Slowdown opens new vistas for Indian outsourcing

Wednesday, August 19, 2009

By Arvind Padmanabhan and Fakir Balaji

The global slowdown and the financial crisis have ironically whetted the appetite of India’s $71 billion outsourcing industry for takeovers, as back-office arms of multinational companies, both large and small, are being acquired by them in steal deals.

And much to the delight of Indian buyers, the sellers have almost always awarded multiyear, multimillion dollar contracts to get the same services from them that has insured the jobs of millions

of Indian youth.

India is home to 300 captive outsourcing arms, or back-office operations set by companies to cater to their global businesses, each employing between 100-5,000 people.

If big-ticket deals involved financial powerhouse Citigroup and insurance major AXA which sold its offshore shops - also called captives in outsourcing jargon - to Indian firms, there were smaller

ones as well, such as the one with the California-based biotech firm BioImagene.

“The financial crisis has forced many global firms to sell their captives,” said Som Mittal, president of the National Association of Software and Service Companies (Nasscom), a representative trade body.

“Global enterprises, especially in the financial services sector, who had set up their captives in India during the boom period were forced to sell them to raise money in these hard times,” Mittal said.

Another reason, according to him, was that while enterprises may have cut their information technology budgets to save costs, their technology requirement has not come down. So third-party outsourcing like hiring the services of companies like Tata Consultancy, Infosys

or Wipro, was their best bet.

In October, Citigroup sold its Indian information technology operations to Tata Consultancy Services for $505 million, and awarded the Indian IT major a nine-year, $2.5 billion deal to continue

providing the same services back to it.

Two months later, the company also sold its business-process outsourcing unit to another IT major Wipro for $127 million, and gave the Indian firm a six-year deal worth at least $500 million in exchange.

Then, in May this year, it was the turn of US-based insurance major

AXA to sell its captive outsourcing firm, which employs some 600

people to Capita Group, as part of a 15-year, $836 million deal.

Among the smaller deals, biotechnology company BioImagene, based in Sunnyvale, California, transferred its research-and-development outsourcing centre in India to Symphony Services Corp.

The move was part of the company’s decision to replace most of its 50 overseas software developers with ones in the US. The price paid was no more than the cost of computer equipment in the Indian division.

According to research and consultancy firm Grant Thornton, the cross-border merger and acquisition deals involving Indian IT and IT-enabled firms increased by nearly 12 percent last year to $3.22

billion in 98 deals.

In 2007, such mergers and acquisitions were worth $2.88 billion over 159 deals. Accordingly, the average deal size in 2008 also increased to $32.86 million compared to $18.15 million, the consultancy said.

Nikhil Rajpal, principal with global IT consultancy Everest, said apart from the need seen by multinationals to pick cash from as many sources as possible, there were other reasons as well that made them offload their captives.

“Clearly in certain areas, where not much complex work is involved, captive arms are 15-30 percent costlier than outsourcing them to third parties,” Rajpal said.

“Earlier, there were fewer options available to overseas firms to outsource their work to Indian companies. Now the Indian outsourcing industry has matured. So some of these global companies have begun to opt out of captives,” he added.

Rajpal, nevertheless, maintained that the demand for captive units will remain, as trends over the past three months indicated that against 17 new outsourcing arms set up in India over the past three

months, only three or four captives were sold.

Giving the big-picture of the outsourcing market, GE Money chief financial officer Jatinder Bhasin said global corporations were bullish about third-party vendors, as back-office requirements were


“The global back-office industry will be worth about $200 billion by 2010-11, but captives will be able to account for only $33 billion,” he said. “This leaves a huge opportunity for third-party vendors,”

Bhasin said.

Yet industry experts said multinational corporations are not going to give up on setting up or expanding their captive outsourcing operations in India, as such in-house units have a significant edge.

They are part of the parent company, and can move up the value chain easily with in-house talent. “There are certain things captives will have access to which a third-party unit may not,” observed Morgan Stanley India managing director Nina Nagpal. This gives them a better

operational edge.

Wipro vice president Ramith Sethi shared the views. “We’ll see back-office captives in India due to easier regulations, technology convergence, human capital and cost-arbitrage. But these enterprises

will also outsource back-office functions to third-party to lower

August 20, 2009: 9:04 am

Yes, I agree with your article. It was a nice one. Really outsourcing was really affected with the recession badly.

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