IT and ITES: Held Captive in India

23 07 2009

 In the IT off shoring and outsourcing industry, it is really hard to decipher a trend among the companies. New captives are being set-up. Many captives are expanding and some captives are being sold.

In the early ’90s the early outsourcers like GE and Texas Instruments saw the India advantage and set up their own captive units for IT. Following their success, many companies like Philips, Siemens set up their captive units in India and started moving a lot of work and jobs to India. Many multinational banks like Citibank had a multi-pronged India strategy using vendors, created their own software products company and also a captive BPO unit.

When the MNCs were setting up captive units, the large Indian IT companies of today the likes of TCS, Infosys were busy taking up on-site (body shopping) assignments and doing a small part of the projects through their offshore centres.

The real feasibility of a captive BPO unit and the attractiveness of India as a BPO was shown by GE’s captive unit namely GECIS ( now GENPACT). Following GE, several banks and financial services units set up their captive IT and BPO units in India. This trend really took off after the dot-com bust/ Y2K crisis in 2000.

Even today several latecomers are setting India captives. Wells Fargo, J P Morgan, Nomura , Fidelity and many insurance companies have set up captives in India in the last two years. Many captives who came in earlier are expanding in India using the cost-advantage of India to move jobs and grow in these recessionary times. HSBC, UBS, Bank of America, Deloitte to name a few.

Yet, some of the early captives are selling out. GECIS is no longer a captive of GE and is owned by a clutch of private equity investors. Philips captive was acquired by Infosys and Infosys took on the work as well as the staff of servicing Philips. TCS acquired Citibank’s captive BPO unit in India in a 500 Mn $ deal last year. Cognizant recently has taken over the captive unit of Invensys. The Chennai based captive IT unit of Alcatel is being taken over by Infosys. 

The attractiveness of India is bringing several companies to set-up captives. These captives are set-up with minimum investments and limited transfer of people from the western countries. Slowly, the work is gradually moved to India and the local staff is recruited and trained to handle the work. These captives become profitable from the first year itself in view of the wage arbitrage. In three to four years time with growth rates of over 50 % year on year, these captives acquire significant size. Being highly profitable they command good valuations too.

Some of the owners of these captives, faced with financial difficulties, (like Citi) in these recessionary times decide to sell off these units. Indian IT companies who were used to 30-35% growth rates suddenly find the market very difficult, so find acquiring captives as a good way of buying growth. The parent companies continue to use India for their IT/BPO services except that instead of using the captive, they have a long-term contract with a vendor.

The other captives who are not tempted to cash-in their valuations early are happy to accumulate their savings year-on-year. Proprietary knowledge and strategy is one more reason many MNCs want to retain their captives.

Jobs are moving to India, when captives are set-up. When captives expand new jobs are being created. When a captive is sold out, the jobs remain in India, only the employer changes.

– G. Mohan





Magazines or Books: Changing Value Propositions

17 07 2009

Recently, while traveling by train from Hyderabad to Kolkata, I was faced with a dilemma, I have not faced before. Whether to buy or a magazine or a book? In the past, they both had their distinct price points, hence did not compete at all. A typical magazine at Rs 15-25 and a book for over Rs 250, had their distinct positioning. Magazines was meant to be read during the journey to catch up on the latest and discarded. Book was supposed to be read at leisure, brought back and stacked at the book-shelf, adding to one’s collection.

 Regular readers of magazines would have noted the sudden across-the-board increase in prices of magazines. BusinessWorld which had long been priced at Rs 10 per week, has been increased to Rs 15. Outlook Business,a fortnightly, is now priced at Rs 25 against Rs 20 until recently. Forbes India has been launched at a premium price of Rs 50/-. Mind you, they mention this is just the invitation price. The general news magazines like Outlook and India Today have also revised their prices.

Wondering if this is in response to rising costs or declining revenues from advertising. Just as the prices of magazines are going up, the prices of Indian paperbacks have been brought down.

I found several bestselling paperbacks like Chetan Bhagat’s “3 Mistakes of my life”, BPO-Sutra, compiled by Sudhindra Mokhasi priced at Rs 95/-. Even non-fiction/ management books like Kishore Biyani’s “It happened in India” and Rashmi Bansal’s “Stay Hungry, Stay Foolish” are priced at a relatively inexpensive Rs 99/- and Rs 125/- respectively. What should I buy, a magazine at Rs 50/- or a book at Rs 95/- ?

