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

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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.

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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 non-
interest 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 third-
parties. 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 Finance and Accounting Procurement

• Payroll processing • Financial reporting • Vendor analysis
• Recruitment and • Management reporting • Bidding reviews
staffing • Financial analysis • Cost analysis
• Pension and benefits • Accounts receivable • Just-in-time
administration • Accounts payable processes and
• Hiring and training systems
(including eLearning) • Invoicing and
• Travel 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. 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

STRENGH WEEKNESS
 Reshaping the firm’s competitive  Target Firm Market Recognition
scope
 Developing new Capabilities
 Knowledge for product
OPPORTUNITY THREAT
 Increased geographical spread  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’ asset-
based 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 Win-
Win 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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