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BPO Cross-Border Deals Why are Indian BPO firms on an acquisition spree overseas?
Snigdha Sengupta Feedback to this article | e-mail this article

It isn't just Bhargava. The global travel bug has bitten the entire business process outsourcing (BPO) industry. Almost every CEO says he is now following an excruciating travel plan. With reason too. In the last three months, BPO companies have quietly signed five deals overseas to buy out BPO firms in the US and the UK. And most experts reckon there's plenty more to follow. Godrej Industries has just announced that it is in talks to acquire the US-based Outsource Offshore Inc. Delhi-based vCustomer is currently in talks with potential acquisition targets in the US. It plans to deploy close to $20 million to buy a 1,000-seat facility. Bangalore-based 24/7 Customer is evaluating more than one acquisition in the US. Mumbai-based Epicenter Technologies is scouting around for acquisitions to beef up its front-end capabilities and is looking at $10 million-15 million revenue companies. And the ChrysCapital-backed Ephinay, one of the earliest niche BPO firms to emerge in India, bought the Phoenixbased Core3 last July and has now hired San Diego-based acquisitions specialist Ascent Partners to scout for new targets.

(from left to right) Naresh Ponnapa, CEO, Indecomm Global Services; Ananda Mukerji, CEO & MD, ICICI OneSources; Neeraj Bhargava, CEO, WNS Group

Last week, Neeraj Bhargava was at the Wankhede Stadium in Mumbai, cheering the Indian cricket team as they beat world champions Australia. This was a rare occasion when the 40year old CEO of the WNS Group, the largest third-party Indian BPO firm, let his hair down and enjoyed himself. "I seem to spend most of my time in an airplane these days," says Bhargava. Much like in his previous stint as a McKinsey consultant, Bhargava says he ends up criss-crossing the globe four days a week, before getting back to his home base in Mumbai by the weekend.

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Generic Plays
Group competition from MNC BPO players such as Convergys, Accenture and IBM is forcing home-grown companies to quickly build up a global delivery model and highmargin services to sustain growth rates.

Ananda Mukerji, CEO & MD, ICICI OneSource

P.V. Kannan, founder and CEO, 24/7 Customer

This is an important turning point for the seven-year-old Indian BPO industry. Indian BPO firms have made 14 acquisitions in the last three years (See 'The Deal History'). They range between $1.5 million to $110 million - far, far smaller than many of the headline-grabbing global deals struck in recent times by Corporate India's heavyweights - Reliance (Flag Telecom, $211 million), Tata Motors (Daewoo, $102 million) and Tata Steel (NatSteel, $286 million). But then, most BPO firms haven't been around for more than four years and only a handful - like Wipro Spectramind, EXL, WNS and ICICI-OneSource - have turnovers exceeding $50 million. Contrast this BPO buying spree with what their older and bigger cousin the $15.6-billion plus Indian software services industry - has been able to achieve, and the comparison suddenly looks interesting. The $1.4-billion Indian third-party BPO industry has invested close to $300 million in buying assets overseas. In contrast, frontline IT services firms have collectively invested less than $ 300 million in overseas acquisitions - despite having hordes of cash. The biggest deal that an Indian IT services firms has struck so far is for $68 million. Yet the tenor is no different. Over the last decade, frontline IT services firms relied on organic growth to drive topline growth and profitability. Through the 1990s, the IT services firms set up global delivery centres bit by bit, on their own, across the world, largely to pilot work that would eventually move to India. Over the last four years, the IT services firms have changed tack and are scaling up these centres to provide customers with a blended model: an on-shore, near shore and off-shore capability, depending on what customers want. For the BPO industry though, the time horizons have been dramatically compressed. "The IT industry had the luxury of nearly 12-15 years of growth, uninterrupted by foreign competition. BPO has had to compete with global players right from day one," says Ananda Mukerji, CEO, ICICI OneSource. Over the last two years, global companies like IBM Global Services, EDS and Accenture have been aggressively scaling up their offshore BPO presence in India. Already, IBM and Accenture have ramped up to a headcount of over 10,000 and 5,000, respectively. Says Mukerji: "In two years, every large global BPO company will have a presence in India." This is primarily being driven by customer demands for a blended offshore-onshore delivery solution.

