changes.

As banks start to embrace cloud-based solutions, shared services models and even the concept of buying software as a utility then the trend could be towards sharing duplicative systems, or licensing platforms on a utility / SaaS basis. This would certainly help to keep costs down and speed up the process of transformation. Recently, Metro Bank opted to use the Temenos T24 core banking system – a cloud-based product that runs on Microsoft Windows Azure platform.

The worry is that rather than innovate now to adapt to the changing environment the banks will continue to put off the changes that are required. But they cannot afford to delay in today’s fast-moving digital market.  If the likes of Google or Apple or Alibaba decide to enter the UK banking market, the traditional banks may not be able adapt their systems fast enough, and customers will move with a few clicks of a mouse or taps on a smart-phone.

Source:http://www.lexology.com/library/detail.aspx?g=419fe34d-3b5b-402a-a9ec-b5f25966464d

Ausgrid to offshore IT jobs

October 22nd, 2014

Publicly owned electricity distribution business Ausgrid is proposing to send 37 IT jobs offshore as unions step up a campaign to protect their workers’  job security.Outsourcing34
The United Services Union said Ausgrid management believes it can save $8.5 million a year by outsourcing the jobs to an overseas company.
The company has flagged the loss of jobs and the use of an overseas contractor to provide IT services.

A spokesman for Ausgrid said it is reviewing the delivery of services in its Information and Communications Technology division as part of a “business-wide restructure to reduce non-essential operating costs”.

“This includes 37 roles in the area of development and technical support,” the spokesman said. “The review includes discussion with unions and staff about the merits of these roles being outsourced to the external market. Ausgrid would expect any external provider to maintain a local presence.

“It’s not unusual for an organisation to test the external market to benchmark the efficient cost of delivering services.”

Ausgrid employs more than 270 staff in its Information and Communications Technology division. This includes labour hire and senior contract roles.

The spokesman said it is important for Ausgrid to “reduce costs in a responsible way so we can keep electricity prices as low as possible for our customers, helping to keep average price increases over the next five years to below CPI”.

“We also remain steadfast in our commitment to no forced redundancies,” he said.

The development comes as negotiations begin for a new enterprise agreement for Ausgrid.

Unions are fighting for the inclusion of job protection clauses that would prevent the offshoring of jobs, restrict the outsourcing of work, and protect staff from forced redundancies.

USU energy manager Scott McNamara said an internal review had found $2 million could be saved while retaining the services within the company, and $3.5 million could be saved by outsourcing the services to an Australian company.

“Ausgrid employees are deeply concerned by the potential loss of jobs and outsourcing of essential support services,” Mr McNamara said.

“For the sake of a few million dollars, Ausgrid management want to send the jobs of 37 loyal staff.

“Not only will they lose the experience and skills of these loyal staff, but service standards will likely drop as work is carried out by external companies in other parts of the world.”

Mr McNamara said the move would not help consumers.

“Networks NSW is driving cost cutting across the business, fattening up the network businesses for NSW Premier Mike Baird’s power privatisation,” he said.

“If electricity network companies are already looking to cut jobs and send positions overseas, it’s no wonder that staff fear massive job cuts from privatisation, which is what happened in Victoria when an overseas buyer took control of the electricity network.”

Source:http://www.smh.com.au/nsw/ausgrid-to-offshore-it-jobs-20141021-118vh3.html

Gulf between Infosys & TCS narrows in September quarter

October 22nd, 2014

Infosys, India’s second-largest IT services exporter, has narrowed the gulf with its rival Tata Consultancy Services (TCS) in certain growth parameters like organic growth and operating profit margins in the just concluded September quarter, setting the stage for an interesting battle between the two Indian IT majors.Outsourcing34

TCS has been consistently maintaining a definite lead over Infosys in all the key metrics like revenue, profit, OPM, attrition rates and there were no signs of any closure of the gap between the two in the past many quarters. However, at the end of second quarter of FY15 the revenue growth reported by Infosys was 3.1% while it stood at 3.6% for TCS, without taking into account the inorganic revenue from the buyout of its stake in its venture with Mitsubishi. In the same vein, the gap between the two in terms of operating profit margins (OPMs) closed down to just 0.7% when compared to 1.2% in the preceding sequential quarter.

