Indian BPOs, growing up, growing
out By Indrajit Basu
KOLKATA
- Economists say that in the lifecycle of any boom there
comes a time when the weak go under and into the
shopping bags of the strong. Ever since the concept of
business process outsourcing (BPO)became fashionable
globally, it has been the Western companies that have
rushed to India, outsourcing their back office
operations, or in many instances, acquiring Indian
outfits that do such work. But going by the spate of
overseas acquisitions by Indian BPO companies in recent
times, it seems to be turnabout time now. Over the past
two years, Indian BPO outfits have snapped up 18
overseas back office business processing companies,
siring an entirely new breed of global services model -
with roots in India.
Activities in the deal
street have been particularly hectic lately. The past
three months saw Indian BPO companies making or
announcing their intentions to make at least 10 overseas
deals for buying BPO firms in the US, United Kingdom and
in Singapore. Experts believe more could follow. "This
is an important turning point of the relatively nascent
Indian BPO sector," said an official from NASSCOM, the
industry lobby.
According to Mumbai-based
investment Bank Edelweiss Capital, a significant reason
driving the acquisition spree is the fact that smaller
back office operations are available cheap overseas.
Indeed, in the past, when a customer in, say US, wanted
an offshore solution, the IBMs or EDSs would partner
with an Indian vendor since offshoring seemed a winning
proposition given the cost arbitrage that countries like
India offered. Then slowly, margins in the US turned
less lucrative for global players than they used to be.
So, instead of passing on revenues to Indian companies,
it made more sense to set up captive offshore operations
in India to take advantage of the cost arbitrage, and,
in certain cases even gobble up Indian outfits.
But things changed again when recession hit the
US economy and customers began to squeeze billing rates.
Rates dropped to about 6% or 7% over the past three
years, impacting margins adversely. Unlike global firms
like Convergys and IBM that could expand to set up
offshore delivery centers in countries like India,
relatively smaller BPO firms - unlisted outfits with
revenues of less than $50 million - were suddenly short
of enough cash flow to expand overseas. "Profits at most
of them have declined 8% to 10% annually in the past
three years," says an Edelweiss study. "And because
these companies can't match the cost structure of their
Indian rivals, they're selling for just one-fifth to
one-half of revenues."
For instance, Irving
(Texas) call center operator of Aegis Communications
Group, which generated revenues of $140 million in 2003
serving clients such as AT&T and American Express,
sold out for $28 million last year to a joint venture of
India's Essar Group and Deutsche Bank. "The landscape in
the US is littered with hundreds of such firms, with
500-1,000 seats. These firms typically work with a base
of seven to eight local marquee clients and also take up
short-term project-based work. Today, with billing rates
under pressure, they have two clear options: shut down
or partner an overseas offshore service provider," says
an industry insider.
But why is it that BPO
outfits are mostly getting grabbed only by Indian
companies? According to Sujay Chohan of Gartner, few BPO
industries worldwide have the depth and maturity that
the Indian BPO sector has. "Australia has it too," says
Chohan, "but my experience is that Australians prefer to
restrict their operations within their boundaries and
the country has not marketed itself as a viable offshore
location as aggressively as India."
Chohan also
believes that the latest buzz on the BPO block is "dual
shoring" - operating out of two global delivery centers,
one in the US or UK and the other in India.
Traditionally, most BPO companies have ran a sales and
marketing front office in the US or UK, but the trend is
now changing. Companies seem to be getting a part of
their process work done in the US too. "So, while the
tier-one, rule-based work gets done in India, work that
requires more intricate knowledge of the local legal
technicalities can be done in the US. This way, service
can also be rendered differently on a
customer-to-customer basis, depending on their
preferences," says Chohan. "Moreover, a front-end run by
Americans can help reduce the sales cycle which could
otherwise run into six to 12 months."
Yet
another reason for the rush to acquire overseas is
purely political: This is an ingenious method to buck
the global backlash against offshoring, say industry
players. "Having an American face to an Indian company,
which also demonstrates that it can create jobs in the
US, helps create a defense against the backlash," says
Naresh Ponnapa, of Indecomm Global, a niche BPO based in
Bangalore. The technique is simple. Operate an office in
the US that employs a few American workers and let them
handle 10-15% of the project work. The rest can safely
be offshored to India. "It also takes care of de-risking
issues that have arisen post 9/11. Customers are more
comfortable when they know that you have a business
continuity plan with an onshore presence in the US."
Nevertheless, it is also true that it is time
for Indian BPOs to scale up outside its shores. "As
India's outsourcing sector matures, the need to increase
industry expertise, geographic reach, and, most of all,
customer base becomes all the more crucial," says a
spokesperson of Mindteck - a global software solutions
firm with centers in India, the US, UK, West Asia and
Singapore - that has just announced acquisition of a
Singaporean software firm engaged in business
applications segment.
Despite the protectionist
ballyhoo in America, the fact is that the market and the
demand are still buoyant there. At one level, these
acquisitions will provide the momentum to continue
growing at the 50%-a-year rate that the Indian BPO
sector envisages, and give an opportunity to third-party
local BPO outfits to move up the value chain and take on
more complex and higher margin segments. Besides, Indian
BPO companies need a dogged acquisitions drive to stay
ahead in the race for a healthy share of the global
outsourcing pie.
The
deal street
Buyer
Target
Size
Dec
2004 Mindteck
Unnamed Singapore-based outfit
Undisclosed
Nov
2004 Apollo Group
Looking at outfits in the
US, UK
Undecided
i-Flex Solutions
Equinox Corp, US Login SA, France
Undisclosed Undisclosed
Godrej
Outsource Offshore Inc, US
Undisclosed
OfficeTiger
Devonshire Group, UK
Undisclosed
Oct
2004 Patni Computer
Cymbal Corporation, US
$68 million
ICICI One Source
ASG, US
$45 million
Sep
2004 Scandent
Cambridge Integrated, US
$110 million
Hinduja TMT
Source One Comm, US
$8.5 milion
ICICI One Source
Pipal Research, US
$1.25 milion
Oct
2003 Datamatics
CorPay Solutions, US
$9 million
Jul
2003 Epinay
Core3, US
Undisclosed
Apr
2003 IndiaLife Hewitt
Embrace, Singapore
Undisclosed
Aug
2002 WNS
Town and Country Assistance, UK
Undisclosed
May 2002 HCL
Tech
Apollo Contact Center, UK, a
British Telecom arm
$11.5
milion
Indrajit
Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12 years
of experience in business/finance and technology
journalism. Besides writing for Asia Times Online, he
also writes for US-based publications, as well as IT
companies.
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