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BW Businessworld

Leader’s Dilemma

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 You would expect the head of India’s largest business process outsourcing (BPO) firm — which has $431 million in cash and liquid assets, no serious domestic rivals, and a net income margin of 11.4 per cent — to be doing nothing more stressful than planning a session of golf or the next holiday destination. But Pramod Bhasin, president and CEO of the $1,120-million third party BPO outfit Genpact, is a bundle of nervous energy as he fidgets with his iPhone (he hates it, he says), his BlackBerry and arranges and rearranges a sheaf of paper on his desktop.

Bhasin is a bit edgy. The recession in the US, which accounts for about 70 per cent of his revenues, has slammed the brakes on Genpact’s growth. The firm’s growth rate dropped from a vigorous 26.5 per cent in 2008 to an anaemic 7.6 per cent in 2009. The net income of Genpact went down 26 per cent to $34.6 million in the quarter ending December 2009 (the company attributes it to specific investments in marketing and hiring). Getting new clients and orders has suddenly become an uphill task. Deal closing time has lengthened to over 12 months — way longer than the 3-6 months at the peak of the last boom. Global competition has intensified and average outsourcing deal sizes have reduced by about 15 per cent from $12-15 million.
More importantly, Genpact has been hit by its over-dependence on just two verticals — banking, financial services and insurance (BFSI), and manufacturing. These two broad sectors account for 83 per cent of its revenues, and they were the worst hit by the recession. Genpact’s lack of exposure to growing sectors such as retail and small and medium enterprises (SMEs) has meant that it could not use those to take up the BFSI and manufacturing slack. And, despite his best efforts in the past two years, Bhasin has been unable to deploy the cash on Genpact’s balance sheet for big-ticket acquisitions — the purpose it was raised for in a public issue in 2007.
IT: Not able to provide holistic IT solutions like bigger IT-BPO companies. IT comprises only 18% of revenues
Clients: Yet to have customised SME business processes. This might affect its ability to cater to large number of firms
Over-dependence on GE: About 40 per cent of its revenues are from GE. But these revenues have not grown in numbers. They have remained static in the past four years — at $450 million. The recession has hit GE revenues as well
Small clients: Genpact’s solutions are higher up the value chain, making it very costly for small clients to deploy them
Domestic presence: One of the last entrants into India’s domestic BPO market; revenues are still 2 per cent
Weak verticals: Has to strengthen segments such as retail and travel. For now, banking, finance, insurance and manufacturing constitute 83 per cent of Genpact’s revenues. It has very little presence in customer care and HR
A handsome acquisition: Sitting on a huge cash reserve; but is unable to acquire a company that will give it vertical strength and cultural synergy
End-to-end solutions: Something that bigger IT-BPO firms are pitching. Genpact loses on this ground
Competition: In verticals like healthcare, it faces stiff competition from Perot Systems, which has already created a niche market. Big IT players are also gnawing away its market
Looking thoughtfully out of the all-glass wall of his third floor office in Gurgaon, Bhasin says, “We want to buy something.” He has just snapped up Symphony Marketing Solutions, a US-based analytics and data management firm focused on retail, pharmaceutical and consumer packaged goods sectors for an estimated $40-50 million. There are also rumours that he is in talks to buy India’s 12th largest BPO, Intelenet (both Bhasin and Intelenet officials deny this).
Bhasin’s problem is that small acquisitions such as Symphony are not going to help him achieve his twin objectives of vertical diversification and quicker growth. And big buys have been eluding him so far. Genpact has missed two big-ticket takeovers recently. Last year, it tried to get hold of UBS and Citi’s captive BPOs based in Hyderabad and Mumbai. They were later acquired by Cognizant and TCS, respectively. Earlier, it has made a play for WNS — the second-largest (says Nasscom) BPO’s 50 per cent stake held by private equity firm Warburg Pincus. The deal would have given Genpact strong back-office operations. WNS is also strong in research and analytics. But Warbug postponed the sale.
LOOKING THROUGH: Customer care, the largest revenue generator for global BPO (53.8 per cent), contributes only 5 per cent to Genpact’s topline (BW pic by Bivash Banerjee)
Bhasin professes he is not worried about the ones that get away. “We are very careful buyers,” he says. Genpact has bought a few small firms, but none of them will alter its revenue and growth mix much. Bhasin is careful all right. Analysts say he walked away from the Citi acquisition as its valuation was very high. “What TCS paid for Citi made it an expensive buy,” says Bhavan Suri, a senior analyst with William Blair, a US investment and research firm that keeps an eye on the NYSE-listed Genpact. The UBS deal probably did not work out for similar reasons. “We will do the right deal at the right time; 50 per cent of acquisitions go wrong,” says Bhasin.
