TCS Acquisition of FNS: a Success story

TCS Acquisition of FNS: a Success story
By Vadan Mehta PGCBM-17 SMS ID: 106360 Location: Borivali, Mumbai

SM assignment by Vadan Mehta

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TCS Acquisition of FNS: a Success story

TCS Acquisition of FNS
1. INTRODUCTION
In 2005, Tata Consultancy Services (TCS) has acquired Australian banking platform vendor Financial Network Services (FNS). The intention was to acquire FNS’s software arm (BANCS) that will further promote TCS’ IT services capabilities in the banking industry. From TCS perspective, this deal should help TCS to extend it’s position in regions like Asia Pacific and the Middle East, where FNS had strong presence. In Europe and North America, success depended on how quickly TCS is able to integrate FNS’s software platform (BANCS) into existing financial soft-architecture. This document will discuss about the outsourcing trend in banking and financial services industry (BFSI), strategic decision behind acquisition including background, SWOT analysis and resulting impact on TCS, concluded by summary.

SM assignment by Vadan Mehta

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TCS Acquisition of FNS: a Success story

2.

BANKING & FINANCE SECTOR INDUSTRY (BFSI)
During the 1990's, banks relied on a number of strategies to increase shareholder value: risk reduction through loan/asset securitization, revenue diversification to generate noninterest income, and industry consolidation to capture economies of scale and scope. Cost cutting and technology innovation in the form of increased automation have also helped banks improve their efficiency during the past decade. Banks are under unrelenting pressure to lower their operational costs in a market plagued by low margins, industry consolidation, and increased global competition. Hard pressed to squeeze more efficiency out of the business, banks are evaluating which processes represent their source of competitive differentiation and which might potentially be outsourced.. Most banks are investigating what role BPO (Business process Outsourcing) should play in their business operations, with a number actively pursuing initiatives. Both horizontal and vertical processes are being addressed, with each bank’s individual approach differing based on factors such as size, geographical region, competitive environment, and internal culture. Some banks have determined that distribution is the most critical process along the value chain for developing and retaining profitable customer relationships while others have chosen to focus on product development or transaction processing — choosing to outsource non-differentiating processes to thirdparties. In general, banks are electing to retain end-to-end control of core vertical processes, particularly if they possess the economies of skill and scale to operate such functions efficiently, but may selectively outsource discrete processes to improve efficiencies. Banks are assessing which elements of the banking value chain (i.e. product development, distribution, or transaction processing) form their basis of competition in the market and are making outsourcing decisions accordingly. In addition, banks are looking to outsource in an attempt to not only reduce costs, but also to improve process efficiency and effectiveness and make their organizations more flexible and adaptable.

2.1.OUT SOURCED PROCESSES
As banks determine which elements of the value-chain form their basis of competition in the market, they are in turn making decisions regarding which processes to insource or

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TCS Acquisition of FNS: a Success story

outsource. Looking across the banking value-chain, the majority of BPO activity taking place today is focused on the customer and product support, transaction processing, and product portions of the value-chain. Celent expects this trend to continue. As banks gain more experience and confidence in their service providers, it is expected to see a gradual increase in the amount of end-to-end process outsourcing, where BPO will also see banks putting greater emphasis on process optimization through the use of automation.

Another factor that influences which processes banks outsource is the perception of their existing economies of scale and skill relative to what an outsourcer can provide. Banks are more likely to outsource processes where they lack the scale and skills to provide the function optimally themselves. This is most likely for horizontal processes which do not represent the bank’s area of specialization (e.g. human resources), or for vertical processes that do not represent its basis of competition in the industry. For example, a regional bank focused on marketing and distribution may opt to outsource product development and transaction processing to a third-party provider or another bank.

2.2.

HORIZONTAL PROCESSES
Processes that are common across all industries and firms are referred to as horizontal. As shown in the following table A, the three primary horizontal processes banks are considering outsourcing include: human resources, finance and accounting, and procurement.

2.2.1.1.1.

