Mergers and Acquisitions (M&A) in the Business Process Outsourcing (BPO) industry, particularly in India, have acquired a momentum and scale perhaps unprecedented in any industry since 2003. Dozens of deals worth billions of dollars have taken place over the past few years with much more to come. Research by ASSOCHAM, the Indian industry body and Evalueserve, knowledge service expert, in 2005 predicts that the Indian BPO and KPO (Knowledge Process Outsourcing) industry will witness as many as 100 mergers and acquisitions from 2006 to 2010 involving large and small companies and worth between $3–$5 billion.
Global heavyweights like IBM, EDS and Accenture are on an acquiring spree in India and other strategic BPO locations, even as leading, Tier 2 Indian IT companies like Wipro, Infosys, Aditya Birla and Patni are growing outward to gobble up a range of service providers locally and in multiple geographies.
Clearly, each is trying to grow market share and gain clients through these activities. Yet most mergers disappoint. According to a report in the McKinsey Quarterly in 2004, 70% failed to achieve expected revenue synergies. In the same report, McKinsey also cited evidence that unless merger synergies are realized in the first year, they are unlikely of ever materializing. The missing ingredient to success in many cases is an articulated strategy and clear emphasis on managing talent issues before, during and after the merger.
While most M&A plans speak to the benefits of acquiring talent, few include strategies that describe how the newly merged firm will retain, engage and deploy its combined workforce. “Part of what you are buying is the talent and intellectual capital of the organization. You can erode that quickly if you get off on the wrong [foot],” says Frank Giampietro, Principal and M&A Leader for Towers Perrin North America. In a 2004 study, Giampietro and his colleagues found that most mergers fail to meet expectations. However, when the people issues are addressed, that situation changes and the likelihood of success increases significantly.
Of course, for Western and Indian firms attempting to merge, the difficulties are greater. How do the employees of an Indian firm react and adjust when acquired by an American multinational with a substantially different corporate culture? How do employees in Western firms acclimate to the reality of being owned by an India-headquartered firm? The latter scenario is becoming almost as common as the former and while Indian employees may have some experience with Western ways, it is unlikely that more than a few North American or European employees will have experienced Indian business culture.
There is a wealth of evidence going back as far as the 1970s to show that M&As are prone to a range of human-capital challenges, from lowered productivity and higher absenteeism to sharply increased rates of attrition. Historically, M&As have had a checkered history as far as the workforce goes.
In the U.S.A., it is still associated with downsizing and the gutting of once proud companies. And while this may not be the motivation today, a great deal of fear, mistrust and uncertainty pervades the workforce where an M&A is concerned.
Moreover, just as Indian BPOs acquired by foreign competitors will face management and workforce integration challenges and quality of work issues, Indian companies absorbing global companies will have to surmount difficult assimilation and operational obstacles. “The buyer’s offshoring managers and trainers,” says Anthony Mitchell, “should spend time at the newly acquired facility in order to gain domain expertise, operations training, corporate cultural immersion and personal contacts.”
The odds are not evenly placed for foreign competitors entering India. A Mercer Report titled “M&A in Asia: Preparing for Successful People Integration” declares “the skills and demands” placed on the HR function in a deal are diverse and difficult. Companies in India need to be prepared to invest the time and resources to build key HR skills to support deal making and long-term growth.”
The large-scale hiring that most Indian BPOs are planning, and concomitant training will make managing growth difficult even without additional M&A challenges. Add to this, the talent crunch afflicting the IT and ITeS industries in India. In the BPO space alone, estimates from research firms, including Gartner and McKinsey peg talent shortages of trained and qualified people in the range of 260,000 by 2009.
Clearly, talent management is an essential ingredient in making M&A initiatives work. Thankfully, a realization of this fact is growing. Our own experience, in speaking with dozens of American and India multinationals over the past six months, has been encouraging. In several cases, executives in the firms we spoke with invited us onto their campuses in the U.S.A. and India to facilitate debates and focus groups around the talent challenges arising from recent American-Indian corporate mergers.
We’ll share the outcomes from these discussions in December.
In the meantime, please share your own experiences, good or bad, in M&As. Is talent management as important as we believe it is in this process? How difficult are mergers between Indian and Western BPOs? What are the main challenges? Write to us at talkback@globalservicesmedia.com.
Lori Blackman, Founder and President, DNL Global. DNL Global offers solutions across the entire lifecycle of talent management. Allan Schweyer is the President and Executive Director of the Human Capital Institute and author of Talent Management Systems.
