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Restructuring and Recasting of Service Lines in Outsourcing – A Brief Summary of TCS and Infosys

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In recent times, several IT and BPO service providers have been involved in restructuring to organize their service lines and reshuffle their top executives and service heads. Most recently, in May 2017, Tata Consultancy Services (TCS) launched its major restructuring activity in close to a decade, putting it under a new President, Krishnan Ramanujam. The company also reshuffled business heads, as it looked at growing its digital offerings. The exercise comes at a time when TCS, like its peers in the IT services industry, is looking at focusing on new businesses like digital.

Broadly, TCS has merged all service lines into one mega unit called Business and Technology services which will, in turn, have three main buckets — Cognitive Business operations, Digital Transformation Services and Consulting and Service Integration. Individual service lines have been clubbed into these three divisions. As part of the reorganization, the company has also reshuffled some of the heads of its service lines. The company has also given control of some service lines, which had become very large, to the industry verticals such as manufacturing. The last major organization restructuring at the company was in 2009, when N Chandrasekaran had taken over as CEO.

Similarly, in October 2016, Infosys split its four large industry verticals into 15 smaller units in rejig aimed at making the company agile and sharpen client focus. The objective is to give its presidents more time to build customer experience relationships and strategy to improve sales, rather than internal operational matters. The new structure announced by Infosys include 15 smaller industry units, each with US$500-700 M in revenue, with a separate head, and profit & loss (P&L) responsibilities. Its four large verticals are Banking & Financial Services and Insurance (BFSI); Retail & Life Sciences; Manufacturing & Hi-Tech; and Energy & Utilities, Communications and Services.

Reasons behind Restructuring Activities

Just a few years ago, incumbent outsourcing service providers retained their contract of renewal more than 80% of the time. However, in recent times, it has been noted that not even 50% of incumbent providers retain the business. Hence, companies are getting more involved in restructuring practices in order to retain their clients by focusing on customer satisfaction.

  1. Declining Prices – In a buyers’ market, service providers that do not proactively offer significant reductions in pricing, ahead of renewal time and offer updated, state-of-the-art solutions likely find themselves replaced.
  2. Costs of Switching Providers have Dropped – Mature companies have figured out that while switching costs are material, they are not prohibitive. Additionally, competitors now help absorb some of those costs in exchange to stay agile in the market.
  3. Multi-Sourcing as a Default Strategy – Sourcing maturity and the evolution of the solutions have caused a shift, where large enterprises prefer a multi-provider solution for its capabilities and built-in competitive tension. Application services have been better options for sourcing to multiple providers, with many companies having split their service portfolios.
  4. Refusal to Implement New Solutions – Clients generally want to stay with their existing providers, but the provider’s refusal to implement new solutions with better approaches than those used in the past, ultimately costs them the business.

In order to stay competitive in the market, it is important for service providers to change their strategies by shuffling and restructuring their service lines and executives from time to time according to industry trends. The exercise is expected to make service providers more agile, improve market penetration, and client management. A new strategic business unit structure would benefit nimble and fast decision-making for clients. Business leaders must make sure to understand the current market and the opportunities it provides in order to find improvements to new solutions and derive maximum utility from their suppliers in the long term.

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