Captive Outsourcing Unit - A derivative prodcuct

GE, the company that pioneered the outsourcing in India, set-up its first captive unit in 1997. Captive outsourcing units are fully owned subsidiaries of the parent company and being so helped the management to have a complete control over the execution and quality of deliverables in the early stages of outsourcing. Additionally, the brand also helped them in negotiating better deals with government and attracting the top talent. Transition of work from U.S to India was not an easy job as there was always resistance from the employees to transition work or co-ordinate work with an off-shore location. The feeling of being the same company helped there as well.

Outsourcing was primarily to reduce the cost of operations(rent, wages, benefit- to name a few). However, GE showed the businesses that there are multiple ways to make money on outsourcing.

When GE built a big outsourcing unit in India, lot of jobs in the U.S /Europe were moved to their Indian operations. By conservative estimates, there should be at least 30% cost savings- Otherwise there was no point in outsourcing. GE engaged their workforces to train their counterparts in India and implemented the quality processes smoothly over a period of 10 years. Within 10 years , GE India unit was supporting most of the business units with different back office works - including analytics, financial transaction processing and customer service centres. That's the time GE businesses globally was aligned with the off-shore operations and the processes become smooth . Then came the news that GE was selling the India unit!

I think it was a brilliant decision GE took to make money out of their BPO operations. GE sold 60% of their Indian BPO operations in 2004 to two U.S private equity companies- Oak Hill Capital partners and General Atlantic Partners -for $480 million and the Indian unit become an independent BPO, Genpact.

GE never had any real estate holding in India. All their equipments were leased. So what did they really sell ? Knowledge about their own processes and the team that possessed it!

Savings to GE actually starts with the deal. GE committed for alt east 5 years of business - this means they continue to enjoy 30% discount on their operations cost. Now GE is a customer, they could always ask for more productivity - Something GE does with other IT vendors in India, where they insist 10% of productivity every year - This mean if you support a project with 10 people this year, you are expected to support the same with 9 people next year through process improvement or expertise building (or just working longer hours for some managers ?). Also, when Genpact renews the contract, pricing could be done based on a competitive bidding. So to an extend GE is insulated with increasing cost of doing BPO business. And who knows, there could be cheaper ways inthe future.

On the other hand, GE still holds a 40% stake in Genpact - good enough to control them along with their committed business(read dependency of Genpact). When Genpact flurishes, GE could still reap the benefit through dividends or capital appreciation. Genpact was listed in NYSE (G) in 2007 and this month we saw GE is offloading another 3% stake for $ 100 Million when the liquidity in U.S market dried up. ( That was another smart move as the Genpact shares crashed since then : from $14.32 to $6.92 as of today).

Well, I am impressed about GE management, ever since I joined them in 2001. What made me write this blog is a 'me-too' deal by Citibank to sell their BPO unit ( Citibank Global Services) to TCS for a $505 Million, with a commitment of business for next 9 years. May be half a billion is not too big for Citi or GE but the idea of capitalising their captive units and ensuring a low cost operations for years to come is definitely a smart move.

In other words, its possible to package the back-office work into a finacial product called captive unit. It has a revenue stream and hence a valuation ( Say 2.5 Billion in case of latest TCS deal). Now its safe to assume that Citi saves close to a 1.25 Billion when they sell their own work to TCS (505MM + 30% savings on outsourcing). And since it was captive, they made sure the new company could deliver the way want.

Not every one is happy. Employees feel betrayed as they signed up for an MNC brand but now they ended up with a less known Indian brand. Uncertainties like what will be the impact on the benefits when the clients squeeze for more productivity every year coupled with increasing cost of doing the business.

So the question is who is next ? Amex, HSBC, IBM ?. Thanks to GE.

Outsourced analytics centres -next wave BPOs

(This article was published in Domain-B.com on 21st February 2004, ghost written by me. At that time some of my direct exposure to this industry helped in writing this article)

The recent anti-outsourcing furore in the US and the UK, has done nothing to dent India's standing as the preferred outsourcing destination for organisations from the west.

Despite the excellent potential — according industry estimates, the Indian business process outsourcing (BPO) market is estimated to grow to between $21 and 24 billion by 2008 — the bulk of Indian BPO service providers are engaged in non-core jobs like human resources administration, finance and accounting, call centres and other back office work.

A handful of notable exceptions do exist. Some of the biggest names such as GE Capital, American Express, Citibank, Prudential Insurance, Accenture and Honeywell, among some more have already outsourced a part of their analytics work to their captive centres in India. Among the independent analytics service providers, the front runners include BPOs such as Bangalore-based IGate (loans and mortgage); Symphony (insurance, supply chain and financial services); Modalytics (banking and investmens); Gurgaon's MarketRx (medical and market analytics); and Scendant (logistics); or Mumbai's Orion Pro (banking, treasury and credit cards), among another handful. They target those companies which are looking at outsourcing even some of their core businesses functions like analytics and business intelligence.

