Client costs in focus, IT deals revive 'rebadging' of employees

TCS co-opting a third of Boeing workers facing job cuts not an exception; analysts admit that the practice is returning, though not a full-fledged trend yet

With cost optimisation deals rising among Indian IT players, rebadging of employees is making a return.

Companies that have entered into such arrangements include Tata Consultancy Services (TCS), HCLTech and Capgemini.

On Tuesday, when aircraft manufacturer Boeing announced job cuts, international media reports also mentioned that TCS would be taking a third of such employees as part of its work with the airline major.

TCS is not the only one taking employees on board as part of such deals. Earlier this year, HCLTech signed an agreement with insurer State Farm to reimagine its IT service desk and infrastructure operations. It also inducted some employees.

“Some State Farm employees supporting this work will transfer to HCLTech to continue their important role in delivering cutting-edge technology services to State Farm,” a company statement said.

Recently, Paris-headquartered Capgemini said it would rebadge 174 employees from Denmark’s Nuuday as part of its digitisation project. The employees make up approximately one-third of the personnel in Nuuday’s technology department, news outlet ITWatch reported.

Top IT vendors have already alerted a trend in Q2 and Q3 FY23 of deals allowing cost optimisation and takeouts have taken precedence.

Rajesh Gopinathan, CEO and MD, TCS, said on an analyst earnings call: “We see a client caution translating into greater focus on cost optimisation. We’re seeing an increase in the number of large operating model transformation engagements.”

He added that in the first three quarters of FY23, TCS won 20 such deals versus 16 in the year-ago period.

Infosys CEO and MD Salil Parekh, too, highlighted this trend. “The deal pipeline continues to be strong and oriented towards cost takeout and tech/ops transformation,” he said in an earnings call.

Analysts tracking the sector are not yet agreeing to a trend, but admit that clients would be looking at reducing costs in multiple ways.

In transition

• Boeing to transfer some employees to TCS
• Earlier this year, HCLTech inducted employees as it signed a deal with insurer State Farm
• Capgemini took on board 174 employees or one-third of Nuuday’s tech department
• Rebadging was a trend a few years ago, when IT firms would include large groups of their clients’ personnel

“Firms are seeking to cut costs and addressing virgin scope, that is to say an area that they have not used third-party services in before. Rebadging is becoming more common. Another factor is that with growth slowing in the digital transformation area, Indian firms are more willing to rebadge,” said Peter Bendour-Samuel, CEO, Everest Group.

“It is too early to say that it’s a trend. It is happening on a case-to-case basis. What we have seen so far is that this happens in large deals. Mostly in the digital era, deal sizes have become smaller and worth a few million dollars. What we have observed in recent times, and which is yet to be a trend, is consolidation of the vendor ecosystem,” said D D Mishra, senior director analyst, Gartner.

He reasoned that because a huge extent of digital transformation was likely needed in many organisations, they were yet to embrace it holistically. “In this case, vendors are able to sign deals worth $500 million-$700 million. Those are the kind of deals that may pop up from time to time,” he added.

Rebadging of employees was a common practice a decade ago, when large outsourcing agreements would get signed as a chunk of employees would transition between companies. The idea behind the practice was also taking over talent that was core to a company’s operations then. Such rebadging would mean that the outsourcing company would get the minimum revenues from the customer as well. Some of the prominent examples among several deals from that period include TCS acquiring Citigroup Global Services in 2012 for $505 million or Infosys’ acquisition of Philips BPO practice a year later.

Analysts, however, pointed out that the current phase of rebadging employees was different.

Pareekh Jain, founder of Pareekh Consulting, said that even cost optimisation deals were quite complex now.

“A cost optimisation deal is about optimising, and not just cuts. If it is taking away cost from one area, then service providers are expected to add value in other areas. The BT-TCS deal is one such case,” he added.

During the earnings call, Gopinathan also said that TCS would ramp down over 70 per cent of its digital legacy technology estate, and boost capacity to build its new strategic technology architecture faster, supporting the group’s growth. “Our scale, full-services capability and track record of delivering outsized savings through operating model transformation is helping us win such deals,” he said.

Mishra agreed. “Cost is always the second biggest factor from the perspective of Gartner. Cost optimisation has got many dimensions, and it’s not just cost cutting but optimisation and creating operational efficiency within the team. Most of the deals these days have some sort of cost optimisation and every year the client costs have to come down by 5-10 per cent at least,” he added.