In 2006, two pure-play offshore BPO firms, WNS and EXLService, listed in the U.S. Mumbai-based WNS and New York and Noida, India-based EXLService have done well on the markets so far. The third offshore BPO firm — the largest such firm globally — that is getting ready to be listed on the U.S. bourses is Gurgaon, India-based Genpact.
What is significant is that these three have successfully challenged the myth — often propagated by the large IT-services firms — that you cannot grow as a focused BPO player. All three, unlike the other early movers in offshore BPO, are not large call centers but diversified business-service outsourcing firms, that have often beaten the large IT-services firms’ BPO arms hands down in the marketplace.
The fact that these three have gone/are going for IPOs to unleash value reveals that they have done something right, faster than many others. That is the edge — creating value faster, with a disciplined approach — private equity provides to portfolio firms.
Private-equity firms have a growing interest in outsourcing — today’s most-favored business value-creation tool. This interest has its own cause and effect. The cause is: outsourcing is the sure-shot way of creating value. And the effect is: while buying out outsourcing firms, investing in them, and making the portfolio companies outsource, private-equity firms are inadvertently creating lasting impact on how outsourcing is done, by both buyers and service providers.
We identify seven ways how they are, well, adding value, to outsourcing and thereby redefining the rules of the outsourcing business.
Far from the madding street: Taking public companies private for re-structuring. When India-based offshore services firms such as TCS, Infosys, Wipro and Cognizant began to take on the established service providers in North America, they were not taken seriously by the leaders. But, soon enough not only were they winning bigger deals, the customers were also rethinking the way they had done outsourcing contracts. Many of them, listed in American stock markets, also got a thumbs up from analysts. Today, both Infosys and Wipro are valued at more than $20 billion by the market. With multiple times revenue, companies like CSC, ACS and EDS are languishing at much lower valuations. IBM and Accenture, thanks to their consulting capabilities, are still holding on.
In terms of depth of execution, CSC and ACS are great firms. In terms of handling large projects, they are far mature than the Indians. But they are not being seen as creating much value by the market. They do not match up to the Indians either in growth or in margins. Part of it is because they do not match the smaller companies in terms of agility; and part of it is because they still rely a lot upon government contracts — which are not seen as making much money in the long run. In short, time for some transformation! But with quarterly pressures on, they can hardly try any drastic measures.
Enter the private-equity firms. In October 2005, a group of private-equity firms comprising The Blackstone Group, Texas Pacific Group and Warburg Pincus started talking to CSC for a possible buyout. They had reportedly roped in Lockheed Martin, which was looking at the government business of CSC. The talks, however, failed, only to resurface in January this year, when The Wall Street Journal reported that a different combination, HP and The Blackstone Group, are talking of a possible buyout of CSC. This time, too, talks fizzled out. During the same time, there was speculation that a group of private-equity firms comprising Texas Pacific Group, Bain Capital and The Blackstone Group, were in talks with ACS for a possible buyout.
So far, these talks have not materialized. But this shows that the ambition of private-equity firms is not restricted to doing deals of a few hundred million. Had they materialized, both these deals would have been multibillion dollars ones. In fact, what gave them courage was a successful earlier buyout, in March 2005, of SunGard Data Systems, a NYSE-listed firm, in a $11 billion deal. The firms involved were who’s who of private equity: Silver Lake Partners, Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, KKR, Providence Equity Partners and Texas Pacific Group.
“We can look at any investment that makes sense. Size is no longer a barrier,” says Bill McGlashan, MD, TexasPacific that was part of the consortium in all these deals.
So far, apart from SunGard, however, there have not been many large deals in the business-services space. The ones that stand out are the $950-million buyout of NCO Group, a leader in receivable management-services outsourcing by One Equity Partners, a unit of JP Morgan Chase; a $900-million buyout of Flextronics Software Systems, an India-listed firm (now called Aricent) by KKR and Sequoia Capital, both in 2006; and a March 2004-buyout of Stream by HIG Capital from Solectron.
The value proposition is clear. There is an onslaught of firms with new business model from low-cost destinations in the services space. If the older services firms have to compete with them, they have to drastically re-structured. Whether they can do that as public companies is a matter of doubt. This is the space that private-equity firms would be targeting. If they manage to do a transformation, the offshore firms will again be on the defensive. And if that happens, outsourcing business is sure to change yet again.
