At first look, Infosys Technologies Ltd’s acquisition of a $38 million (around Rs177 crore) business process outsourcing (BPO) firm looks totally insignificant. After all, its revenues stood at $4.66 billion in the year till March. Besides, the upfront payment of $38 million will make practically no dent in the company’s cash balance of about $2.8 billion. Infosys will pay an additional $20 million based on business performance over three years.
Nonetheless, the acquisition of Atlanta-based McCamish Systems Llc makes immense sense for the company’s BPO practice. Infosys BPO Ltd, a wholly owned subsidiary of Infosys, reported revenues of $275 million last year. The acquisition, therefore, will add around 14% to the BPO business. What’s more, McCamish is a platform-based BPO company, which services 10 of the top 20 insurance firms in the US.
A platform-based BPO service provider develops and maintains the underlying application, hosts it and runs business processes on the platform. Given this higher level of control over the platform on which the services are provided, the service provider’s ability to extract meaningful savings for the customer is enhanced. From a customer’s point of view, platform-based BPO results in a drop in capital expenditure involved in hosting one’s own platform. This gets translated into operating expenditure, which can be more cost effective with the use of pay-per-use pricing models.
In times such as these, when information technology (IT) budgets have been under pressure, the outlook for platform-based BPO services is relatively good. Indeed, BPO services in general have done better than overall IT services during this downturn, as firms have sought to cut operating expenditure with minimal capital expenditure.
McCamish’s business metrics aren’t that impressive. It boasts 39 clients and annual revenues of $38.2 million, which implies rather low revenues on a per-client basis. Besides, the Infosys management has indicated that the company is not profitable at this stage, with the slowdown resulting in non-absorption of employee costs.
McCamish employees who are on the bench can now be utilized in Infosys’ various projects, especially since half of the company’s employees are IT professionals. There would be other benefits of being part of a large firm such as Infosys, in terms of financial backing and being able to market a much broader set of services to clients.
This is the company’s first acquisition in over two years. In the past two quarters, Infosys has been lagging behind peers such as Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp. in terms of revenue growth. Investors would be relieved to see that the company is open to using the inorganic route to drive growth. Needless to say, the company needs to do bigger acquisitions for meaningful results.
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