How the TCS-Epic case could impact the IT services sector

Indian IT services companies with software platforms could be forced to rethink their operational set up after the massive fine imposed by a Wisconsin federal jury against TCS.

While TCS has denied the allegations of stealing healthcare software from American company Epic Systems, analysts say that it’s time for Indian tech firms to legally and physically separate their software divisions.

“IT firms need to be at an arm’s length from their software divisions and create a separate legal entity for them. Not only does the software unit require to be a separate legal entity, but the company should also ensure that the employees and management are also totally independent. Unless, that happens, such allegations cannot be ruled out,” said Sanchit Gogia, CEO of Greyhound Research.

Not many IT services companies currently follow this practice. Infosys separated its software product company, which remains a fully-owned subsidiary, in 2014.

“Indian IT needs to be more careful with own product development. We note that several employees of Indian IT companies may be having access to documentation and user-manuals of third-party products used by clients given their involvement in implementation, customisation and testing of such products.

“Now that Indian IT has embarked upon own platform development, it needs to adequately protect itself in cases where there is a conflict of interest,” said an analyst at Kotak Institutional Equities Research.

Short-term impact Industry watchers said that in the short-term, those opposed to the outsourcing model could use the TCS case to make a case of captive expansion rather than use third-party vendors. But in the long-term, discerning clients can always see through the case. Noise levels would be higher than the actual impact. In an election year in the US, such cases will get undue press and it is negative from a sentiment standpoint,” said the Kotak analyst.

Generally, Independent Software Vendors (ISVs) or software product companies for long were not very comfortable outsourcing their core product development because of IP reasons and this case could worry the ones outsourcing this work. “This incident might lead a few ISVs to rethink about their outsourcing strategy. Overall, it might impact a small portion of the market in the short-term. It might mean more security measures and contractual penalty and more seriousness and risk management on the part of vendors too,” said Pareekh Jain, research director at HfS Research.

“Mostly, ISVs have captives in India and they avoid outsourcing their development especially to large companies such as TCS, which have competing products. ISVs generally outsource to small and niche software product engineering firms. Now, with the advent of SaaS, the ISVs are becoming more comfortable in using software product outsourcing firms,” Jain added.

Nasscom, the industry body representing Indian IT firms, said that most Indian companies have been doing their best to abide by the law. “We've seen some cases which were initiated in different US courts but none of them have finally resulted in an adverse ruling,” said R Chandrasekhar, President, Nasscom.

He, however, agreed that the verdict will have an impact on other IT services firms, at least in the near term.

“This kind of a judgment is not a happy situation. There could be questions that could arise but at the same time we are confident there was no wrongdoing. But we should reserve our views till the legal process comes to its conclusion,” Chandrasekhar said.

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