The proposed acquisition of an IT services company by India's largest business process outsourcing (BPO) firm, Genpact, has fueled a debate on whether pure-play BPO firms in the country can survive independently.
A pure-play BPO firm has a strong value proposition for the first three to five years of an engagement, driven by cost arbitrage and operational efficiencies and effectiveness, and Genpact has been successful in riding this wave, wrote Saurabh Gupta, vice president of Everest Group, in a post on Wednesday on the research firm's blog.
It is often difficult to drive the next wave of value from pure BPO, and often this requires integrated IT and BPO capabilities, Gupta added.
Genpact said on Wednesday that it had signed a definitive agreement to acquire Headstrong, an IT services company focused on capital markets and to an extent healthcare, for US$550 million.
Genpact will cross-sell its services to Headstrong's customers in the capital markets and healthcare segments, the company's president and CEO, Pramod Bhasin, said in a conference call on Wednesday.
Headstrong's IT services customers want it to deliver services in business processes and analytics as well, both areas in which Genpact is strong, said Sandeep Sahai, CEO of Headstrong.
India's pure play BPO firms are finding it difficult to stay that way because they need new revenue streams to sustain high revenue growth, and also because customers prefer their suppliers to offer a variety of services, said Siddharth Pai, a partner at TPI, a sourcing data and advisory firm.
Customers' preference to do business with a vendor that offers a variety of services has already driven an earlier phase of acquisitions, when IT firms like Wipro and IBM acquired BPO companies in the country, Pai said.
Genpact previously tried getting into IT services on its own, but its revenue from the business has been falling over the years, in contrast to its revenue from BPO services. The share of IT services in total revenue declined from 20 percent in 2008 to 16 percent in 2009, and 14 percent in 2010.
Having tried growing the IT business on its own, the company has now decided to acquire, said Sudin Apte, principal analyst and CEO of Offshore Insights, a research and advisory firm in Pune, India. Headstrong has strong domain expertise and intellectual property in the area of IT services for capital markets, he added.
Apte does not however think that all pure-play BPO firms in India need to get into IT services. "I don't see a trend here for other pure-play BPO companies," Apte said.
Pure-play Indian BPO firms can grow their revenue and profits by staying in BPO alone, if for example they move quickly from voice to high-value transaction processing, and also by investing in technology platforms that can deliver services more efficiently to customers, Apte said.
There are however limits to how much a BPO business in India can grow, Pai said. A number of companies outsourcing business processes to India still prefer to set up or expand their subsidiaries in the country, rather than outsource to a third-party provider, he added.
As service lines get commoditized for BPO companies, they are likely to look at new service lines in BPO, and new businesses like IT services, said Prakash Gurbaxani, formerly head of a large BPO company in India. IT services is a logical diversification, as the processes and systems, and project and people management skills tend to be similar, he added.