US-India Niche Plays

These companies focus on highmargin niche segments such as healthcare, market research, etc. The acquisitions are essentially to buy technical knowhow to improve processes and front-end teams.

Naresh Ponnapa, founder & CEO, Indecomm Global

Anshuman Kankan, founder, Ephinay

In the past, when a customer wanted an offshore solution, an IBM or an EDS would partner with an Indian vendor. But things took a turn for the worse, when recession hit the US economy and customers began to squeeze billing rates. Suddenly, offshoring seemed a winning proposition, especially given the cost

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arbitrage that countries like India offered. For the global players, margins in the US were no longer as lucrative as they used to be. They have dropped to 6-7 per cent over the last three years. So, instead of passing on revenues to Indian companies, it made more sense for the global firms to set up their own offshore operations in India and take advantage of the cost arbitrage. IBM Global Services's acquisition of Daksh eServices for Rs 700 crore this year was the signal that the ground rules in the BPO industry had changed forever. Even as the global BPO giants begin scaling up in India, the third-party Indian BPO firms have to now figure out how to stay in the race. Their relatively small size is a serious handicap. Barring the bigger players - WiproSpectramind, EXL and WNS - none of the others today are anywhere close to the requisite scale. "To compete with the global players, you need a headcount of at least 40,000 globally," says Mukerji, whose firm's headcount today is just a tenth of that number. Without scale, it will not be possible to bring in the blue-chip contracts. The ability of Indian BPO firms to scale up and grow will decide how much of the $1-trillion BPO pie they will be able to bite off. There are, of course, varying estimates of how much of this work will be offshored to India. Nasscom expects 70 per cent of the work that will be offshored to flow to India. Tech research analyst Gartner sees India continuing to retain its 80 per cent share of the global offshoring market. Last year (fiscal 2003-2004), the Indian BPO industry earned $3.6 billion in revenues. Third-party companies accounted for 40 per cent of the overall pie. But competition is increasing. Billing rates in the US are already under pressure, adversely impacting margins. In the US, there is already a big shake-out among the small- and medium-sized BPO firms. Unlike global firms like Convergys and IBM that are expanding to set up offshore delivery centres in countries like India, these relatively smaller BPO firms - typically unlisted companies with turnovers of under $50 million - do not have the cash flow to expand overseas. The landscape in the US is littered with hundreds of such firms, with 500 to 1,000 seats. These firms typically work with a client base of seven to eight local marquee clients and also take up short-term project-based work. Today, with billing rates under pressure, they have two clear options: shut down or partner an overseas offshore service provider.

THE DEAL HISTORY

When Where Acquiree Acquirer Value Why May 2002 : Belfast, Ireland Apollo Contact Centre (British Telecom arm) HCL Tech $11.5 million Onsite facility to expand services to European market. $31 million revenues for three years from BT.

August 2002 : Ipswich, UK Town and Country Assistance WNS Not available To enter the insurance claims processing market.

April 2003 : Singapore Embrace IndiaLife Hewitt Not Available To expand presence in the AsiaPacific.

July 2003 : Phoenix, USA Core3 Ephinay Not available To acquire customers and consulting experience, move up the value chain and get a US delivery centre.

September 2003 : USA Claims BPO WNS Not available To enter the US healthcare market.

October 2003 : Detroit, USA CorPay Solutions Datamatics $9 million Set up US front-end and ramp up finance and accounting offering.

November 2003 : Philadelphia, USA Upstream Godrej $6 million To enter the $800-million travel services market in the United States.

November 2003 : Texas, USA Aegis Communication Corp. Essar (with Deutsche Bank) $28

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million Access to blue-chip telecom and financial services firms. 5,000 seats and 11 centres in the US.

December 2003 : San Francisco, USA Simpata Indecomm Not available Establish US delivery centre.

September 2004 : Illinois, USA Pipal Research ICICI OneSource (51 per cent stake) $1.25 million-1.5 million Enter the high-margin research and analytics market.

September 2004 : New Jersey, USA Source One Communication Hinduja TMT $8.5 million Centres in New Jersey, Toronto, Manila; multi-lingual capabilities in French and Spanish.

September 2004 : Illinois, USA Cambridge Integrated Services Scandent $110 million Enter the insurance claims processing segment, expand presence to Australia and the United States.

