India's accelerated development

In quick order, the business process outsourcing and information-technology services sector has expanded its geographic locations and scale of operations, while acquiring new value-added services

In just seven short years of existence, this industry in India has crafted its own unique strategy, combining supply-side restructuring with aggressive demand generation. The result has been robust growth.

Indeed, business process outsourcing and information technology-enabled services—or BPO-ITES as industry-wallahs call it—have seen their exports soar to US$4.5bn in the fiscal year ended March 31st 2005 from US$3.1bn in the previous fiscal 2003/04, according to the National Association of Software and Service Companies (Nasscom), an independent coterie of technology companies. It expects BPO-ITES exports to reach US$6.3bn by the end of fiscal 2005/06, registering a 37% year-on-year growth. In fact, a 2005 report by Nasscom and McKinsey & Co, an international consultancy, says India is in a position to capture about US$60bn of the BPO export market by growing at 25% year on year till 2010.

Propelling this growth is the industry’s steady expansion of the scale of its operations, an increase in the breadth and depth of existing service lines, and the addition of newer domain-specific, value-added business services. BPO-ITES companies are also establishing new sourcing centres in second-tier Indian cities and, more significantly, in overseas locations.

At home and abroad

For example, Genpact has its head office in Gurgaon, Haryana state, next to New Delhi, and a presence in Jaipur in the western state of Rajasthan. But it also has a presence in Hungary and Romania. Progeon, the BPO subsidiary of Indian IT bellwether Infosys Technologies, has facilities in Pune in western Maharashtra state, as well as in Brno in the Czech Republic. Similarly, the BPO arm of Mphasis-BFL, a leading IT solutions and services company, has established a centre not only in Mangalore, a coastal town in the southern state of Karnataka, but also in Tijuana, Mexico.

The expansion to satellite towns and newer cities within India offers several incremental benefits such as better access to talent, and lower costs for location and administration. It underscores the industry’s growing maturity in managing the changing cost dynamics and the greater drive towards efficiency and scale.

The expansion overseas reinforces the point. Mphasis’s delivery centre in Tijuana offers Spanish-language, customer-interaction services. Progeon’s Czech facility offers services in 11 European languages, while IBM-Daksh’s call centre in Manila acts as a contingency site. WNS Global Services has set up a facility in Sri Lanka, while EXL Services, a top-tier BPO services provider, plans to set up centres in South Africa, China, Dubai and Malaysia, according to Rohit Kapoor, the company’s president.

Ananda Mukerji, chief executive of ICICI OneSource, the BPO arm of financial-services giant ICICI says, “We are country agnostic. Our strategy is purely customer-led. For instance, one of our customers wants us to open a facility in Ireland and another in Vietnam; yet another in Reno, Nevada [in the US]. And that is where our next centres will be.”

All these are green-field ventures, established to act as alternate sourcing destinations. Yet, in many ways, they represent a sort of coming of age for the industry, a willingness to move beyond the comfort zone of Gurgaon and Bangalore in Karnataka, and an ambition to transcend the ‘made in India’ moniker to that of being ‘global and diversified’.

A new confidence

The overseas acquisitions these firms have made are noteworthy, however, not only for the location options and language capacity that they bring, but also for new customers, new domains and new revenue. A case in point is the November 2005 acquisition by Tata Consultancy Services (TCS) of Comicrom, a market leader in Chile in banking and pensions BPO. A privately held company with more than 1,200 employees, Comicrom provides cheque-processing services to banks, insurance companies, pension funds, government bodies and other large corporations in Chile.

In a press release announcing the deal, Gabriel Rozman, president of TCS Iberoamerica, the arm that oversees business in the Spanish- and Portuguese-speaking parts of the world, said: “Comicrom’s long-time presence of over 25 years and strong client base gives TCS ready access to local knowledge of the market, as well as provides us with deep customer relationships to help drive growth in this entire continent.”

A month earlier TCS had announced plans to buy the life and pension businesses of the UK-based Pearl Group. The two purchases strengthen TCS’s presence in the global pensions industry. N. Chandrasekaran, global head of sales and operations at TCS, was quoted in a press release as saying, “The acquisition gives another fillip to our strategic initiatives in the transaction-led BPO for the pensions and insurance sector following the Pearl transaction in the UK.”

WNS, Mphasis also buy overseas

TCS is not alone. A day after TCS’s Chilean acquisition, WNS Global Services acquired US-based Trinity Partners, a provider of BPO and IT business solutions to financial institutions. WNS got access to Trinity’s six clients, including a US$60m, five-year outsourcing contract with wholesale lender, US-based First Magnus Financial, and Trinity’s 500 employees.

The new business will deliver multiple services across the mortgage-value chain, including lead qualification, loan set-up and processing, risk management, post closing, documents indexing, quality control and customer service. It will also deliver solutions to the lender services sub-vertical, including title, escrow, credit and insurance appraisal. Earlier WNS had acquired UK-based Town and Country Assistance, and US-based ClaimsBPO, leading to the creation of new service lines in insurance and healthcare, respectively.

In a similar transaction in March 2005, Mphasis-BFL bought Eldorado Computing, a US-based healthcare benefit management firm that specialises in claims-processing and benefits-management solutions. According to Alok Misra, the company’s chief financial officer, “The acquisition is part of Mphasis’s overall business strategy to strengthen our footprint in the US and to enter the healthcare insurance and payment market.” Like TCS-Comicrom, the deal will provide Mphasis an opportunity to offer platform-based, subscription-type BPO services. It will also give Mphasis access to the 128 clients representing 2.5m members that Eldorado serves. More importantly, it will open a new target market consisting of third-party administrators and small- to mid-sized insurance companies.

