"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, MD, Information and Communications Technology, Warburg Pincus.

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. It is because of the lack of maturity to handle mergers and acquisitions as well as agreeing to a common goal are often problem areas.

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 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 UK-based private-equity firm that invests in medium-sized companies. "They certainly want to do it," he adds.

When Bhargava joined 3i, after quitting as CEO of Progeon, Infosys' BPO subsidiary, it was a no-brainer that the UK firm was looking to invest in Indian BPO.

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, but there is no supplier to serve them," he says.

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."

One Step Ahead
Picking companies with scope to add value through outsourcing. Vashistha contends that many forward-thinking private-equity firms today realize that outsourcing provides tremendous opportunities to add value quickly and if they can identify at pre-investment due diligence, where they can add maximum value, they can make a killing.

Increasingly, private-equity firms are identifying companies where the scope to add value through outsourcing is large. Today, apart from the traditional sourcing advisory, Tholons is into this area as well. The scope of working together with private-equity firms is so high that the firm has formed partnerships with two private-equity firms-RW Baird and FlatWorld Capital-for helping them in deal-sourcing. Vashistha describes Tholons as "the operational partners of the private-equity firms."

This is still a fairly new trend, and the jury is still out on whether this experimentation will succeed.

Creating Born-global Companies
Making companies globalize from day one. In certain segments, most notably high technology products space, it is fairly common today to see private-equity firms-in their role as venture-capital investors-push companies to globalize from day one. In startup ISVs space, for example, today most venture capitalists make it clear that the companies do their development in India or Eastern Europe to save cost.

While for venture capitalists, it means they can fund three to four companies with the amount with which earlier they would have funded just one, thus spreading risk, that means additional cost saving for the product companies; faster time to market, because most of them choose suppliers rather than doing it all by themselves. That also gives them access to world-class development practice, because these firms work for Fortune 500 software companies as well. This practice has become fairly established in the ISVs space, and is now spreading to other knowledge-based industries.

An External Helping Hand
Providing outsourcing firms with management discipline. This is still an isolated example. Of late, a few large outsourcing companies are roping in private-equity firms to partner with when they create/acquire a new business unit. HP's partnering with Blackstone Group is a case in point.

Even Infosys roped in Citicorp as a partner when it started Progeon. Says Akshaya Bhargava, former CEO, Progeon "It was to provide management discipline."

An informed, external investor provides a much-needed thrust to a small business that may not receive management attention, when it requires that most.

Just Flavor of the Season
Is the interest level in outsourcing by private-equity firms just because of the hype around outsourcing? Far from it. One sure-shot way of measuring the commitment is how many high-profile outsourcing industry professionals these firms have been able to rope in.

Vivek Paul, former vice chairman, Wipro has been appointed by the Texas Pacific Group. Michael Marks, the former CEO, Flextronics, is with KKR. And to top it all, the biggest private-equity firm, Carlyle, which counts among its partners and advisors one former president and one former prime minister, is headed by Lou Gerstner, the former CEO of IBM, better remembered as the man who turned the Big Blue from a pusher of big boxes to a new generation, nimble services firm.

Can Gerstener do that with many of his firm's portfolio companies? Can Paul acquire some hot targets and grow them the way he did with Wipro?

We don't have the answers yet. But if they do it, they would have "transformed" the outsourcing industry with that. No turnaround and no rapid growth is possible without disruptive transformation. The private-equity firms are in the best position to do that. They better not lose this opportunity.

Shyamanuja Das
vadmail@cybermedia.co.in
Republished with permission from Global Services
(www.globalservicesmedia.com)