Table A: Examples of Horizontal Processes Being Outsourced (Source: Celent)

Human Resources • Payroll processing • Recruitment and staffing • Pension and benefits administration • Hiring and training (including eLearning) • Travel and

Finance and Accounting • Financial reporting • Management reporting • Financial analysis • Accounts receivable • Accounts payable

Procurement • Vendor analysis • Bidding reviews • Cost analysis • Just-in-time processes and systems • Invoicing and payments

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TCS Acquisition of FNS: a Success story

entertainment
For horizontal processes, banks to seek a single provider for multiple services where possible, largely to simplify relationship management and governance tasks, which can add an additional 5 to 20 percent to the cost of an outsourcing contract. This will tend to favor vendors with a broad portfolio of horizontal offerings, typically the global consulting players, such as TCS.

2.2.2.

VERTICAL PROCESSES

Processes that are unique to a particular industry and that are part of that industry’s value chain are referred to as vertical processes. Banks have been outsourcing vertical processes to specialized outsourcers for many years. Most of these initiatives have been focused on discrete processes such as data processing (e.g. First Data for transaction processing, Fiserv for consumer banking), retail lockbox services, check printing, plastic card production, and ATM management. The following table B provides examples of other vertical processes currently being outsourced by banks.

2.2.3. Table B: Examples of Vertical process outsourcing(Source: Celent) Retail Banking • Account opening and maintenance • (including customer • inquiries) • Account reconciliation • Check processing • Mortgage and other consumermcredit processing • Credit card processing • Payment processing Commercial Banking • Trade finance processing • Factoring • Account reconciliation • Cash management • Foreign exchange deal • processing Investment Banking • Trade processing • Settlement support • Reconciliation • Knowledge services (e.g. research and analytics) • Reference data management • Asset servicing • Issuance and payment support • Document management

3. OUTSOURCING VENDOR

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TCS Acquisition of FNS: a Success story

Having elaborated horizontal and vertical processes, Banking client would like to outsource, a outsourcing partner required to develop horizontal and vertical expertise to offer end to end comprehensive product suite, scalable processes and innovative frameworks for optimizing Client’s IT investments, enhancing operational efficiencies, minimizing risk, and acquire sustained cost leadership. To stay competitive, IT vendors has to strategically build value chain which offers e2e product suite for the client. TCS acquisition of FNS is one of such strategic decision taken by TCS management to enhance their product suit and expand the market spread and share.

4. STRATEGIC DECISION BEHIND ACQUISITION
At the end of October 2005, India’s Tata Consultancy Services (TCS) acquired Australia’s Financial Network Services (FNS), a Sydney-based banking platform vendor, for approximately US$26 million. After Oracle and i-flex solutions, this is the second banking platform vendor deal in the second half of 2005.

4.1.1.

ABOUT TCS

Tata Consultancy Services is an IT services, business solutions and outsourcing organization that delivers real results to global businesses, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through its unique Global Network Delivery Model™, recognized as the benchmark of excellence in software development. TCS has over 160,000 of the world's best trained IT consultants in 42 countries. Financially, TCS has revenue of over $6.3 billion (fiscal year ending 31 March, 2010). With approximately 30 % of TCS business emanating out of BFSI, it is critical that TCS structure itself in a manner that can deliver real value to clientele.
SM assignment by Vadan Mehta

As per the
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TCS Acquisition of FNS: a Success story

organization’s operating model defined in March 2008, BFS vertical got logically divided into 4 Industry Solution Units (ISUs) with all necessary delivery and technology expertise embedded in these units with support from BFS Industry Practice group to provide the business domain related nuances in projects and pre-sales. ISU 1 and ISU 2 are geared towards Retail / Corporate / Commercial Banking, ISU 3 catering the Capital Markets segment while ISU 4 delivers to BFS clients of UK and Europe.

4.1.2.