In fact 2005 saw many such mergers and acquisitions. In April 2005, Customer Corporation, a BPO company, took over all the eight call centres of MCI, a global telecommunications giant, thereby gaining access to directory assistance and operator services, and the relay-service assets of the telecommunications company, and gaining a presence in the US and the Philippines. In August the same year, Genpact had announced the acquisition of Creditek, a leader in the Order-to-Cash Cycle and Enterprise Receivables Management, based in New Jersey in the US.

A month later, OfficeTiger, a US-based BPO services company with operations in Chennai, India, bought MortgageRamp, the real-estate mortgage finance back-office company of General Motors Acceptance Corporation Financial Services. In addition to the revenue, the deal gave OfficeTiger access to 150 major commercial and residential financial institutions worldwide and a skills base of financial analysts, real-estate professionals, loan underwriters, property inspectors and analytical architects, as well as a nationwide network of more than 2,000 loan and real-estate auditors, underwriters and servicing support professionals trained in the firm’s processing methodologies. (Separately, it is learnt that RR Donnelley, a US-based company which is a leading global provider of print and related services, has recently signed a definitive agreement to acquire OfficeTiger for about US$250m.)

The trend is pervasive and even relative newcomer Adventity, a 1,200-strong BPO services provider based in Mumbai, has been quick to grasp opportunities. In a strategic move aimed at expanding Adventity’s footprint in mortgage services, as well as geographic coverage, Adventity acquired Profolio Home Mortgage, a leading mortgage broking company, in August 2005. Says Vivek Arora, head of transaction processing, and a co-founder of Adventity, “The skill-sets available in the Indian market, coupled with the cost pressures that US mortgage players face, presents the US mortgage market a huge opportunity to leverage India as an offshore location.”

ICICI OneSource’s acquisition

While these are still early days, initial results are positive. ICICI OneSource’s acquisition a year ago of Account Solutions Group (ASG), a US company specialising in third-party debt collection, has proceeded well. Ananda Mukerji of ICICI OneSource says, “The acquisition was in line with our strategy to aggressively expand our service offering and continuously deliver value to our clients. It has proceeded as per plan and today, a year later, its employee base is up from 500 to 650. We can now offer a full suite of collections capabilities: customer acquisition, billing, customer service and collections.”

The acquisition of ASG enabled ICICI OneSource to add three of the top ten US credit-card issuers to its client list, provided it with two global delivery centres in Buffalo and New York, and gave it more than US$25m of revenue. Mphasis’s Mr Misra says that thanks to the Eldorado acquisition, Mphasis was able to add five more clients and cross-sell additional services to Eldorado’s existing client base.

It has not been all smooth sailing, though. Issues pertaining to cultural compatibility, personality clashes, and control all surface periodically. In fact, according to Mr Misra, one main problem is getting the management of the acquiring company to stay motivated. “In an all-cash deal, the management and founders have all probably received significant payouts, and there is a tendency to check out,” he says. “Creative structuring, in terms of deferred payouts and stock-swaps are clearly better ways to manage these situations.”

Other problems relate to flawed execution, where the intended benefits of the acquisition are not realised. This was the case of Ephinay’s acquisition of Core3, a US-based finance and accounting player.

The drivers are many

Despite the difficulties, the trend is bullish. Clearly, increased capacity, varied and specialised skill-sets and product offerings, as well as access to customers and revenue are all compelling benefits for Indian BPO companies. Moreover, a global delivery model and particularly a US presence help to create a defence against any future backlash against outsourcing.

However, the most important reason is having references. “In most situations there is a chicken- and-egg situation,” says Mphasis’s Mr Misra. “The client does not give you the business because you do not have a track record. An appropriate acquisition helps surmount that problem. It buys you ‘referenceability’, significantly accelerating the sales process.”

While all these reasons strengthen the case for overseas acquisitions, another key driver is valuation. High valuations of the Indian firms, juxtaposed against the eroding margins of their overseas counterparts, make the acquisition environment favourable for Indian companies. In the US, firms are available at valuations as low as one to two times revenue, whereas in India this ranges from three to six.

A related factor is the extremely conducive capital market, both domestic and global, along with convertible debt and private-equity funding options, that makes it much easier for Indian companies to finance overseas acquisitions. The Indian government, too, has relaxed regulations for overseas acquisitions and on the limits that Indian banks face finance these.

Fending off rivals

However, the most pressing reason for going overseas is global competition. Unlike the IT industry, which had the luxury of 12-15 years of growth uninterrupted by foreign competition, the Indian BPO industry has had to deal with dramatically compressed time frames, and global competition virtually from its infancy.

Over the last two years, international companies like EDS, Accenture and IBM Global have all been aggressively scaling up their offshore BPO presence, and already have significant headcount in India. In addition, countries like Poland, Brazil, South Africa and Russia are trying to replicate the Indian BPO model.

Against this backdrop, it is the ability of India’s BPO-ITES industry to scale up and stay ahead of the game that will determine its share of the global outsourcing market in years to come. So far it looks as if it is on the right track.

SOURCE: BUSINESS INDIA INTELLIGENCE.