The Hindu Business Line : Captive BPOs turning attractive for services cos

Value in acquisitions
In a slowing economy, the acquiring cos get large contracts, sustained revenues.
The recent meltdown in the US economy has facilitated the process of acquisition.
MNCs, faced with a financial crunch, want to unlock the capital.

Shamik Paul

Bangalore, Oct. 13 The next 12 to 18 months could see large Indian IT services providers making bids for captive business process outsourcing centres, the prelude to which was the recent acquisition of Citigroup Global Services Ltd by Tata Consultancy Services Ltd.

Industry experts believe one of the principal motivations for such buys is the large business contracts that come with it.

Also, it would help the IT services providers, who were late entrants into the BPO space, to scale up their BPO operations.

“They are literally buying contracts. It’s a natural business model,” said Mr Vinu Kartha, Principal, Tholons Consulting, an off-shoring advisory company. In a slowing economy, the biggest challenge is getting large contracts (5 to 7 years) as clients are unsure about their IT budgets. Smaller contracts fail to provide the certainty that comes with the bigger contracts, he added.

Citigroup Inc has signed an agreement for TCS to provide, through CGSL, process outsourcing services to Citi and its affiliates in an aggregate amount of $2.5 billion over a period of 9.5 years.

Mr Kartha said buying a captives excludes a vendor’s competition from getting into the account for a long time, while it gives sustained revenue to the vendor, almost like an anchor client. This helps the vendor to build scale around its BPO operations.

Attractive assets

Many of the large Indian IT services providers did not have significant capabilities in the BPO space, said Mr Siddarth Pai, Partner and Managing Director, TPI India, a sourcing advisory firm. Therefore, the captives are attractive assets for the service providers.

The recent meltdown in the US economy has facilitated the process of acquisition, and more such transactions would happen, he added.

Also, service providers are better prepared to deal with fluctuations in demand because they work with more than one client, unlike the captives who only caters to the parent organisation, said Mr Pai.

This is another reason why companies would want to outsource work to third-party vendors, he added.

In the past decade, many companies had invested in captives centres in India to show their commitment to offshoring; but now faced with a financial crunch they want to unlock the capital, said Mr Sudin Apte, Senior Analyst and Country Head, India Operation, Forrester Research. Hence, they would want to sell their captives.

“Service providers are looking for bulk business and this gives them the opportunity to grow their top-line,” Mr Apte said. The Citigroup Global Services was on the table for long, but the pricing was too high. “Now it makes sense to buy,” he added.

Natural progression

The diminishing value proposition in the Indian market is another reason for companies selling their captives.

“In the heavily competitive Indian market, it is a challenge to sustain the price advantage,” said Mr Kartha. Mr Pai said it was a “natural progression” for the captives, many of which have reached maturity.

Mr Kartha said in the next two years, many more captives would be sold. On being asked which other captives could be sold, he said, “It’s the usual suspects.”

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