Print

Comment

Email

Digg

Del.icio.us

Reddit

We identify seven ways how private equity firms are 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 bn 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.

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.

So far, these talks have not materialized, but 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 dollar 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 bn deal. The firms involved were the 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.

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, 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.

In 2004, GE 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.

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 UK Already a significant third-party player, it has been acquired by a private-equity consortium led by Oak Hill Capital Partners.

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 is one such example.

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. 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," he add.