Few eyebrows were raised when Plano, Texas-based outsourcing major EDS announced its intent to acquire majority stake in MphasiS BFL, a Bangalore-based IT and BPO services company with revenues in the excess of $170 million in 2005. From early March, the Indian media has been reporting that EDS was in talks for a possible buyout of the stakes of Barings Private Equity, which holds a majority stake in MphasiS BFL.

EDS, in a technology conference earlier this year, had announced that it was seriously looking at the inorganic path to ramp up its offshore capability in India, apparently to catch up with rival North American vendors IBM, Accenture, and a much smaller ACS.

If EDS manages to clinch the MphasiS deal — the offer is conditional, and is subject to EDS getting a majority 52% that it is seeking — it would keep its promise to the shareholders.

That will put the pressure on two other services companies — much smaller in size though — Capgemini and Atos Origin (who had also divulged their plans to ramp-up offshore operations in India the inorganic way, in the same conference). All the three companies had said they intend to acquire midsize Indian companies to increase the head count in India.

Surprising it may seem, but not many American and European outsourcing companies have taken the inorganic route to scale up their India delivery. In fact, seven out of 10 M&A deals that involve India-based companies are outbound, agreed all panelists — industry executives and venture capital/private equity investors — in a discussion on M&A, organized sometime back by the Indian IT software services association, NASSCOM.

That does not mean that American firms have not acquired companies in India. But in most cases, skill acquisition has been the objective, rather than ramp-up. IBM’s $160 million acquisition of Indian call center firm Daksh in 2004 may seem big — it actually was — but the prime objective was not to build scale but to have a good B2C call center setup, traditionally not a stronghold of IBM. So was Perot Systems’ acquisition of Chennai, India-based Vision Healthsource, a year before. Perot, a strong player in the healthcare player side, saw a complementary skillset in Vision, specializing in BPO healthcare provider side. Keane’s acquisition of Gurgaon, India-based specialized BPO, Worldzen and Cnvergys’ acquisition of Hyderabad, India-based e-learning company, DigitalThink all tell the same story — skill addition; not scale.

Most American companies — IBM, Accenture, ACS, Convergys, HP and even Tier 2 players like Keane and Sapient — who have managed to scale up significantly in India, have done so in the organic way.

So when three players — at least two of which are seemingly on the recovery path after a long period of ill health — announce one after another that they want to ramp-up in India through acquisitions, it surely has caught attention.

The New NATO: No Alternative to Offshore

Currently, more than 60% of large outsourcing deals from the U.S.A. have a significant offshore component and the global service delivery capability of vendors is a prominent vendor selection criteria. It is thus obvious that the scale and operational capability of offshore delivery centers is a strategic lever for companies to compete. IBM and Accenture, as well as late-starter HP, have well been on the path to build a huge capability in India, to compete head-on with India-based vendors like Infosys, Wipro, and TCS.

As Paul Hermelien, CEO, Capgemini had put it, “India is very exciting. IT developments are a national pride. I think that we are doing extremely well (there), but a consolidation would help us. We are talking to several Indian companies.” Capgemini already employs about 4,000 people in India. However, it has plans to ramp-up its headcount to 10,000 by 2007.

EDS, the biggest among the three, will of course have bigger plans. MphasiS, which employs 12,000 people, based in India, U.S.A., U.K., China, Singapore and Mexico — on both IT and BPO deliveries — will give it a big push.

Now, all eyes are set on the other vendors who would like to catch up. Apart from Atos and Capgemini, CSC and ACS also need to do some catching up. John Powers, SVP, Commercial ITO, ACS, had told Global Services that ACS’ commercial business delivery would scale up significantly in India. Looking at the growth track record of the company — it has grown largely by M&A — it would not be surprising if it also looks at a serious inorganic strategy in India, which it has not pursued so far.

For the time being, however, all sort of permutations and combinations — the potential acquirers and targets — are being discussed. Of course, along with the valuation figures.