The surprising aspect in this quarter was the differing performance by Infosys and TCS with regard to market expectations. Infosys, which positively surprised the markets with its second-quarter performance, also received the boost with the presence of new CEO, Vishal Sikka, who is also the first non-founder to head the company providing an indication of the way forward for the company. As BNP Paribas, a brokerage house in its note following the results, said, “The new CEO’s strategy is aimed at transforming Infosys into a ‘next-generation’ services company, more details of which are due by April 2015. Infosys believes a successful shift could mean revenue growth of 15-18% and an EBIT margin of 25-28% in the long term, which are significantly higher than current levels. “

Sikka during investors calls post the results spoke about the increasing use of automation, artificial intelligence by Infosys while bringing new paradigm in terms of design thinking and reskilling of their employees. There are enough strong indications that Infosys would be able to achieve its revenue growth guidance of 7-9% for FY15.

However, it would be a long haul for Infosys to match up with TCS, as the latter over the last two years has consistently maintained a very steady growth rate outperforming the industry benchmark. Today, the revenue gap between Infosys and TCS for the second quarter of FY15 stood at $1.7 billion while the net profit difference being $361 million. At one point of time though Infosys had lower revenue than TCS, its OPMs and profit were much higher.

Industry observers say that TCS has set the pace for others in the Indian IT industry. Pradeep Mukherji, president, Avasant, an IT outsourcing advisory firm, said, “TCS is one of the most robust companies in terms of their depth in leadership, range of offerings and the extent of geographic reach. Their DNA is completely different.”

Source:http://indianexpress.com/article/business/companies/gulf-between-infosys-tcs-narrows-in-september-quarter/

Telco IT spending up as outsourcing increases

October 22nd, 2014

A new report says that while traditional telecom services are struggling, new offerings are showing promise and telco IT departments are doing the right things to support them.Telco

The survey by The Global IT Association for Telecommunications (ETIS) and The Boston Consulting Group (BCG) got responses from a mix of integrated, fixed and mobile operators from emerging and mature markets in Europe. It revealed that these operators are continuing to shift from IT cost reduction to focused IT investments in areas that can drive competitive advantage. Overall, IT capital expenditures rose 3.4 percent for survey participants, and, on average, respondents steered nearly one-third of their investment budgets to their top three initiatives — projects heavily skewed toward improvements in the network and the customer experience.

Of particular note, the study’s authors said, is that even as participants’ IT capital expenditures increased, they managed their IT operating expenses in line with their revenue decline — something that telcos have historically been unable to do.

“The idea that telcos can boost their IT investments yet at the same time lower their IT operating expenses is a powerful – and previously unobtainable – notion,” said Frank Felden, a BCG partner and co-author of the report. “It means they would be able, in effect, to have their cake and eat it, too — spending to foster novel new offerings yet controlling costs. But to do that on a sustainable basis, they will need to find a good mix of innovation-focused and efficiency-focused investments. That is the hard part, but this year’s results indicate that it may indeed be possible.”

The report’s findings on outsourcing were also interesting. It now accounts for 26 percent of study participants’ total IT spending (up from 23 percent in the 2013 survey). For the first time, this annual study did not find a direct linear correlation between a high degree of outsourcing and high IT spending.

