Showing the way from captivity: Leveraged buyouts of captives. There was a time, not long back, when outsourcing was a major risk; offshoring was a bigger one. Few companies dared to do both together. But when the cost savings were too much to ignore, many started with caution, starting with what is today popular as captive centers.
Soon, when the delivery capability matured, a few decided to get out of the operations of these subsidiaries. Most notable was British Airways, a pioneer that started out its offshore delivery way back in 1996 (yes, ten years is way back), was the first to decide to get out. But instead of selling to a strategic buyer, it sold the controlling stake to Warburg Pincus in May 2002. The private-equity firm brought in entrepreneur-in-residence Neeraj Bhargava to run the company under an independent identity, WNS Global Services, and quickly started to transform the company for an IPO. In about four years, WNS became a publicly listed company, when it listed on NYSE in July 2006.
GE — where CEO Jack Welch pushed India offshoring as a strategic goal within the organization is now legendary —decided to follow the same path, when new CEO Jeff Immelt took over.
“In all captives, the growth slows at some point of time. That is something that you have to deal with. We wanted to deal with it before it became a problem,” says Pramod Bhasin, CEO, Genpact, the independent company, that GE’s offshore subsidiary is today known as.
GE also decided to sell it to private-equity firms, rather than strategic investors. In 2004, it sold 60% of the stake in the subsidiary to two private-equity firms — Oak Hill Capital Partners and General Atlantic Partners — in a leveraged buyout.
“I think we could have got more (money) from strategic investors. There was a lot of interest from strategic investors. But this is the best ownership structure that we could think up that met all the three objectives that were key imperatives,” says Bhasin. “With strategic investor, the fear is that will this be the back office of another company. Instead of GE, it will be the back office of someone else.”
Today, Genpact is getting ready for an IPO. EXLService, another offshore BPO firm, has followed the same path. The firm was bought from American Insurer Conseco by private-equity firms, Oak Hill Capital Partners and Financial Technologies Ventures, in a leveraged buyout in November 2002. The firm recently listed on NASDAQ.
The latest to join the leveraged buyout party is Vertex, the BPO subsidiary of United Utilities of U.K. Already a significant third-party player, it has been acquired by a private-equity consortium led by Oak Hill Capital Partners, the same firm that was involved in the Genpact and EXL deals.
More than 100 such captive operations are still operating at least in India. Many of them are potential sell-off possibilities. While the smaller ones would have to go to strategic investors, the larger ones that have created delivery excellence are ideal candidates for leveraged buyouts involving private-equity firms. American Express, which has created a large, diversified services capability in its offshore services arm, is one such example. Speculations are rife that it is scouting for potential buyers.
Unity after diversity: Merger among portfolio companies. Another proactive role that private-equity firms are playing in outsourcing is bringing their specialized portfolio companies together to create combined entities that offer a value that is more than the sum of the parts.
Many firms start up with one/few domain focus, services focus, or location focus. In the early days of development, it helps them manage their business efficiently, thus guaranteeing faster growth. But as they become larger, to sustain growth and to meet customer demand for uninterrupted service delivery across a complete service chain, they have to diversify. Many a times, private-equity firms have helped their portfolio companies to merge with each other, creating larger capability.
Take the case of Ness. Originally started as an IT-services firm with Israel market focus, it was looking forward to tap the offshore opportunity for growth as well as get into newer areas. Similarly, Apar Infotech, a Bangalore-based managed services player, was looking for rapid growth. Their common investor, Warrburg Pincus, brought them together to create Ness Technologies of today, a much larger firm, and a leader in offshore product development and managed services.
“By 2001, it was clear that the substantially growing IT services offering for the coming years would be offshore, coming out of India,” says Raviv Zoller, CEO and President, Ness Technologies. “We met the founders of Apar at an annual Warburg-Pincus portfolio company event, and eventually consummated the merger in the beginning of 2003.”
“Being global is essential to build a world-class company able to compete in its target markets. Initially, Apar was regional and so was Ness,” adds Henry Kressel, Managing Director, Information and Communications Technology, Warburg Pincus. “The current Ness would not have been able to go public on NASDAQ without that successful merger.”
There have been similar instances since then. In 2004, when HIG Capital bought out Stream from Solectron, it decided to merge it with another portfolio company, ECE, in the same technical support space. In 2005, it merged another newly acquired company, India-based Infowavz, and created the new Stream, which has since grown impressively, both in terms of business and delivery capability. It emerged as the number one call-center company in the Global Services 100 list in 2006, in the wake of stiff competition from upcoming offshore firms.
E4E, a small private-equity firm in Bangalore has followed the same strategy. It merged two of its portfolio companies — tech-services firm, Vinciti and testing-services firm Absolute Quality to form Vinciti AQ. Recently, it also merged its financial-services company, iSeva, and has rebranded the new entity.
While strategic acquisition of a smaller firm by a larger firm is common, coming together of small and mid-sized companies to form a larger company is not so. The reasons are not difficult to understand. Lack of maturity to handle mergers and acquisitions as well as agreeing to a common goal are often problem areas. A private-equity firm, as a common investor, plays the role of a guardian.
Practice what you preach: Urging/ helping portfolio companies to outsource. Outsourcing — especially of the offshoring variety — is today almost entirely a game for the large corporations, and smaller players in specific verticals, such as technology and health care. Most of the small and medium (sometimes that could mean revenues of more than one billion U.S. dollars) companies are still new to outsourcing as a practice.
Service providers often blame it on the mindset of such companies. That may be far from the truth. “It is certainly not a mindset problem,” counters Akshaya Bhargava, Head, BPO Investments, 3i, a U.K.-based private-equity firm that invests in medium-sized companies. “They certainly want to do it.”
When Bhargava joined 3i, after quitting as CEO of Progeon, Infosys’ BPO subsidiary, it was a no-brainer that the U.K. firm was looking to invest in Indian BPO. Bhargava, who had worked in Citicorp for number of years before joining Progeon, was the ideal choice to drive that agenda.
Today he spends most of his time finding out where and how he can help 3i’s 1,200-odd portfolio companies add value by outsourcing and/or offshoring. “Many of them would tremendously benefit from BPO,” he says. “But there is no supplier to serve them.”
Small companies, he says, have no management bandwidth and know-how to manage that. In addition to helping them build that capability, he is actively working on a “plan to effectively connect these companies to the right BPO partners.”
Does that mean he would fund BPO firms, which he could drive towards building a niche in serving the small and medium firms? He won’t disclose that, but it is clear that he is proactively working on a solution.
“It is fairly common these days for private equity firms now to seek professional assistance while helping their portfolio companies to outsource,” says Avinash Vashistha, CEO, Tholons, an advisory firm.
