Genpact’s Rs 2,475-crore acquisition is set to take it beyond pure-play business process outsourcing.
Genpact, India’s largest pure-play business process outsourcing (BPO) company, has set the ball rolling for IT-enabled BPO play with its acquisition of Headstrong Corp for $550 million (around Rs 2,475 crore).
The deal, the largest for Genpact, was the third-largest in the IT space after Wipro’s acquistion of Infocrossing for $600 million in 2007 and HCL Technologies’ £441-million acquisition of Axon in 2008.
The $1.26-billion Genpact (formerly GE Capital International Services, a captive unit of GE), with its 43,900-strong staff, has come a long way since it was founded by Pramod Bhasin in 1997.
However, even as the acquisition will give Genpact a boost in both IT space and the banking and finance vertical, Bhasin, president and CEO, has categorically said the intention is not to be another IT company.
“Our strategy on the IT front is not to be another giant IT guy. That is not what we want to be. We want to be very focused in a particular niche, with very strong domain expertise and end-to-end capabilities of delivering processes to our customers. This means you have to have technology, you have to have analytics, you have to have process, you have to bring those three together to be able to provide the services these customers want. It is different in other verticals, but that is the way we are playing it,” Bhasin said in an analyst call after the announcement of the acquisition.
The strategy augurs well for Genpact, which will require the niche focus to counter competition from IT services players like IBM, TCS, Infosys and others, who are increasingly eyeing BPO deals too. This also shows that BPO is no longer just about voice calls. The Indian BPO industry, which started with call centres and back-office assignments, has moved over to much more high-end work.
“Many players in the BPO space are looking to increase their presence in the BFS space. A couple of years earlier, IT services had done the same thing by acquiring BPO companies, as they wanted those capabilities. But, more importantly, BPO companies need to get into the full-services play once they reach a certain critical size,” said Siddarth Pai, partner and managing director, TPI India.
Another edge that IT services companies enjoy is in their reach. Mainstream IT service providers are better placed to sell additional services to the same clients, as it is economically viable for them. They have evolved as bigger brands and can win these deals more easily than standalone BPOs. Platform-based BPO verticals also allow them to deliver the next level of saving, technology refresh and better process efficiency, which standalone BPOs cannot offer.
Analysts also point out that clients are no longer interested in the number of people working on their project, or how soon the vendor can ramp-up the process. Their demand has now shifted to outcome-based results. “Add to this that they also want insight. How can a company help them sell a certain product better? Can they help structure a product or offering better, or can they help in analytics,” said a senior executive of a leading IT services and consulting firm.
TCS made one of the biggest acquisitions in the BPO space in 2009 by acquiring Citi Global Services for $505 million. Similarly, Infosys acquired Philips Captive BPO unit, which had an expertise in finance and accounting. And, one of Wipro’s earliest moves was to acquire Spectramind in 2002.
While the focus has been to get into full-services space, many of the acquisitions have also been about niche capabilities. For instance, when TCS acquired Citi Global Services (CGS), a captive unit of Citibank, one of the capabilities that the acquisition gave was understanding the core banking services of a bank. CGS gave TCS the capability to offer core banking as an outsourcing service.
For Genpact, banking, financial services and insurance (BFSI) contributed 39 per cent to its revenue as of December 31, 2010. The acquisition of Headstrong will further strengthen its focus in the BFSI vertical, giving it a strong technology backing. And, as Bhasin says, this acquisition will make Genpact one of the leading capital markets players. “We will, in fact, add capabilities to them, capabilities in the analytics space related to capital markets, reengineering related to capital markets, process and domain expertise that we currently have in capital markets… so that we build a complete vertical with end-to-end solutions that we can drive. We really believe that that is the way the world is going, that is the way we have been shaping our own organisation and delivery centers over the past few years. This fits perfectly into that strategy,” said Bhasin.
Sudin Apte, founder and principle analyst, Offshore Insights, also believes that pure-play BPOs will need to look at such a strategic fit. “I think pure-play BPOs have a series of challenges… but not essentially because they lack IT service capability. The problems have more to do with format in which they do business and the type of work they do. Most standalone BPOs were started 5-6 years before IT biggies jumped on the bandwagon. By then, it was clear that pure voice was not a good idea, “lift and shift” or “as is where is” shifting of processes have limited opportunity to showcase value. These boil down to labour arbitrage, etc…, so top companies like TCS and Infosys have selected models different from what companies like Transworks, WNS or yesteryears’ Daksh or Spectramind followed,” said Apte.
Garima Vashistha, president, Tholons, agrees: “They could have either acquired a generic IT services company, which would have provided them the technology but lacked focus, or a niche-focus company and gained expertise and capability,” she adds.
This acquisition will also help Genpact arrest the fall in its IT segment. Revenue from IT services accounted for 14 per cent in 2010, down from 19 per cent in 2009. The revenue from the vertical had contributed around 24 per cent in 2007 and has been steadily declining since the global economic slowdown hit the industry.
Moreover, this will also bring down GE’s contribution to the company’s revenues. The company has successfully reduced GE’s contribution to its revenue, but many a time this contribution has hurt Genpact. For instance, after a disappointing second-quarter results in 2009, Genpact almost halved its revenue growth expectation to 6-9 per cent for 2009. Reason: Its largest client, GE, which contributes about 38 per cent to the BPO’s revenue, was under stress.
“The acquisition will reduce GE’s contribution in percentage terms. GE, today, is about 38 per cent of our business. Headstrong brings $217 million, add to that a 20 per cent growth rate. Add that to our current revenues and GE will come out to be 8-9 percentage points lower,” said Bhasin.
Unlike many players who have been focusing on the offshore capability, this acquisition will bolster Genpact’s onsite foot-print along with onsite presence in the US and UK. “Two-third of Headstrong’s capability comes from onsite operations. Besides, it has a significant presence in the US market,” said Bhasin. It has about 3,700 employees in seven countries. Besides the US and UK, it also has presence in Japan and Hong Kong.
“I think Headstrong is an interesting buy. They are a specialist providers focusing on capital markets, have marquee clients in each space they operate (asset management, mortgage, brokerage, etc), have on-shore domain experts, have IP in these spaces and solutions addressing specific client concerns around trading, exchanges, reporting, compliance, etc. It brings many more new accounts to Genpact, brings in IT service capability in ADM space (which is a very small practice at Genpact currently), and the opportunity to up-sell/cross-sell into each other’s accounts.
The acquisition clearly is a thumbs up for the company, but, more importantly, this puts to rest the speculation that Genpact would get acquired.
Source:http://www.business-standard.com/india/news/headstrong-about-making-it-big/432173/
