Bangalore: In February, data storage firm Network Appliance Systems India Pvt. Ltd, or NetApp, “bought” 30 engineers from partner Symphony Services Corp. India Pvt. Ltd which builds software products or parts of them for it.
With this, NetApp joined a growing list of companies that includes Dendrite International Inc. and Oracle Corp. which have exercised the transfer option or buying out people from their partners in a so-called build-operate-transfer, or BOT, deal.
Vikram Shah, president of NettApp India, said the takeover was necessary as the work being handled by the team at Symphony became critical to the company’s business. “It was more of a strategic decision when we felt that the application integration project (that was outsourced to Symphony) has become vital for us,” Shah said.
Traditionally, firms such as Dendrite and Oracle sign deals with India-based product development firms which set up dedicated development teams for them, run the operations for a specified period (usually three-five years), and eventually transfer the teams to them. But it’s only now that the T-factor in BOT is gaining momentum. Depending on the terms of the deal, the vendor is compensated for the transfer as it entails loss of revenue and employee resources.
“As outsourcing deals struck some three-four years earlier come up for renewals, we see more such transfers,” said Pari Natarajan, chief executive of Zinnov Management Consulting Pvt. Ltd, a research and consulting firm that advises clients on their product development outsourcing strategy.
In the past 18-24 months, firms such as Dendrite, SAP AG and Oracle have bought development teams from outsourced development partners. In early 2007, Dendrite took over a team of 325 engineers from its development partner Aztec Software Ltd after it decided to set up its captive development centre in Bangalore.
Dendrite was subsequently acquired by French firm Cegedim SA in May 2007.
Following its acquisition by SAP in 2006, Business Objects bought over a team of 300 from Ness Technologies Inc., which runs a 2,700-engineer development operations in India. In 2007, Ness started transferring a team of more than 100 engineers to Oracle after it acquired Portal Software.
Shashank Samant, head of North American operations for Ness, said transfers happen when clients think they are going to save more money by taking over the teams or when they feel they are losing control over core operations. Mergers and acquisitions are another reason for transfers, Samant added. He said Ness has done some six transfers in the past five years, the latest being to Portal Software.
For NetApp, the recent transfer marks the first time it has taken over a team from a vendor and integrated it into itself. Instead of terminating or extending the contract, “we felt it was better to buy the team,” Shah said, thus saving time and investment in re-building a new team that would have “slowed us down”.
However, NetApp continues to outsource its software development to Symphony and half a dozen other Indian vendors. “Our engagement with Symphony continues, as they have a large outsource team of 60 people in Pune working for NetApp,” Shah said. The pricing details for the transfer have not been disclosed.
Ajay Kela, chief operating officer and managing director of Symphony Services, denied that NetApp had bought a team from the company.
The BOT delivery option provides all benefits of a fully outsourced service and additional benefits, such as a complete control over billing, a faster learning curve through on-the-job training, and access to expertise, skills, innovation and technologies that would not otherwise be available.
“Earlier, the BOT model helped firms mitigate the risk of setting up operations in India, but now, after they have reached a maturity level in their operations here, they are taking over the teams rather than continue with the outsourcing arrangement,” said Chandramouli C.S., engagement manager, advisory services, Zinnov.
Typically, the client is billed between $3,700 and $4,500 a month for every outsourced engineer of the vendor. Depending on the nature of the contract, the transfer is priced on a “sliding” scale, according to Chandramouli. If the team is transferred after two years of the contract period, the client has to pay approximately three months’ salary per employee. After three years, this comes down to an average of two months’ salary. “It could be that after four years of the contract period, the vendor has to transfer the team for free,” Chandramouli explained.
BOT also gives customers an opportunity to get an offshore development centre built to suit their needs. They also have access to a set of dedicated personnel who are hired and trained in collaboration with the client. The staged process helps the client evaluate the risks involved and check the feasibility before investing in a full fledged manner.
On the flip side, BOT deals could involve a sudden loss of revenues and resources for vendors. After the Dendrite deal, Aztec has not signed any BOT contracts as such deals bring in an element of uncertainty in revenue cycles, said V. Sundarajan, the company’s chief financial officer. Dendrite accounted for 10% of Aztec’s revenues when the transfer happened and the vendor’s growth was impacted.
“Last year, only 20% of our contracts signed were based on BOT model compared to four years ago when almost all deals were BOT model. However, larger companies have increased outsourcing to OPDs like us, and we expect majority of contracts that will come up for renewals will not be based on BOT model,” Kela added.
However, the model continues to attract some vendors and clients. “We signed six new deals last quarter on BOT model,” said Samant.
And even Aztec’s Sundarajan said that structuring these deals better could make them more attractive to companies, even those such as his that have been previously stung by them. “We are open to look at such deals if the terms are good and the transfers are well planned,” Sundarajan added.