Better days ahead for Indian outsourcing industry

NEW DELHI: The total value of mergers and acquisitions (M&As) and IPOs in the Indian outsourcing industry is expected to touch $3-$5 billion between 2006-2010.

According to a recent study by Evalueserve, the expected increase in M&A and IPOs in the Indian outsourcing industry would lead to a significant consolidation in the mushrooming BPO industry, especially amongst the small and medium sized players.

According to Evalueserve co-founder and CEO Marc Vollenweider, the drivers for these M&A activities are largely expansion in terms of geographic markets and additional line of business, multi-location delivery capability, getting access to a lower cost base in India, the acquisition of complementary skills, availability of capital through private equity firms and capital markets, the pressure on private equity firms for exit of investment and complexity reduction for MNC operations.

Key trends according to Evalueserve for M&A and IPO in the Indian outsourcing industry include MNCs providing outsourced services acquiring established large or mid-sized BPO players or small niche BPO and KPO players. It also includes large BPOs acquiring stake in specialty BPO and KPO firms having expertise in a niche area.

Vollenweider warned about the significant challenges in making the transactions successful. According to the study, post-merger integration may face problems due to cultural differences between players. Turning spun off captives into successful vendors in the open market will be a major cultural challenge.

The study also said valuation hurdles and key man risks may be a major barrier for acquisitions of smaller BPOs/KPOs. IPOs conducted only for financial reasons without strategic rationale may become very costly in terms of actual cost and opportunity cost.