You could call it the third offshoring wave. First came bodyshopping. Next in line were small and big chunks of projects offshored by Indian tech and BPO companies. The Indian outsourcing story is now graduating to the third level?homegrown companies are beginning to swallow entire departments of global corporate bigwigs. This was probably the last bastion of IBMs and Accentures in services space that Indian techies were shying away from.
And the new-found appetite for people and assets of their clients is expected to take Indian outsourcing giants closer to the billion-dollar deals they have been eyeing for long. Many feel big services deals might be difficult to get without logging into takeover space. Early signs are encouraging. Indians are being invited to the ivy league of carve out deals?literally meaning carving out departments of large firms as cost centres and monetising them by way of a capital transaction.
Already, TCS has taken over UK-based insurance company Pearl?s 950 employees based in Peterborough, near London. Infosys has acquired three finance and accounting centres of Philips with 1,400 people?750 based in Poland, and 190 in Bangkok. HCL Technologies, which claims to have pioneered the trend with its joint venture with Deutsche Bank six years back and later acquired British Telecom?s contact centre in Ireland, continues to acquire people from clients. ?We have won eight contracts last year where we have taken over people in UK, Germany, US and Asia,? says HCL Technologies president, Vineet Nayar.
Many more are in the pipeline. Infosys is reported to be in talks with Siemens for BPO arm and Wipro is believed to be eyeing Lufthansa, Biflinger Berger and Gauselmann?s IT arms. ?We are ready to acquire people in multiple locations. Already over 9% of our people are based outside India and we expect it to grow to 12-13% in a couple of years,? says TCS CEO, S Ramadorai. ?We are in the market for more deals like the Philips one,? echoes TV Mohandas Pai, member of the board and director?human resources, education and research and administration, Infosys.
Insiders also call them two-in-one?a business order and an acquisition. It opens doors to new business and helps expand their global delivery model by acquiring operations in various geographies. Analysts feel these deals signify a lowering of their risk aversion and underline the need for an inorganic driver to sustain current momentum. With most of these contracts coming in Europe, it could cut industry?s reliance on the US. Bringing in people from locations outside India (mostly in low-cost offshore locations), it could make IT giants less susceptible to rupee appreciation.
The opportunity is huge. But it?s not going to be easy for Indian companies to grab a foothold in the space dominated by IBMs and Accentures. And an even bigger question is?can Indians digest the huge number of people and assets that come with these deals?
As the initial excitement about grabbing the business settles down, pressure to demonstrate the impact on business will come in spotlight. Infosys, for instance, expects to ride on the $30-million per annum of Philips business to make it to the global top five in finance and accounting, but is prepared for lower-than-group margins in the first year. The deal will add less than Re 1 per annum to the consolidated EPS. ?We would not have got the business without acquiring these people and assets,? admits Pai of Infosys.
However, he is clear that they have to work to earn their margins by bringing in productivity improvements and making sure ?we are able to leverage what we have.? In simple terms, this means cross selling these services to more clients will do the trick.
?Revenue upside could come from additional services from the same client in the medium term and cross-selling service skill sets to other customers in the long term,? agrees ABN Amro senior analyst, Pankaj Kapoor.
When an Indian company buys the BPO arm of a global firm, they surely value the business they get; but the difference between success and failure lies in platformising the newly bought IP and taking it to market. ?Indian vendors will have to demonstrate the multiplier effect in 18-24 months and bring in more clients on the back of acquired skillsets. It is not easy and will take time,? asserts Sudhin Apte, country manager, Forrester Research India. TCS, for instance, is still platformising the IP it has bought from the Pearl deal last year.
It is yet an unproven model, and insiders are worried that it will not be easy to create revenue from a carve out because it has the mentality of a department and not a vendor.
Changing mindsets is not the only problem; taking over assets add to complications too. Integration costs are higher, and it?s virtually impossible to layoff people and bring in efficiencies. ?Since most of the departments being acquired are based in low cost locations, it is not easy to improve margins.
Indian companies cannot layoff thanks to strict laws on transfer of people and strong unions. They will either rely on natural attrition or send people offshore from their organic operations,? explains Kapoor.
Escalating cost structure of captive centres or global firm?s own IT and BPO units is also fuelling the trend. Research suggests that more than 60% captives based in locations like India, China and Russia are ailing and are in the market. ?Captives have a 6-8 year lifecycle. Almost every captive can be expected to come to market in the sixth to eighth year of existence,? says Forrester?s Apte. ?In the last one year, 30 captives have fully or partially exited the business. Most of them are in the IT space, and deal values are much smaller with each of them involving no more than 150-200 people,? he adds.
Most of these are in product development space. Ericsson?according to recent reports?sold its facility to Wipro because it was not able to scale up enough to be self-sustaining and cost-effective . Also, two UK-based firms,
BelAir Networks and Powergen closed their call centres in India, as these were costlier than anticipated, and staff attrition was estimated to be as high as 80%. Firms such as BEA Systems, Capital One Services, Google, Mimosa, Seagate, and Yahoo started using partners instead of doing it all alone. Analysts blame poor delivery track record, operational problems, lack of scale, poor morale, rampant attrition, and high costs for these failures.
Many in the industry feel that the BPO deals might have triggered the initial excitement, but the real action will start when Indian tech majors start acquiring IT departments of global firms, based in other countries. And several such deals, insiders reveal, are currently being negotiated.
?The real excitement will be in the IT deals. Inefficiencies in IT are globally high. You see hundreds of applications where there should be one and hundreds of servers and people, where there should be few,? explains HCL?s Nayar.
Used to digesting the breakneck pace of organic hiring and expansion, our tech brigade is busy rewriting the code for absorbing their client?s people and assets too.