October 2003 : New York, USA Accounts Solutions Group (ASG) ICICI OneSource $40 million45 million 500-people US delivery centre to enter the high-margin, late-stage collections market.

November 2004 : London, UK Devonshire Group OfficeTiger Not available Expand capabilities to consulting and staffing services.
Source: Nasscom and media reports

Now, not too many overseas BPO industries have the depth or the maturity that the Indian BPO industry has developed. An exception would be Australia which has enough BPO firms with the maturity to compete in verticals like high-end financial services. However, while a few of the larger Australian firms undertake offshore work from the US, the industry has not been able to market Australia as a viable offshore location as aggressively as India, says a senior Gartner analyst. That's why most of the M&A deals so far have been bagged by Indian BPO firms. "In the US, there are firms available at valuations as low as one to two times revenue," says Bhaskar Menon, head, Msource BPO. (In India, it ranges between three and six times). These are primarily mom-and-pop shops. So, while the valuations are certainly attractive, sometimes poor due diligence can end in customers walking out as soon as the transaction is done, says Navanit, CEO, Epicenter. Despite the pitfalls, the benefits are compelling for Indian BPO firms. At one level, these M&A deals will provide the momentum to continue growing at 40-50 per cent - and thereby gain the scale to stay in the race. Also, third-party Indian BPO firms now get a chance to move up the value chain, and take on more complex and higher margins segments as well. Besides, a global delivery model would also help them stem some of the criticism in the US against offshoring back office jobs. In fact, an onsite presence is now critical. "Having an American face to an Indian company, which also demonstrates that it can create jobs in the US, helps create a defence against the backlash. It also takes care of de-risking issues that have arisen post 9/11. Customers are more comfortable when they know that you have a business continuity plan with an onshore presence in the US," says Navanit. "A front-end run by Americans can help reduce the sales cycle which could otherwise run into six to 12 months," says Naresh Ponnapa, founder and CEO, Indecomm Global, a niche BPO based in Bangalore. There is no common pattern in the way Indian BPO firms are sequencing their M&A activity. The strategies are dependant broadly on the category into which the firms fall. Different Strokes, Different Folks There are two broad categories of Indian players who are pushing through plans to offer a blended onshore-nearshore-offshore offering. In the first category are generic players, pursuing acquisitions to enter new markets and expand their domain capabilities. In the second category are companies typically known as niche players - most of these were started by US-based entrepreneurs of Indian origin, are usually headquartered in the US, and have set up their back-end operations in India. These companies

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are typically funded by venture capital money originating in the Silicon Valley and have technology as the backbone of their operations. Consider the case of ICICI OneSource. It belongs to the second generation of third-party generic BPO companies, which emerged sometime around early 2001. Like its peers, ICICI OneSource is at a critical stage in its evolution. Though it has used a combination of organic and inorganic methods to reach critical mass, it still lags way behind the first generation players like Wipro Spectramind, Daksh eServices and EXL Services, who have used a consistent policy of organic growth to achieve scale. ICICI OneSource's first priority was to quickly reach critical mass. Having done that, it has bet on a series of acquisitions overseas to build global scale. "From our perspective, what we need is to be of a certain scale to play in the big market. Today, nobody really has the scale to compete with the global players. So acquisitions form an important part of the strategy to grow scale," says Mukerji. ICICI OneSource now has a headcount of 4,800 and a portfolio of 24 customers. Is that enough? Not quite. To make matters more difficult, the company will soon have to contend with increasing competition from Indian IT majors Infosys, Satyam, TCS and HCL - who are finally getting aggressive with their BPO plans. So what does Mukerji have up his sleeve? He has just hired an M&A specialist, Rajesh Subramaniam, to prospect and evaluate opportunities. According to Mukerji, the company's acquisitions have been focused on enabling it to move up the value chain in financial services, telecom and utilities. "The opportunity that we have within these areas is very large. If you look at the acquisitions we've done so far, it's been largely around these verticals," he says. So the company now has capabilities in four generic areas - customer acquisition (CustomerAsset), customer fulfilment, customer service (FirstRing) and collections (ASG). "And we've added research and analytics (Pipal) as an overlay because every piece of what we do can use research," explains Mukerji. The idea is to cross-sell a large bouquet of services to the same customer. Not every generic player can afford to stay focused on just a few verticals. Take WNS. The former British Airways subsidiary started out with historical capabilities in the airline and travel space. In 2002, WNS acquired the Ipswich-based Town and Country Assistance to gain a foothold in the auto insurance claims management segment - and gradually reduced its dependence on the travel and airline segment. "Prior to the Town & Country acquisition, the travel and airline business accounted for 97 per cent of our revenues. Now it is about 30-35 per cent," says Bhargava. Having acquired a set of reference customers, WNS took the next big step: offer a delivery centre service in the UK. "Having a UK presence also gave customers who wanted to approach India through a UK company an opportunity to do so," says executive chairman David Tibble. Since then, WNS has moved 50 per cent of Town and Country's business - now WNS Assistance - to India. Tibble sees 70-75 per cent of the business being serviced out of India over time.

