Leader’s Dilemma

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.

WEAKNESSES 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 GAPS IN PORTFOLIO 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 CHALLENGES 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.

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.