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While established outsourcing vendors like IBM, Accenture, and Convergys chant the offshoring mantra and build up huge offshore (read India) capability, the Indian companies, who have traditionally got the outsourcing business by just selling India, are finding that competitive advantage waning.

After say a few quarters-years are too long a time in this business-of trying to sell why they understand India better than the multinationals, the Indians find that offence probably is the best form of defense. And they are all out to build up the front-end capability, or as they say challenging the Americans on their own turf.

Realizing that an onshore capability does not just spell S-A-L-E-S, they are quick to build expertise in consulting, proof-of-concept centers, and even a certain degree of delivery capability. Based on the existing strengths and positioning, the strategies, of course vary. What is common is a desire to get there quickly. Enter acquisitions.

Yes, the traditionally Mergers and Acquisitions-shy Indian companies are beginning to buy up companies in the market that they are serving-that is US and UK, primarily. These are early days still, but the trend seems to have been established strongly and is expected to accelerate.

The Strategies
When men and women agree, goes the saying; it is only in the conclusion. Their reasons are always different. It seems the same can be said about the front-end strategy, more specifically, front-end acquisition strategy of the Indian outsourcing companies.

For comparatively bigger companies, it is a much more holistic approach, the objective being a long-term strategy to grow onshore delivery capability for variety of reasons.

Sanjay Kumar, CEO, vCustomer, which recently acquired the directory assistance facilities of MCI, lists several of these reasons. "One reason was to address client expectation from us for being able to provide both onshore and global outsourcing options, and giving them the flexibility to choose," says Kumar. He also wants to address the much larger onshore market since only about 20 per cent of corporations are looking to offshore immediately. "Now, we have a solution for the remaining 80 per cent," he says. He also lists Spanish support capability and B-B capability as other reasons behind a robust onshore presence.

"We plan to have at least 50 per cent of our employee base in the US going forward. We believe that a US delivery capability is essential when servicing a US customer base, putting us close to our customers," says Kumar. Though, he is probably the first among the CEOs of Indian companies to proclaim that objective in quantifiable terms, a handful of others are looking at significant onshore delivery.

One such company is HCL BPO. Way back in December 2001, HCL BPO, then called E Serve Technologies, acquired BT's Apollo Contact Center in Belfast with 290 employees, which remained the only significant onshore/nearshore acquisition by any Indian company. With that, it also acquired BT's business.

The company has since then been ramping up, taking its employee base to 1600 people, and is now the largest BPO service provider from Ireland. The Ireland operations have been used to cater to the needs of European customers who are reluctant to offshore. In February this year, HCL BPO acquired AnswerCall Direct from PWC adding another 200 employees. "The UK market is booming and we get a lot of business there. We are in Ireland because clients want a near shore location.

It enables us to provide clients with a risk-mitigation strategy with an offshore and onshore combination," says Sumit Bhattacharya, Executive VP, HCL BPO.

Incidentally, both the examples in this category have striking similarity. They are acquisitions of assets of bigger companies, rather than full acquisitions of small outsourcing companies. Both of them have business deals from the sellers of the asset, and interestingly, both are in the telecom space. This also suggests that Indian vendors are becoming comfortable with people and asset transfer-based deals that US outsourcers like EDS, ACS, and Accenture have been doing for years.

Some new entrants have used the onshore acquisition route to make a differentiated entry. Bangalore-based Valdel Xtent is a start-up company by old economy major MS Ramaiah Group and has used its onshore presence as a strategic differentiator. Valdel started its operations by acquiring UK-based Anipoint Group, which is a marketing support services company. After the acquisition, it has over 450 people in Liverpool and a US presence through its partnership. At the same time, it is in the process of building up its India presence. It has over 100 people at its Bangalore center and is in the ramp-up mode with a targeted 700 people by next fiscal.

CEO of Valdel Xtent, Ashvani Srivastava, who has an aggressive onshore strategy says, "We want to leverage the global opportunity. There is a lot of work which is happening onshore, with only a tiny portion coming to India. Besides, there are many processes which cannot be offshored because of regulatory issues."

Valdel Xtent aims to offer a 'blend of services', such as moving data capture activity offshore while keeping outbound call activity onshore. Third, the advantage of having a significant onshore presence is the ability to use onshore centers as test beds and proof-of concept centers for clients looking at prospective BPO solutions. This, in turn helps to reduce the sales-cycle, which can take 6-12 months.

Dan Sandhu, CEO of Vertex India and head of offshore business, Vertex, succinctly describes the advantages of a blended offshore-onshore combination. "The onshore presence helps to address the market requirements faster than pure offshore service providers. It also helps in maintaining a high degree of local language and cultural touch with the client on their shore," he says.

While the tier-one, rule-based work gets done in India, work that requires more intricate knowledge of the local legal technicalities can be done onshore. Meanwhile account management teams and clients work together for strategic insights to have robust operating processes which can be offshored. Gradually as processes mature, most of the work can be offshored "because ultimately labor arbitrage and ability to scale is important and will impact bottomlines," says Ravi Ramu, CFO at Mphasis, an established player in the offshoring market.

Mphasis recently acquired Eldorado Computing which specializes in claims processing and management solutions for the healthcare insurance sector.

Fourth, Indian companies are using acquisition as a tool to gain skill sets and build high end competency that require them to be close to the client. For instance, Mphasis' acquisition of Princeton Consulting and OfficeTiger's acquisition of Devonshire. Devonshire which specializes in creative services has expanded OfficeTiger's skill sets but at the same time it will also require closer customer interaction. Devonshire's strong presence in UK and Continental Europe is expected to help OfficeTiger cross-sell its financial services to a new set of customers.

Finally a very important reason for companies to build their onshore presence is the strong wave of anti-offshoring sentiment existent among a section of population. According to a Convergys study a third of the US population would not do businesswith the company if they realized that calls were being offshored. While suchprotectionist sentiments may fade away, it underlines the importance of having onshore presence.

While the Convergys study was confined to US, protectionism exists everywhere including the more open UK economy. Says Phil Telfer, Sales and Marketing Director of Ventura, one of the largest contact centers in UK, "There are customers who are against the idea of offshoring. For instance, companies like Northern Rock, a bank providing mortgage services based in Leeds is against offshoring of jobs."

The only reason of acquisition that is missing from this is for purely building scale. Indian companies like Infosys and Wipro, with huge market caps can build scale overnight by acquiring bigger companies. At the moment, Indians do not want to do that. They still believe more in healthy growth than fast growth.

Balaka Baruah Aggarwal