ABOUT FNS

Financial Network Services Pty, Ltd. provided software and services for the banking and finance industry worldwide. It offered BANCS, a software based, banking solution that provides online processing of various business functions covering retail banking, wholesale banking, corporate banking, customer relationship management, financial management control and reporting, and risk management. The company also provided retail banking solutions for treasury, multi channel delivery, payments, trade, and benchmark reports; customer centric branch automation and Internet banking solutions; and wholesale banking solution incorporating treasury, trade finance, and international payments. In addition, Financial Network Services Pty, Ltd. offered implementation and project management, customization, maintenance, solutions integration, and training services. The company was founded in 1982 and is headquartered in Redfern, Australia. It also has additional offices in London, Dubai, Johannesburg, Seoul, Manila, Jakarta, Kuala Lumpur, Hong Kong, and Santiago. As of October 20, 2005, Financial Network Services Pty, Ltd. operates as a subsidiary of Tata Consultancy Services

4.1.3.

BACKGROUND

The acquisition of FNS emerged from a multiyear history of projects that TCS delivered based on FNS’ software banking platform BANCS Prior to the acquisition, TCS was working closely with FNS and had developed a client base in the domestic banking sector for BANCS. BANCS is banking software platform, designed by FNS. TCS has already deployed the BANCS solution in over 8,000 branches across State band of India and it’s associated banks.

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TCS Acquisition of FNS: a Success story

Thus TCS had already knowledge of the product and FNS as organization. TCS was willing to acquire this BANCS capability of FNS, in order to create greater value for it’s banking offering.

5. VISION
TCS-FNS acquisition is vertical integration for TCS as it has acquired product of it’s supply chain. The vision behind acquisition was to avail FNS strong software platform and TCS global workforce to create end to end product suit for banking client worldwide (as shown in figure)

FNS BANCS (Software platform)

TCS increased market power in banking sector
TCS global presence (Sales force)

6. ANALYSIS
The driver force for any acquisition is the strategic benefits in near future and in long term, acquiring firm expect to gain. These benefits can be acquiring talent, increased value chain, market spread, increased market share, etc. 6.1.

SWOT from TCS perspective WEEKNESS
 Target Firm Market Recognition

STRENGH
 Reshaping the firm’s competitive scope  Developing new Capabilities  Knowledge for product

OPPORTUNITY
 Increased geographical spread

THREAT
 Existing capabilities

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TCS Acquisition of FNS: a Success story

 Increased Opportunities

 Integration

6.1.1. RESHAPING THE FIRMS’S COMPITITIVE SCOPE
BANCS is a banking platform that not only targets retail banking, but also offers additional wholesale and corporate banking functionality. Application modules include deposits, loans, treasury, trade finance, accounting, and CRM, as well as support for the branch, call/contact center, and the Internet. The underlying architecture aims at independence from hardware and application infrastructure as well as comprehensive parameterization of the overall banking platform and supported business processes. BANCS has the potential to work as a “door opener” for a stream of banking platform renewal projects that TCS could deliver.

6.1.2. INCREASED GEOGRAPHICAL SPREAD
FNS’ customers are mainly located in Asia Pacific, the Middle East, and Australia. In Europe, FNS customers include smaller banks like Slovenia’s Nova Ljubljanska Banka and national subsidiaries of foreign banks, such as the South African Bank of Athens. While TCS’s major banking clients are located at India, US and UK. Acquisition opens new geographies for both the companies.

6.1.3. KNOWLEDGE OF PRODUCT
Prior to the acquisition, TCS was working closely with FNS and had developed a client base in the domestic banking sector for BANCS. TCS has implemented the BANCS for eight banks that form the State Bank of India group, Indian Bank and Central Bank of India. Cumulatively, TCS has already deployed the FNS solution in over 8,000 branches across these banks. Thus TCS knew the FNS’s core product very well and had required skillset to adapt BANCS solution worldwide.