The Need To Acquire
The BPO industry is going through a bit of a mid-life crisis. Enterprises outsourcing their work typically want to deal with only a handful of vendors, and are giving more work to fewer players. So, it is imperative for the country’s largest BPO to widen its offerings. Genpact is among India’s best in finance and accounting (F&A) BPO work, which contributes 40 per cent to its revenue. This segment is the world’s second-largest BPO horizontal; about 22 per cent of the $115-billion global BPO business. But the largest is customer care (53.8 per cent), which contributes only 5 per cent to Genpact’s topline. The third largest — HR (15.6 per cent) — cannot be counted among Genpact’s strengths at all.
There is much more to BPO than the two sectors Genpact dominates. Retail, travel and healthcare are segments that are growing fast. But they have not been Genpact’s strengths. One reason why Genpact wanted Citi’s captive BPO desperately was because it would have not only given Genpact a big captive client, but would have also brought in high domain expertise essential to attract other banking clients.
The BPO industry is also slowly maturing in India, and offshoring as a model is getting seasoned. Analysts warn that growth rates in the future will not be as high as the 30 per cent plus that they have seen year over year in the past. For the top three BPOs, it becomes important to gain scale and expertise across verticals to continue to remain at the top. “We anticipated a stream of takeovers in 2010, but started seeing it happening in the second half of 2009 itself, with Infosys taking over McCamish,” says T.J. Singh, research director at Gartner.
Though Bhasin insists Genpact is growing faster than the industry, even dollar growth rates (Genpact only declares revenues in dollars) of the Indian BPO industry are higher than Genpact’s. The Nasscom Strategic Review shows the dollar revenues of the Indian BPO firms are likely to grow 18 per cent in FY09, whereas Genpact has grown 7.6 per cent during the same period. Genpact is growing slightly slower than the industry since its largest client GE has not been doing well. “GE (revenue) is down about 9 per cent. Even if GE would have been flat, Genpact would have grown more than the industry,” says Suri.
Genpact also realises the only way to grow is to offer solutions from multiple locations around the world. So Bhasin is also on the lookout for a firm that has offshore ability and would also provide cultural synergies. Language and culture are the two major factors driving Genpact’s global business, leading to greater traction in near-shore business. For example, Latin America, which contributes 6 per cent to Genpact’s revenues, is used to cater to clients within the region. “Some clients want near-shore rather than offshore. Language for some countries becomes a problem,” said Pradeep Bahirwani, vice-president of talent acquisition at Wipro.
The Bete Noire
Another reason why Bhasin needs to grow Genpact inorganically is the rate at which IT firms are bagging BPO businesses. This is giving rise to speculation that pure-play third party BPOs such as Genpact face tough times ahead.
Perhaps, the biggest challenge that most of the pure-play BPOs are not ready to accept is the growing advantage and aggression of IT-backed BPO companies such as Infosys and Wipro. Infosys, which has always been strong in F&A in the IT sector, has started extending its expertise to BPO as well. Sandeep Aggarwal, Intelenet Global Services’ executive vice-president of sales, solutions and transition, does not buy this trend: “About 15 per cent of the work is IT-BPO combined, where IT companies have an edge, but in the rest 85 per cent, we are there.”
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In the recent past, Infosys has closed three big, multi-million dollar deals for providing end-to-end solutions such as technology, BPO and application development to clients on an outcome-based pricing mode. “Beyond a point, you cannot do this without bringing in technology,” says Swaminathan Dandapani, managing director and CEO of Infosys BPO.
Bangalore-based IT firm Cognizant, which recently acquired UBS’s captive BPO for $75 million, feels IT is a significant strength today. In fact, unlike other IT firms, Cognizant did not hive off BPO business into a separate subsidiary. It always followed an integrated approach. “The boundary line between BPO and IT is bluring,” says R. Chandrasekaran, president and managing director of global delivery at Cognizant. The firm is also looking backward, integrating IT to BPO using common technologies with the help of Internet-based cloud computing.
Though Bhasin disagrees IT firms have built an edge, analysts such as Singh say IT firms have been growing their interests in the minds of the clients (at the expense of pure-play companies). “There are more opportunities for (an) organisation with an IT heritage. They are gaining better traction to provide a lot of non-voice work,” says Singh. “They have a bigger voice. I am bemused by their noise and the lack of data they provide to demonstrate what they say,” says Bhasin.