Late Entrants
BPO is a new focus area for industrial groups like Godrej and Essar. Overseas acquisitions enable easy access to customers and capabilities. Singaporebased Scandent views India as the hub for a global delivery presence in BPO.

Adi Godrej, chairman, Godrej Industries

Ramesh Vangal, founder & CEO, Scandent Group

Last year, when WNS was looking to enter the US, it relied on yet another acquisition. This time, it bought the US-based ClaimsBPO, which facilitated its entry into the US healthcare market. "Healthcare accounts for 20 per cent of the US economy, " says Bhargava. In the future, he feels his company will evolve into a large diversified generic player. In other words, WNS will cover the entire gamut of services in a certain vertical. But to keep his growth rates from flagging, Bhargava says he plans to add one to two new verticals every year, by relying on an aggressive acquisition strategy which will be supported by strong organic growth. Perhaps taking their cue from the early movers, others have also started moving towards acquisitions overseas to keep the growth momentum going. Bangalore-based 24/7 Customer has, in the past, articulated clear intentions to go after more than one acquisition in the US. Flush with the $22-million funding from Silicon Valley private equity investor Sequoia Capital, the company is looking to acquire midsized BPO companies which will enable it to deepen its domain expertise within its three related verticals -

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banking, finance and insurance. It currently runs a 4,000-strong operation in Bangalore and plans to ramp up to 7,000 people by the end of the fiscal. Much of this expansion will come inorganically. P.V. Kannan, founder and CEO, was not available for comment. Delhi-based vCustomer is also looking at setting up delivery capabilities in the US and in Asia. Founder and CEO Sanjay Kumar says: "Another 1,000 seats in India is not of much value to customers. All our customers want to offshore and have onshore needs as well." The company already has 6,000 people in India. He also hopes to enter one or two new verticals through acquisitions, to add to the company's existing offerings - tech support and retail. "I can offer a blended US-India solution and deepen my relationship with clients, and customers are now willing to pay a US premium." Of late, Kumar has been making frequent trips to the Philippines to evaluate acquisition prospects. His intent is not to acquire domain skills, but to buy out firms that will provide the same skillsets available in India - at almost comparable costs. "The Indian market has a huge talent deficit right now, and that is making costs go up. Out of every 50 agents that we hire, 20 are qualified but expensive, because they are poached from competition. The balance 30 are just not up to the mark, but have to be recruited because we need scale," says Kumar. According to Nasscom, there is only a 4 per cent difference in personnel cost between the Philippines and India. Expanding verticals and moving up the value chain is only one step towards the end game. Equally important is to move towards higher net margins. To do that, companies like ICICI OneSource and WNS have already started tweaking the pricing structure from the current full-time-employee (FTE) model to a per transaction model. The trick is to first get into high-end, non-voice processes. Forty per cent of ICICI OneSource's total business is already on the non-FTE model. This also means that the percentage of transaction processing services as a component of the overall service offering will increase. "We would like the voice and data mix to change. It improves my asset utilisation and that has an impact on margins," says Mukerji. In fact, most of the second generation generic and niche players have maintained a strong focus on high-value, transaction-based services. WNS has always kept voice services under 20 per cent of its overall services. The niche plays have also been busy doing acquisition deals, but their emphasis has been on technologyled companies. Take, for instance, Indecomm Global Services which started operations with $5 million in private equity funding from Goldman Sachs-backed WestBridge Capital Partners. In December 2003, Indecomm acquired a technology company called Simpata in San Francisco. CEO Ponnapa says the acquisition gives the company access to a technology platform which will enable it to offer higher-end services in the healthcare and benefits administration segment. "It also gives us a credible entry point into Fortune 100 companies," says Ponnapa. He claims Indecomm has crossed the $50-million mark, thanks to its foothold in the US.

