Diligenta’s record deal with Friends Life is flawed

Diligenta’s record deal with Friends Life is flawed

The announcement that TCS’ UK insurance and pension arm, Diligenta, has secured £1.3Bn over 15 years should be seen in context. The market marked TCS stock up only 1.8% on the day. This is wise and proportionate to the importance of the deal.

Diligenta will administer 3.2 million policies for Friends Life bringing them to 8 million policies under their control since they secured the old Pearl Assurance (now the Phoenix Group) “closed” book.

Why the lukewarm reception for what is a headline grabbing deal? Well firstly around 1,900 Friends Life staff will be transferred to Diligenta “under their existing terms of employment”. Effectively the deal more than doubles Diligenta’s staff numbers to 3700. This is a huge commitment to staff longevity and terms and conditions that are above the market average. Factoring this into the deal logically depresses the future prospects of profitability in an industry that demand automation to reduce it fixed costs attributable in the main to … staff. This is in a situation where the stock of transactions is, by definition, coming down over time. Outsourcing is about standardisation, better processes and automation in order to reduce headcount and increase accuracy.

Securing any additional books of work in the future can now only be economical if volume increases occur without a corresponding commitment to the taking on of staff. What new client would be prepared to transfer a significant workload whilst making their staff redundant? So how does Diligenta propose to “square the circle”?

Additionally this deal appears in some part to be based on charging by each transaction. Inactivity therefore hurts Diligenta financially unless it can reduce staff faster than volumes drop.

So why was the deal so well received in the press? Mega deals have almost disappeared in recent times and were largely confined to the US tier one service providers. So for an Indian provider to score a £1.3Bn deal is a worthy headline grabber. For context according to Ovum analysts “this is the largest private sector deal in the UK since 2005”.

However, let us not forget that the deal is only £91m per annum and dependent on volume of transactions to hit that turnover. Given the long-term staff liabilities and that fact that Diligenta currently operates at a profit before tax of only 3%, although this deal puts more volume through the software platform, it is unlikely to significantly improve this return.

The market’s 1.8% rise in TCS stock prices looks optimistic.

Posted in Suppliers Comments: 5 comments


5 Responses to Diligenta’s record deal with Friends Life is flawed

  1. gary says:

    All good points well made. However missing the bigger picture of the migration to the baNCS platform. Given FP’s long history consider that their IT infrastructure is equally antique and has a high level of technical debt. Once the data is migrated then likely no need for a number of staff, so plenty of savings to come via redundancy.
    Also an error in the article is that the transferring staff are at above industry level rates. Quite simply not true given recent pay freezes and organisational design whereby it was discovered many staff were performing roles of a higher level, yet not being compensated accordingly. Expect another of the current sites to be shut down within 2-3 years once the platform move is complete.

  2. MSZUjE says:

    I liked this site so much, I have saved to my favorites.

  3. vOO6F says:

    Quite intriguing subject, appreciate you posting it.

  4. cimon says:

    I like this site too and also this topic – albeit in a morbid way. Diligenta only exists because it is the cheapest legal way that TCS can operate in the UK on the closed books of other companies. They are not an IT company therefore, the accompanying systems will probably be assimilated into the TCS regime by necessity…. along with the other industries and exploitation from Tata CS worldwide especially amongst those less able to protest in Mid to Southern India. This is a global problem in allowing business leaders to serve the planet before their own countries !!

  5. Jock says:

    Sure enough more people are being made redundant but because FL isn’t spending money with Diligenta!

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