The back-office arms of India’s leading software service firms such as Wipro Ltd and HCL Technologies Ltd plan to acquire the business process divisions, including employees, of large US and European corporations as a means to acquire business following examples set by larger peers Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd.
In July, Infosys took over the back-office operations of Royal Philips Electronics, employing around 1,400 professionals in Chennai, Bangkok, and Lodz in Poland for $28 million (Rs115 crore). The Bangalore-based vendor will execute payroll processing and other financial services as part of the seven-year contract that will see it making revenues of about Rs1,000 crore.
TCS, in October 2005, won a Rs3,810-crore business process outsourcing services contract from UK insurer Pearl Group, taking over around 950 employees as part of the deal.
Indian BPO firms are pursuing such acquisitions “to gain more scalability, non-linearity in terms of growth and domain expertise,” said T.K. Kurien, chief executive officer for Wipro’s back-office business, who, too, is looking at similar global acquisitions.
The back-office arm of HCL Technologies, which acquired 90% of a BT Plc contact centre in Belfast for $11.5 million in 2001 and followed it up two years later with a $160-million services contract with the British telecom firm, is also keen on this route. “Such acquisitions help us get a jump-start and acquire the existing relationships, contracts, people of the customer. We are currently talking to other global players for such acquisitions in the future,” said Ranjit Narasimhan, chief operating officer of HCL Technologies’ global BPO operations.
Analysts say that this “buy revenues” strategy will “help Indian BPO firms clinch mega outsourcing deals that are in the range of $500 million and $1.5 billion. We will see a lot more of this trend as we look at larger deals,” said Sabyasachi S. Satyaprasad, research director at Bangalore-based offshore advisory firm neoIT.
Other than the back-office operations of Indian tech vendors, even pure play BPO players such as FirstSource Solutions Ltd are game to make similar buyouts. The Mumbai-based firm acquired the 400-strong captive centre of one its telecom customers with operations in Argentina in October last year. “This acquisition gave us a footprint in the Americas,” said Ananda Mukherji, managing director and chief executive of the firm.
Infosys aims to follow up its Royal Philips back-office buyout, which helped expand its presence in Europe in a big way and also brought it domain expertise, since this route proves cheaper. “The value we ended up paying for this business was much lower than if we had not taken over people and other assets as part of the acquisition,” said Amitabh Choudhary, chief executive of the Infosys BPO business.
Such deals do have their sh-are of risks.?“Assets can beco-me a liability when there are integration challenges in terms of making the two entities wo-rk together,” said neoIT’s Satyaprasad. Also,?said Wipro’s Kurien, the benefits of such deals are not sustainable unless the business can be expanded rapidly. “It’s a short-term measure if it’s not a scalable?proposition,”?he?said, adding that Wipro is following a conservative approach to the model.