6.1.4. DEVOPING NEW CAPABALITIES
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TCS Acquisition of FNS: a Success story

TCS sees BANCS as a central element of its financial services strategy. BANCS will be a cornerstone of TCS’ offerings for retail banks. TCS intends to prepare and communicate a new technology and functional road map for BANCS. TCS considers this approach to be a significant step toward extending its business beyond IT services in the application software and solutions space. Consequently, FNS is unlikely to get the lion’s share of the new business: While FNS’ core banking development team will remain responsible for BANCS’ core modules, TCS will manage regional modules and drive customer-specific modules. According to current plans, three or four acquisitions in the payments, wealth management, and risk management space will extend the functional breadth and depth of TCS’ banking software offerings beyond today’s BANCS.

6.1.5. INCREASED OPPORTUNITIES
TCS will use a phased approach to extend BANCS’ geographic reach. Using about 400 BANCS consultants and 10 specialized sales managers, TCS plans to significantly extend the customer base in terms of size and geography. Phase 1 will continue the current focus on Asia Pacific (excluding Australia), Middle East, and Central and Eastern Europe, for example. Phase 2 will target potential customers in Canada and selected European regions, such as Benelux and Scandinavia. Australia, Germany, France, the UK, and the US will be part of phase 3.
6.2.

IDENTIFIED RISKS

If acquisition related strategic decisions are not properly backed by deep study of risks and concerns associated with the acquisition, can result in total failure. Risks associated with acquisition should be indentified and suitable mitigation strategy should be planned.

6.2.1.

EXISTING CAPABILITIES

TCS has already developed banking platform, QUATZ, a joint development venture with Swiss TKS-TEKNOSOFT. QUARTZ has provided the basis for a number of

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TCS Acquisition of FNS: a Success story

TCS project engagements, such as a joint venture between KBC Bank and Rabobank. TCS has to reposition QUARTZ for it’s offering portfolio. The silver lining is that QUARTZ was not in retail banking. According to TCS, new target markets for QUARTZ will include wholesale and private banking and acting as a platform for payment and securities processing. TCS needs to embed existing (QUATZ) and acquired banking platforms(BANCS) in an ecosystem of business services — based on user companies, ISVs, and other IT services companies.3 One of the key challenges for TCS will be shaping such a vision and executing on it. .

6.2.2.

INTEGRATION

TCS needs to balance technology independence and its business services ecosystem. Integration of diverse cultures will also be huge task for human resource planning. Major challenge for TCS is to integrate FNS’s processes of HR, Accounting and Finance with TCS’s already existing processes. It is time consuming and cautious task. 6.2.3. TARGET FIRM MARKET RECOGNITION FNS is not the best-known vendor in some regions. In some major economies, FNS is not an established vendor at all: Installation count is low to nonexistent; it suffers from weak to no user perception; it does not show up on shortlists — and combinations of all three. Improved marketing will solve this issue in time, which is why TCS’ phased approach makes sense. But the phased approach also creates some challenges for TCS with its newly acquired banking platform. While it’s good to leverage BANCS’ strength in its core geographies first, this also gives competitors more time to work with banks in the other major economies. i-flex solutions and TEMENOS are already identifying potential European and North American banks interested in off-the-shelf banking platforms; and SAP has started working with clients in some of TCS’ phase 2 and 3 geographies while skipping TCS’ phase 1 regions.

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TCS Acquisition of FNS: a Success story

7. RESULT
After acquiring FNS, TCS has created new unit called TCS financial services based on BANCS offering. TCS financial services (Brand name: TCS BaNCS) has achieved significant results in past few years. Few Success stories of TCS BaNCS: 7.1.1. MAJOR CUSTOMERS • • • • • • • • Guangdong Provincial Rural Credit Cooperative Union Selects TCS BaNCS Core Banking Solution RBC Dexia Investor Services Chooses TCS BaNCS HDFC Bank Implements TCS BaNCS Treasury Solution New Zealand Stock Exchange Selects TCS BaNCS Market Infrastructure Solution TCS BaNCS Core Banking Solution Implemented at Bank of Panhsin TCS BaNCS Securities Processing Goes Live at Orbay General Insurance Corp. of India Implements Centralized TCS BaNCS Insurance within Six month Timeframe B.I.N. BANK Selects TCS and FNS for BaNCS Core Banking Solution