Source:http://www.billingworld.com/news/2014/10/telco-it-spending-up-as-outsourcing-increases.aspx

IBM Earnings Preview: What We Are Watching

October 17th, 2014

International Business Machines is set to announce its Q3 earnings Thursday, October 16th. In the second quarter of 2014, the company reported a marginal decline in revenues due to currency headwinds and divestment of the customer care outsourcing business. This decline was further accentuated by weak performance of the server and storage division, which is facing decreasing sales, product transitions, market disruptions, as well as the pending divestment of a major product line (x86 servers).Outsourcing31

During Q2, IBM’s total revenue declined by 2% year on year to $24.4 billion. However, the company reported 28% rise in net income to $4.1 billion, largely due to base effect of lower earnings a year ago arising from workforce rebalancing that impacted the bottom-line by $1 billion. While its core software business witnessed low-single-digit growth, due to 3% year-over-year growth in middleware revenues, its Global Technology Services revenues declined by 1%, primarily due to the negative impact of the sale of the customer care Business Process Outsourcing services business in Q4 2013. However, cloud computing and analytics initiatives buoyed Global Business Services division revenues, which grew by 2% year over year to $4.5 billion in Q2.

We expect that IBM will continue to report growth in revenues for both the software segment and the GBS division in Q3. Trends in IT spending indicate that it will continue to grow, albeit at a slower pace. According to Gartner, Worldwide IT spending is on pace to total $3.7 trillion in 2014, a 2.1 percent increase from last year. While most of the growth is expected to come from developed countries such as the U.S., we expect the company to report growth in revenues from emerging economies, which reported a lackluster performance in the previous quarters. Furthermore, we expect order backlog to improve, which will boost revenues in the future. However, we are closely watching the GTS revenues, which have declined due to contract restructuring and pricing pressure. We also expect its server and storage division to report another quarter of disappointing results as the company is refreshing its product offering, and demand for its product remains low.

Middleware and OS Revenues

The Middleware and the Operating Systems divisions are the biggest contributors to IBM’s stock value, together making up nearly 47% of our estimate. This division continues to report good growth on the back of strong brand recognition of its suite of software such as Tivoli, Rational and Websphere, etc. Additionally, demand for enterprise software remains healthy, which should boost demand for middleware software. Furthermore, these solutions cater to the growing markets that include mobile, social and security tools. Therefore, we expect software division to post growth in Q3 as well as in the near future. However, in this earnings announcement, we are closely monitoring the growth in new licenses for the different middleware products as it will help us to ascertain software demand in today’s market in greater detail.

Revenues From GTS To Remain Tepid

According to our estimates, the global technology service division makes up 21% of IBM’s stock value. Revenues from this division have declined over the past few quarter as a result of contract restructuring and a decline in outsourcing backlog. Furthermore, discretionary IT spending from clients remains weak, which is negatively impacting outsourcing revenues. We expect this trend to have continued in the third quarter, which likely produced a decline in revenues. However, contract restructuring will help the division to post higher profit margins in Q3

GBS Revenues To Post Another Quarter Of Growth

The global business services division contributes over 11% to IBM’s stock value according to our estimates. In Q2 2014, GBS reported a 2% year-over-year growth in revenue to $4.5 billion, buoyed by growth in Business Analytics (7% growth) and Cloud (50% growth). We expect this trend to power GBS revenues in Q3 and contribute more to the top line performance going ahead.

Server Revenues To Decline

Server and storage division, which was once the cash cow of the company, is witnessing a continuing decline in revenues. The company announced the sale of its x86 server business to Lenovo in Q1, in a transaction that is to close in increments over the remainder of the year. The x86 division caters to the blade and rack server market, which is facing intense competition from white box (i.e., unbranded) and better positioned server manufacturers. We expect to get a better understanding of the divestiture process on the earnings call. The remaining server businesses – z-Systems mainframes, the Power line, and its range of high performance computing platforms – each face specific issues. Mainframes are at the trailing end of product cycle and Power systems are confronting severe disruptions in the Unix server market, albeit with the new and open Power 8 architecture. High end platforms retain a strong market position and are benefiting as well from the new Watson initiatives. In short, this challenged division is experiencing a range of issues, though the trends may well be on the cusp of more meaningful improvement.

We currently have a $227 Trefis price estimate for IBM which is about 20% higher than the current market price.