The global hotspots for M&A activity

North America & Canada
q

Mature pool of small- and mid-sized BPOs,mostly profitable but lack resources to go offshore. Deep front-end skills and access to customers.United Kingdom

United Kingdom
q

Strong skill base in high-end, transactionbased services but companies are unable to grow due to limited pool of workers.

Asia-Pacific
q q

Australia - Local BPO industry enjoys high customer comfort with the US market. The Philippines - Has high-end skills like claims processing, banking transactions. Culturally close to the US market.

But things haven't gone as smoothly for the ChrysCapital-funded Ephinay, which focuses on the finance and accounting space. In July 2003, the company acquired the Phoenix-based Core3 to move up the value chain into consulting and to gain a US delivery centre. Its founder and former head of India

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operations, Anshuman (Andy) Kankan, says that the early mover advantage that the company had in the F&A segment was lost due to bad decisions on the front-end on how to go to market. "Players like Progeon and EXL got into the F&A space much later, but have had quick success with customers because of greater sales reach," he says. The company has not added any fresh customers to the four or five it already has. Kankan says acquisitions are a must for Ephinay if it wants to scale up and compete. He recently joined a captive outfit in Gurgaon, but remains a small shareholder in the company. There is another breed of third-generation BPO firms that have jumped into the M&A race. Consider the Singapore-based Scandent Group, which was promoted by former Pepsico India head Ramesh Vangal and former McKinsey CEO Rajat Gupta. In September this year, Scandent acquired the Illinois-based Cambridge Integrated Services for $110 million - the largest cross-border deal by a BPO company of Indian origin. Cambridge will be merged with PeopleMind, Scandent's BPO subsidiary based in Bangalore. "India will be the hub of Scandent Group's BPO operation, and post merger, a disproportionate number of jobs will be concentrated in India," says Satyen Patel, vice-president, Scandent. Late last year, three Indian groups - Godrej, Essar and Hinduja TMT - made their entry into the BPO space. Again, their chosen route was overseas acquisitions. As things stand, there aren't too many good BPO firms available at the right valuation in India. An overseas acquisition, on the other hand, offers immediate access to customers. Essar bought an 80 per cent stake in the US-based Aegis Communication Corp., along with Deutsche Bank, last year. The acquisition gave it a 5,000-strong workforce and 11 delivery centres in the that country. Over time, they plan to gradually shift work to India to their back-end operation in Mumbai. The Endgame Players like ICICI OneSource and WNS clearly see themselves evolving into large-scale generic plays with global delivery and front-end operations in all the three major markets - the US, Europe and AsiaPacific. "India will continue to be a BPO proposition, but it will be global companies in India which will be running Indian BPO companies," says Mukerji. As he sees it, Indian BPO firms have no option but to globalise their operations. "Our roots will be in India. A major part of our operations will continue to be in India. But we will have big teams in other parts of the world, doing client servicing, business development and delivery," he says. For niche players, however, the end game is still not clear. Much will depend on whether these firms are able to raise the money to pursue acquisitions and build their global delivery platforms. The niche segment would see a natural consolidation where many of these companies would probably find synergies with a large BPO or IT services company and become attractive acquisition targets, says K.P. Balaraj, MD, WestBridge Capital. "From an investor's point of view, the most likely exit option would be to sell its stake to a larger IT services or BPO player," he adds. WestBridge has investments in a number of niche plays, including Indecomm. For third-generation BPOs like Godrej, the aggression and drive with which they snag and quickly integrate overseas targets with a back-end in India will make the crucial difference. Those that can do it may hope to make up for the lost time. Indian BPO firms may have lost a bit of the early advantage to global BPO firms. But a dogged M&A drive could well give them a fighting chance to stay in the race for a healthy share of the global outsourcing pie. Share your comments

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