7.1.2. AWARDS & CERTIFICATIONS • • • • • Tata Consultancy Services Ranked 10th Leading Global Provider of financial Technology TCS BaNCS Payments Accredited with SWIFT Gold 2007 Ready Label TCS BaNCS Products — Custody and Corporate Actions — Win SWIFT Gold 2007 Ready Certification TCS BaNCS Core Banking Ranked China’s No. 1 Core Banking Solution in 2006 by Independent Research Firm TCS BaNCS Financial Solutions’ Payments Product Wins Technology Award

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TCS Acquisition of FNS: a Success story

• • •

TCS BaNCS Awarded Top Retail/Private Position in 2006 IBS Sales League Table TCS BaNCS Gains B.I.S.S. Corporate Actions Accreditation for the Fifth Year in a Row TCS BaNCS System Achieves World’s First Corporate Finance B.I.S.S. Accreditation

Globally, TCS-FNS' Core Banking Solution has been installed in over 115 banks spread over 35 countries and its clients include Tier I and Tier II banks in emerging markets in Europe, Asia, Australia and Africa. Recently, a large private sector bank in Russia and Hua Xia Bank, a leading commercial bank in China had announced the adoption of BANCS. As per the details above, it concluded that acquisition of FNS was good strategic decision by TCS.

8. MEDIA Published at ITWIRE (28 Oct 2005)
Commenting on the acquisition, S. Ramadorai, CEO and managing director of TCS said, “FNS, TCS’ first major international acquisition is great value as well as strategic in nature.It will add great value to the company as it enhances the range of TCS’ assetbased solutions for the banking industry besides giving us a number of new global banking customers in Asia, Europe and South Africa." “This is a robust, well-established product and TCS is confident of being able to implement this solution in any bank in any part of the world,” said N. Chandrasekaran, Global Head of Sales and Operations. “With this acquisition, TCS will compete aggressively in the core banking enhancement and replacement market by leveraging its unique capabilities developed on complex banking projects in major global financial markets.” Tony Ward, founder and CEO of FNS said, “We are absolutely delighted to be joining the TCS group. With one of the best core banking solutions on the market and a great organisation to support it, we, at FNS are really excited by the huge opportunities that lay ahead.”

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TCS Acquisition of FNS: a Success story

9. SUMMARY
As banking and financial services are more inclined to oursource it’s core processes for cost optimization and enhance performance, IT vendors have to develop horizontal and vertical process expertise to offer end to end product suit for banking client. TCS acquisition of FNS is one of such strategic decision to enhance the organization’s value chain. TCS has acquired a FNS with as vision to expand its IT market share as well as to extend its business product portfolio. From FNS’s perpective, merger with TCS, it will enjoy stronger worldwide sales, a greater support structure, and larger development teams and budgets than before. TCS’s phased approach for integration to the target geographies has helped to improve FNS’ worldwide sales and marketing footprint. TCS-FNS acquisition story is case study to understand successful strategic decision which has WinWin situation for both, Acquiring and Target organizations.

10.

Reference
        http://www.tcs.com/offerings/bancs/solutions/corporate_actions/Pages/default.aspx http://www.indiaeducationdiary.in/Showebn.asp?newsid=2532 http://www.tata.com/media/releases/inside.aspx?artid=f4l2rBK/FAU= http://en.wikipedia.org/wiki/TCS_BaNCS http://en.wikipedia.org/wiki/Vertical_integration http://www.inntron.com/banksys/fns.htm Strategic Management: Concepts and Cases: Competitiveness and Globalization by Michael A. Hitt R. Duane Ireland, Robert E. Hoskisson Mergers and Acquisitions: A Guide to Creating Value for Stake Holders by Michael A. Hitt & R. Duane Ireland (Author) Indian Vendor Consulting Capabilities Scorecard Summary: TCS by Stephanie Moore The Internationalization of Indian Companies: The Case of Tata by Andrea Goldstein
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SM assignment by Vadan Mehta

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