Suddenly, the book looked a great bargain. You guessed it right. I ended up buying a Rs 95/- paperback. By playing the price game, it appears that the publishers have been able to expand volumes considerably. Rashmi Bansal wrote in her blog recently, that her book has already crossed the 100,000 mark.

The next time you visit the airport or railway book stall to buy a magazine, do check out the books on offer.

 – G. Mohan





Errors of Omission or Commission : A Hobson’s Choice?

10 07 2009

Jeff Bezos, the founder of Amazon.com has recently commented:

“We’ve made many errors. People over-focus on errors of commission. Companies over-emphasize how expensive failure’s going to be. Failure’s not that expensive….The big cost that most companies incur is much harder to notice, and those are errors of omission.”

 

The above quote from Jeff Bezos has set me thinking. Are the errors of omission always more costly than the errors of commission? Is it only applicable to high-technology businesses like Amazon’s or is it applicable for all businesses? In high-technology businesses like Internet, the business life-cycle is very short. It is important that the business leaders look for new opportunities constantly. Also, with barriers to entry being low in such businesses, there is always a competitor who can offer a better proposition to the end-customer. Microsoft’s delayed entry in the Internet space has been an error of omission, which it has not been able to make up in spite of all the efforts and investments. It is clear that the high-tech companies can ill-afford errors of omission. The cost of experimentation in Internet based businesses is not very high. Companies like Google are always keeping several products in beta stage, trying to learn about user-preferences and also learning from their own errors of commission. In other businesses, it may not be always true. The pace of change is slow, hence even if you miss being the first mover through an error of omission, there is a chance to catch up. There is lumpiness of investments, which can make errors of commission very costly, sometimes even leading to survival questions.

 

Ratan Tata has openly admitted that Corus and JLR acquisitions are errors of commission, in terms of timing and valuations. Now, both Tata Steel and Tata Motors have to really struggle hard for several years, to correct these errors. Business conservatism is about minimizing errors of commission. Infosys is a shining example of a conservative business in a high-tech business. It evaluates hundreds of acquisition proposals and just lets them go, if they find there is an iota of possibility of an error of commission. Even in the recent case of Axon acquisition, it chose not to compete with HCL Technologies. Only time will tell, it was an error of omission on the part of Infosys or an error of commission for HCL. In most old, large companies, the managers are obsessed with avoiding errors of commission, rather than avoiding errors of omission. Because, errors of commission can be attributable to an individual or a team and responsibility can be fixed. Nobody gets punished for errors of omission.

 

Stretching this discussion to another walk of life – in test cricket, – the captain or the batsman is focused in avoiding errors of commission. A batsman can leave several scoring opportunities but should not play a wrong shot, because he can get out. A captain can avoid an aggressive declaration thereby making an error of omission, because draw is an option. In T20, both errors of omission and errors of commission are punished immediately. In the recent World Cup T20, MS Dhoni by sending Ravinder Jadeja ahead of Yuvraj Singh , made an error of commission. By scoring at just 50 % strike rate in another match, Dhoni made an error of omission. Both got punished by Indian team losing the matches.

 

In career moves, several professionals commit errors of omission when they are either deeply absorbed in their routine work or they are in a cozy comfort zone, by being oblivious to opportunities for change. A few commit errors of commission by landing up into wrong roles or wrong organizations, when they are too desperate for change. In the case of a career, errors of commission are usually costlier than errors of omission.

 

 Warren Buffet while explaining his investing style explained that he normally invests in a business forever. He mentioned that he may let go of several investment opportunities, but the business that he selects he wants to be sure. In other words, he is open to several errors of omission even when he is sitting with huge piles of cash but wants to avoid errors of commission at any cost. He is the second richest man in the world, surely he knows what he is saying. Yet, I wonder can you really avoid making errors of commission, if you do not make errors of commission early on by burning your fingers and learning. Can we generalize that one should not make errors of omission in a growing stage and one should not make errors of commission when you have wealth or reputation to preserve. In the Indian housing market, if someone had not invested in a house or a property before the boom started in 2003, it would have been an error of omission. But if somebody booked a house that too an incomplete project in late 2007 or 2008 it would have been an error of commission. What can you take, an opportunity loss or a real loss? If you do not build physical exercise in your daily routine, it is an error of omission. If you acquire a unhealthy habit like smoking, it is an error of commission. Both can prove costly to a person’s health in the long run.

 

In selection of one’s spouse, which error is more distressing of omission or commission? 

 – G. Mohan








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