Companies buy a piece of the outsourcing action
- Posted:
- 10:14 03 Sep 2004
Companies seem increasingly keen to buy a piece of their
offshore outsourcing suppliers.
Barclays Bank is about to acquire a 50% share in Intelenet Global
Services, the Indian business process outsourcing arm of HDFC. The
announcement follows hot on the heels of IBM's announcement that it
plans to acquire Daksh eServices and a statement by Citigroup that
it is to increase its stake from 44% to 100% in e-Serve
International.
These moves beg a few questions. Why are companies buying a stake
of their offshore outsourcing supplier? What are the benefits and
pitfalls?
An outsourcing arrangement, whatever the geographical location, has
the problem of managing the supplier. It is far easier to manage
the supplier when you own them.
The first criterion for selecting an Indian company to buy into
should be the ability of its managerial team. This is not just
identifying a good manager. What is needed is a company where there
is an effective management structure.
The biggest risk in buying a stake in an offshore supplier is that
there will be a clash of managerial styles.
Other things to consider include the capital outlay in the company;
extra training costs and staff turnover overseas. It's a steep
learning curve and it may take years to develop the capability of
the supplier.
One thing we can guarantee is that it will have a big impact on the
way the UK IT director plans their strategy as well as their
accumulation of air miles.
Barclays and its offshore owning cohorts need to be able to control
their costs, realise their investment in India and be able to
predict the future service delivery both in terms of cost and
security of tenure.
They also need to be able to prove they have control of their data.
You cannot do any of these things to the UK and US financial and
treasury authorities' satisfaction in the post-September 11 world
if you outsource a major part of your business offshore without
being able to demonstrate that you have all the necessary controls
in place. Ownership gives you those controls.
On the plus side, Barclays and others also recognise a good
investment opportunity when they see it; with IT outsourcing
continuing to grow and business process outsourcing set to boom,
particularly in the highly regulated financial sector, then who
better to provide the economics of offshore to a regulated finance
sector than a British or US bank with its own operation in
India?
It is a natural progression from joint ventures between user and
supplier and can help the user protect its intellectual property,
such as software and ITskills.
Financial services organisations are major users of offshore, so
while Barclays and others buying into their offshore service
provider will not quite become the norm, we will see more of
it.
Edward Kirkby is business development director at Morgan
Chambers