What Bhasin does agree with, however, is that the IT firms are entering the BPO industry because “this is a terrific area of growth”. And so with higher technology capabilities and deeper pockets to make investments, the BPO industry may continue to be under pressure from the bigger IT vendors. Companies such as Infosys and Cognizant believe their IT capability has helped them bag clients. “We have the ability to offer infrastructure and technology, apart from the BPO services... In a pure play, the customer would have to invest a lot separately in it,” says Infosys BPO’s Dandapani.
The Genesis
The genesis of Genpact’s current state lies in its history. It started life as GE Capital International Services (GECIS), a captive BPO of GE, which sold 60 per cent of stake in GECIS to PE firms Oak Hill Partners and General Atlantic in 2005 (today, GE holds 18 per cent stake in it). As of today, GE still accounts for 40 per cent of Genpact’s revenues, down from 91 per cent in 2005. But, interestingly, the value of the total business from GE has remained constant. In 2005, GE business was $450 million. In 2009, it is estimated to be about $451 million. So, what Bhasin is eyeing is expanding the portfolio through acquisitions which could further reduce the dependence on GE.
So, what is Genpact doing to stay ahead? For one, Bhasin is trying to become relevant to SMEs. So far, all offerings to SMEs were non-customisable and were bundled in a box. “It is little bit like I will provide you (SME) the service, these are the things you will get, and this is the way you will get it (in a box). And this is the information you will give me,” says Genpact’s chief operating officer V.N. ‘Tiger’ Tyagarajan. But Genpact’s offerings cannot be customised to SMEs’ needs. Bhasin expects things to change, and is working on making Genpact’s offerings more flexible for SMEs. But Genpact will have to compete against other BPOs such as Aditya Birla Minacs that has also decided to enter the SME market with F&A solutions (Genpact’s strength). “Every SME wants a platform, and their requirements are not high. We are offering them services on transaction-based models to reduce costs,” says Milind Godbole, president- operations, APAC of Aditya Birla Minacs.
Next, Genpact is focusing on its healthcare vertical, an area that has been largely dominated by Perot Systems. Genpact has made a beginning with the launch of pilot projects in managing hospitals such as Delhi’s government-run hospitals LNJP and Ram Manohar Lohia. Healthcare used to be a key vertical for Genpact because of GE Healthcare, but going ahead, Bhasin expects he can ramp up from these pilot projects to a few larger private and public hospitals. In healthcare too, Genpact is up against domestic competition. “We are seeing a strong momentum in healthcare. We are incumbents in this space,” says Ananda Mukerji, managing director and CEO of BPO Firstsource Solutions.
Another area of immediate focus is retail. Though Genpact offers analytics in retail, it is still a fairly small player here. But it has bolstered the retail offerings by acquiring Symphony, which would provide analytics and data management services with expertise in the retail, pharma and consumer-packaged goods industries. But again like most of the processes of Genpact, the Symphony offering too is higher up the value chain and would typically be expensive, rather meant for larger retail companies.
In taking the leap of faith in growing the healthcare, retail and SME businesses, Genpact is relying heavily on a proprietary process called the Smart Enterprise Process (SEP). It is a scientific tool that helps Genpact identify efficiency loopholes in a company’s business processes. Tyagarajan says SEP is able to deliver the goods. “We have applied SEP to 14 processes. Some of them are horizontal processes. Some are industry- specific processes,” he says. For example, says Tyagarajan, in an order-for-cash process, a client would only want two things — cash flow and customer satisfaction. SEP disaggregates the process into individual steps, which are analysed to bring in greater efficiency. A typical order to cash as a process will have 240 matrices.
While his eyes are set on new verticals, Bhasin also has to focus on expanding Genpact’s geographies and its non-GE revenues. On his part, he is never tired of emphasising the need to get into new locations and verticals for growth. “...80 per cent of growth will come from new segments; segments like healthcare, SME, public services, government services”, says Bhasin. Starting 2010, Genpact is expanding base in Brazil.
In 2009, Genpact’s non-GE revenues is expected to be $670 million, against $42 million in 2005. But till Bhasin does not get a company to acquire, he has been pushing Genpact to mine existing clients and acquire new ones. Existing clients determined as much as 50 per cent of Genpact’s growth in 2009. “Genpact has been signing new deals even in this economy. The growth is spread over the 36 clients it added in Q3, compared to 26 for the same period last year,” says an analyst. Last quarter, Genpact’s topline grew 5.4 per cent y-o-y.
Quarter after quarter, analysts refuse to let Bhasin live down the idle cash on Genpact’s balance sheet. But on his part, he feels the valuations are still very high. Genpact can return the cash to shareholders, but that defeats the purpose for which the IPO was held. Here, of course, Bhasin has the last word. “We are in no hurry,” he says.
sunny dot sen at abp dot in
(This story was published in Businessworld Issue Dated 15-02-2010)