By Preetam Kaushik
The recent spate of acquisitions by Indian BPO companies has been both baffling and obvious at the same time. On the baffling side, there is the global economic slowdown and protests against outsourcing in the US while on the obvious side, the Indian BPO companies are sitting on piles of cash. Moreover, the BPO industry has to grow either organically through growth or inorganically through M&A (mergers and acquisitions).
Organic growth, or increasing the volume of business, is increasingly becoming difficult during an election year in the US when BPO has become a major target of both political parties. Hence, the only other option left for sustained double-digit growth is through acquisitions.
Indian BPO Acquisitions by the Numbers
The facts and figures speak for themselves about the scorching pace of acquisitions in the BPO sector in India. During the year 2011, the Indian BPO sector generated $100 billion USD in revenues, and the sector is characterized by a tiered structure where the top firms have revenues that are far greater than the combined revenues of many smaller firms. This has meant that multimillion dollar and even billion dollar acquisitions are becoming the norm rather than the exception.
For instance, recent moves by Indian BPO provider Genpact, US healthcare services provider Apollo HealthCare and multinational BPO provider Sutherland Global Services point to a possible $220 million deal which has left the industry speculating about possible moves of larger Indian BPO providers like Infosys and MPhasis. Considering that these firms command a healthy market share and an even healthier cash reserve, it would not be surprising if we see some activity by these and other firms like Indian ITO provider MindTree.
The Search for Value
Another reason for the frenzy could be that the BPO sector in India has moved beyond “bread and butter” voice and transaction processing and is increasingly looking for higher value-adding activities like KPO (Knowledge Process Outsourcing), which comprises legal research, advisory and consulting services among other offerings. So firms wishing to quickly move up the value chain must purchase the capability to perform these higher-level and specialized services if they do not possess it in-house.
Furthermore, the sector is also mature enough to realize that the stage is set for the next phase that any business textbook says would result in the market being dominated by fewer but bigger firms. The point here is that the crowding out of the smaller players is an inevitable development as larger Indian BPO companies to leverage the efficiencies of the economies of scale. The estimated value of M&A deals in the Indian BPO sector during 2011 was around $328 million, which is expected grow multifold in 2012 because of the rumored Genpact deal that was mentioned earlier, as well as another large deal that is being proposed by FirstSource.
Indeed, the share of total M&A activity in India represented by the BPO sector is close to 50%, which is an indication of how the sector is the prime mover of this lucrative business for investment bankers. And the fact that there are several foreign players who have pitched in strongly for the acquisitions means that hot money from the West is likely to spur the activities more this year.
Organic Growth is Necessary
However, the BPO sector in India has to realize that inorganic growth yields dividends only to a certain extent and the rest has to come from organic growth. This is the reason that many players are looking for complementarities, rather than moving away from their core competencies. For instance, Infosys, which many analysts point to as being a company whose management studies acquisitions to death despite having substantial cash reserves, is shedding its conservative outlook toward acquisitions and is embarking on a strategy of acquiring Indian as well as foreign companies.
The hectic pace of M&A deals in the Indian BPO sector points to another aspect of the trend, i.e., that Indian BPO companies are wary of losing business in an uncertain global macroeconomic environment. Added to this is the volatility in the movement of the rupee and the rising wages and operational costs. This means that these companies must deploy their reserves to ward off these threats, rather than sitting on them. In addition, the ever-present threat of attrition that is hovering around a 25% industry average means that the Indian BPO sector needs all the growth it can muster to keep its flock together.
While it is still too early days to measure the long-term outcomes of these deals, it is likely that the BPO sector in India is maturing into a business model that is already the norm for established companies in the West. The hopes of the workforce, as well as the investors, are pinned on the growth story that they have had all these years and need to sustain going forward.