India BPO market heads toward consolidation

Some companies that jumped in to the business process outsourcing (BPO) market in India, unable to scale operations up to the level required by customers, are now looking to sell their assets, and multinationals are entering the fray.

India’s BPO services industry, which saw revenue grow by 59 per cent to USUS$2.3 billion in the year to March 31, 2003, attracted a large number of entrepreneurs and investors aiming to cash in on the opportunity to offer low cost services to customers in the U.S. and Europe.

As of March this year, there were about 200 Indian companies offering BPO and related services, according to the National Association of Software and Service Companies (NASSCOM) in Delhi. Many of these BPO companies are now looking for buyers.

“Consolidation (in the Indian BPO industry) is to be expected very soon,” said Ravindra Datar, principal analyst for IT services and BPO at Mumbai-based Gartner India Research and Advisory Services Pvt. Ltd., a wholly owned subsidiary of Gartner Inc. in Stamford, Connecticut. “Too many eager beavers rushed into the industry without understanding the kind of operational and marketing issues they would have to cope with, and the kind of gestation periods to be expected before profits can start flowing in consistently.”

As a result, many facilities that were set up are lying vacant, and the failed enterprises have to either close down or get acquired, as they have neither funds nor clients, according to Datar. In many cases, these facilities have excellent, state-of-the-art infrastructure, and are natural acquisition targets for the more successful companies that are looking forward to expand their capacity, he added.

Even companies that are doing well find that they need capital to scale their operations, according to Datar. TransWorks Information Services Pvt. Ltd., a Mumbai-based, venture capitalist (VC) funded BPO company, was acquired this month for US$13 million by the Aditya Birla Group, a large Mumbai-based Indian business conglomerate. TransWorks has 800 seats employing 1,200 people in its facilities in Bangalore and Mumbai, a revenue run-rate of about US$1 million a month, and has broken even in this fiscal year. But it was strapped for cash to fund its expansion, according to Prakash Gurbaxani, chief executive officer (CEO) of TransWorks.

As business opportunities grow for Indian companies, the need for large funding has increased. “The BPO industry in India has gone beyond the pilot and initial proof-of-concept stage,” said Krishnan Ganesh, president of the contact centre business of ICICI OneSource Ltd, a Mumbai-based BPO company, promoted by the ICICI Group in Mumbai with interests in the financial services business.

“About a year ago, as the pilots were successful, customers started moving large amounts of work and critical and multiple processes to India. As the ramp up started, customers started looking more closely at the size of the vendor’s balance sheet, and his access to capital to scale operations.”

CustomerAsset, a Bangalore-based BPO company co-founded by Ganesh, was acquired last year for US$19.3 million by ICICI OneSource. CustomerAsset had about 750 employees and operated a 350 seat call centre in Bangalore. “Two of our clients were looking at large-scale ramp ups, for which we needed to invest US$4 million in infrastructure for a new centre of 400 seats,” said Ganesh. “We were making profits, but an investment of this scale could not be financed from our profits.”

The cost of infrastructure for a BPO operation is high. BPO companies typically need to invest US$6,000 to US$12,000 per seat depending on the capability they need to develop, according to Neeraj Bhargava, chief financial officer and president of the North America operations of WNS Global Services Ltd., a BPO company in Mumbai.

Promoters of successful BPO companies typically avoid VC investment to tide over a capital crunch. Although TransWorks had the option of raising additional funds from a VC, it preferred a buy-out by the Aditya Birla Group, Gurbaxani said. “As a VC-funded company, your standing is linked to your balance sheet, and there is always uncertainty about the long-term stability of the company, because the VC will want to cash in and sell at some point,” added Gurbaxani.

“This business is about getting marquee clients and about scaling, and this requires a credible brand name, assured access to capital and a strong balance sheet,” said Ganesh. “These criteria cannot be met by a VC funded company.”

Key buyers of BPO companies in India are software services companies that want to position themselves as vendors of a broad portfolio of services, including BPO, to their current customers.

For example Wipro Ltd., a Bangalore-based software and services company, acquired in January this year Spectramind eServices Pvt. Ltd., a CRM (customer relationship management) services company in Delhi.

Mergers and acquisitions in the BPO industry in India are not confined to Indian companies alone. BPO operations in India that belong to multinationals are also changing hands. Last year British Airways PLC (BA) divested about 70 per cent of the equity in WNS to Warburg Pincus LLC, a New York-based private equity investor. WNS was set up in 1996 as a captive back-office for BA. WNS is now positioned as an independent third-party services provider, but still gets about 35 per cent of its revenues from BA. Besides providing funding, Warburg Pincus has often connected WNS to prospective customers, according to Bhargava.

M&A in the Indian BPO industry is proceeding on two fronts. Even as some Indian BPO companies are getting acquired, other Indian BPO companies are acquiring operations both in India and abroad. Last year, WNS acquired Town & Country Assistance, an insurance claims management company in Ipswich in the U.K. HCL Technologies Ltd. in Noida near Delhi acquired over a year ago a 90 per cent stake in the Apollo Contact Center in Belfast of BT Group PLC. The deal gave HCL a beachhead in the European market, and helped it bag business from the London-based BT, including a US$160 million order for setting up a BPO operation for BT in India.