According to Meta Group, the global analytics or data mining market, which was $ 8.4 billion in 2000, is expected to grow at 35 to 40 per cent annually for the next 10 years. Since a large portion of this market is being outsourced, there is tremendous potential for existing Indian BPO firms to set-up outsourced analytics centres (OAC) to tap these opportunities.
OAC brings together three components: technology, advanced analytical capability and domain expertise. OAC customers are billed three times the rate compared to other BPO activities. If the present trend in analytics outsourcing continues, OACs will be a significant contributor to the 24 billion target by 2008.

It has been estimated that the amount of information in the world doubles every 20 months and the size and number of databases increase even faster. Past years have seen an exponential growth in the volume of information or data being stored in electronic format thanks to the increasing use of electronic data gathering devices and automation of transaction processes.
Since data analysis is essential for businesses, it requires going beyond the data explicitly stored to derive knowledge about the business. This is where data mining or knowledge discovery in databases (KDD) becomes important, though the term data mining has been stretched to apply to any form of data analysis, commonly known as analytics.

The potential for data mining received a boost when businesses started storing data in data warehouses — a relational database management system (RDMS) designed specifically to meet analytical requirements. A data warehouse provides data that is already transformed and summarised, therefore making it an appropriate environment for more efficient data mining applications.

Data mining techniques are used most effectively in the banking and financial services industry. Some of these analytics activities include detecting patterns of fraudulent credit card use, identifying profiles of good customers before acquisition, identifying 'loyal' customers for premium offers, customer attrition pattern analysis, detecting delinquency patterns for loan review mechanism (LRM), pricing of the bonds and equities etc. In India, American Express, Citibank and GE employ pools of analysts to provide such services to their counterparts in the US and Europe.

Insurance and health care are other areas where data mining applications are used extensively. The techniques are used for claims analysis such as which medical procedures are claimed together, predicting which customers will buy new policies, identifying behaviour patterns of risky or fraudulent customers, predicting the effectiveness of surgical procedures, medical tests, and medications, among various others. Companies like iGate, Nirvana Solutions, EvalueServe, Symphony services and MarketRx are all set to tap the opportunities in insurance and healthcare data mining opportunity.

According to Gartner, the global BPO market grew by 13 per cent between 1999 and 2000, to $119 billion and will reach $234 billion in 2005. Evidently, with India having emerged the most favoured outsourcing destination, Indian BPO service providers have a potential goldmine at hand

Some new-generation BPOs position themselves as business transformation outsourcing companies (BTOs) and provide domain expertise-based business intelligence that creates high-levels of measurable business value to clients. Being non-captive, they offer their services across the board to customers who wish to outsource analytical operations.

Software major, iFlex solutions, has already set-up its analytics business through its Reveleus Solutions, to seize such opportunities. According to iFlex, 'Reveleus establishes institutional insight to respond to market needs, manage business risk and improve business performance through its suite of advanced analytics and information management products'.

What stops more of the existing BPOs or software services providers from exploiting these substantially higher earning opportunities? One barrier is the use of specialised application OACs for service delivery.

Most of the business reporting is done through tools like 'business objects', Hyperion / Essbase, Cognos etc. Excel-based reports are also popular among the analytics community where many of the applications like Hyperion and Cognos support the excel-based report delivery. SAS is another data mining tool widely used for data manipulation, analysis and reporting. Though most of these tools bring many statistical techniques handily to the analysts, internally developed algorithms are also required for customised analytics solutions.

Another challenge faced by OACs is the lack of availability of trained resource to support their operations. A typical profile of an analyst includes training in statistics or quantitative techniques, computing and business. MBAs from premiere institutes with a quantitative inclination, statistics, mathematics, operations research and economics postgraduates are the primary candidates who fit in to the bill of OACs despite the interest among job seekers who regard it as a high earnings opportunity with the advantage of dealing with higher level decision-makers.

Even when suitably qualified candidates are available, existing service providers face the risk of attrition where trained employees are lured away, often with a 100 per cent salary hike.
However, almost all emerging businesses have invariably faced similar constraints of staff resourcing, training, compensation and attrition. High-end BPO services are no exception. Over a period of time, as industry patterns gradually emerge, these issues almost invariably end up being resolved. In any case, the potential for future billings for Indian BPO service providers is simply too high to let go of opportunities to move up the competency scale.