Source:http://www.forbes.com/sites/greatspeculations/2014/10/16/ibm-earnings-preview-what-we-are-watching/

Essar says no jobs at risk in IT ‘review’

October 17th, 2014

Essar Steel Algoma says it is in contact with “a number of vendors” as it conducts a review of how it provides IT support, though a company spokesperson said job losses are not on the table.Outsourcing30

“At the end of the day, no one’s job is at risk,” said Brenda Stenta. “The company has committed that there will be no layoffs or displacements from the IT department as a result of this undertaking.”

Members of USW Local 2724 were to meet tonight to discuss a proposal from Essar Steel Algoma that the union president says could put as many as 50 IT jobs in jeopardy.

Lisa Dale, president of Local 2724, which represents salaried unionized staff at the steel plant, said Essar told workers on Oct. 1 that it would be seeking vendor proposals for the outsourcing of IT work including process programming as well as application and infrastructure work.

“Our concern is, typically companies don’t go this route if that’s not what their ultimate agenda is,” said Dale.

Stenta said in an email to SooToday that a maximum of 25 roles out of a total of 65 in the IT department are part of the review.

The outcome of the review will be evaluated in the months ahead, said Stenta.

“We have and continue to maintain an open dialogue with the employees and the union and they are actively engaged in the review process,” she said.

A special Local 2724 membership meeting was to have taken place tonight at 7 p.m. at the the Marconi Hall, Ballroom C.

Dale said members were to discuss what the union’s response will be. She said the collective aggreement between members and the company does include language that applies to contracting out.

“We’re prepared to fight this,” said Dale.

Source:https://www.sootoday.com/content/news/details.asp?c=80053

Tata Group consolidates IT business, CMC to merge with TCS

October 17th, 2014

Tata Consultancy Services (TCS), the flagship software unit of the Tata Group, is merging the listed CMC with itself as part of the group’s renewed efforts to consolidate its IT businesses under one single entity. This will be the outsourcing giant’s biggest merger deal after it amalgamated Tata Infotech with itself in 2005, the first sign of the group’s attempt to combine its software services businesses housed under different entities. The other IT companies within the group are the listed Tata Elxsi, in which the group holds 45%, and the closely-held Tata Technologies.Outsourcing29

Tata group acquired CMC through the government’s divestment programme in 2001, when TCS was a division of Tata Sons, the main holding company of the conglomerate. TCS became a standalone company just before it went public in 2004 and at that time the group’s holding in CMC was transferred to TCS. Since then the two companies, although in similar businesses, have remained as separate entities. At present, CMC has revenues of over Rs 2,000 crore and employs about 6,000 people.

Over the years there were whispers of CMC merger but TCS had dismissed those talks as market speculation. On Thursday, the $13-billion IT major announced it is consolidating CMC’s operations in a single company with a swap ratio of 79 TCS shares for 100 CMC shares. TCS holds 51% in CMC which has a market capitalisation of Rs 6,628 crore and the merger, subject to regulatory approvals, will see Tata Sons’ stake in TCS go down marginally to 73.4% from 73.9% now. The valuation for the deal was done by BSR & Associates, a unit of KPMG.

N Chandrasekaran, CEO & MD, TCS, said that TCS does significant work with CMC and the merger will boost its domestic presence. However, in terms of numbers there won’t be any change as CMC’s earnings are reflected in TCS’ consolidated figures. The merger will rationalise cost structure and lead operational efficiency, particularly in marketing of services, Chandrasekaran said, adding that there will not be much savings on costs. The new role for R Ramanan, CEO &MD, CMC, will be known in the coming months.

CMC (formerly Computer Maintenance Corporation) started operations in 1975, and it was only three years later when IBM wound up its operations in India under pressure from the then Morarji Desai government, CMC took over the maintenance of IBM installations at over 800 locations, which gave the company a strong foothold in then nascent IT business in the country. In 2001, in a hotly-contested divestment programme under the BJP-led NDA government, Tata emerged as the successful bidder among 15 which included then global IT giants Compaq and HP, and also homegrown majors like Wipro, Reliance Industries and Aditya Birla group.

Source:http://timesofindia.indiatimes.com/tech/tech-news/Tata-Group-consolidates-IT-business-CMC-to-merge-with-TCS/articleshow/44840264.cms

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