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Business News/ Opinion / Online-views/  Caught in a stormy sea
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Caught in a stormy sea

There will be a lot of asset trading going on as firms shape themselves to encounter whatever their own vision of the digital future is

Photo: iStockphotoPremium
Photo: iStockphoto

In a recent column, I wrote about how we might expect to see some captives, or GICs (global in-house centres) as they are now called, come to the market as potential buys for service providers.

In that column, I had argued that the increase in money available with many business process outsourcing firms that have consolidated their position through mergers and acquisitions (or who have otherwise sold large portions of their business off to private equity, or PE, firms) would help them to systematically go about procuring captives that might be up for sale.

I now think that it is not just the increase in PE backing, but also macroeconomic factors around industry demand for certain types of ageing software assets that will result in an intensification of asset sales as companies attempt to redefine themselves as the new digital world approaches.

The prevailing wisdom among some equity analysts is that this view is not accurate and that the increase (there are more than a thousand of them in India, according to industry lobby group Nasscom) in the number of captives over the past few years points in the other direction—that there is less business to go around for the service providers since clients are building capability for themselves in India.

Clearly, there are two sides to this argument. But the difference always lies at the margin. That is, the issue does not lie in whether the glass is empty or full (it is a bit of both), but whether the glass is more full than empty or vice versa.

Now, introduce the idea of economic cycles and volatility into the argument. To make sense of this, think of the glass above as a tanker on the seas, laden with a liquid cargo in its half-filled tanks. As long as the seas are calm, the liquid in the tanks stays level, and the vessel can even stand more liquid being poured into the tanks, maybe even all the way to the top. But the moment stormy weather hits, the vessel is thrown about and as it lists from side to side, the contents of its tanks begin to spill.

Extending the analogy, we have thousands of Indian- and foreign-made vessels all at sail on the ocean of the world economy—some large and some small, each laden with different levels of liquid, or worse yet, liquefying cargo in its tanks. Each boat is likely to be affected differently when turbulence hits.

Some boats need to jettison some of their cargo—even if it is valuable—just in order to stay afloat. The owners of many captives are likely to find that the captive itself is a piece of cargo that can be safely handed off to another vessel, without causing much damage to the mother ship or the fleet.

Interestingly, this is also true of service providers. International Business Machines Corp. (IBM) has now had 17 consecutive quarters (that’s over four years) of revenue decline, and there are persistent rumours in the market that it is looking to shed some of its assets that have grown long in the tooth. It is attempting to redefine itself along the lines of artificial intelligence and super-fast analytics, as evident in its focus on Watson, IBM’s cognitive computing platform.

IBM is not alone in this shedding of old or excess cargo. Bloomberg and others have reported that Hewlett Packard Enterprise is considering a sale of some of its software assets such as Autonomy, Vertica and Mercury Interactive.

In my years as a sourcing consultant, I have had several discussions with both IT and business process outsourcing services providers as well as the owners of captives about the viability and sustainability of these centres in the long run, and have also been witness to asset sales by services companies that originally built or acquired software, hardware and network assets.

I was at IBM when that company sold the IBM Global Network (the company realized that it was no longer in the telecommunications business, and that networks were better left to the likes of AT&T and others). It has shown great deftness in selling off entire divisions in the past—including the famous sale of its PC business to Lenovo.

Such discussions happen all the time, but volatility is a large contributor and increases the intent of managements to make a sale. The volatility levels currently on display are among the highest I have seen in a long time. This is evident in the results of IT services firms.

The spread in results from Indian service providers—from HCL Technologies Ltd’s unexpectedly strong numbers to Cognizant Technology Corp.’s astonishing near 40% fall in growth rates—points to the fact that there will be winners and losers after this current storm at sea subsides. And there will be a lot of asset trading going on as firms shape themselves to encounter whatever their own vision of the digital future is.

Siddharth Pai is a management and technology consultant.

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Published: 17 Aug 2016, 01:14 AM IST
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