BPOs Increasing Acquisition of Captive Client Centers
Last June, I wrote an article about UBS (NYSE: UBS) exploring a sale of its BPO and KPO units. In the second week of October, Cognizant Technology Solutions Corp. (NASDAQ: CTSH) bought UBS’ India-based captive service provider for $75 million.
Not only is the acquisition an indicator of the continuous growth of the outsourcing industry, it also indicates the increasing number of BPO players acquiring captive client centers. Investors respond positively to such acquisitions. As last October 14th Cognizant’s stock was performing at $39.67, the following day when the announcement of Cognizant’s acquisition of UBS’ India Service Centre Private Limited (UBS ISC) came, Cognizant’s stock jumped to $40.15 with trading volume higher than the previous day.
The acquisition is a win-win for both firms. Cognizant gets to expand its market reach and UBS gets to lower costs. With UBS’s sale of its outsourcing units, the firm is shifting from a buy rather than a build strategy for its offshoring needs, enabling it procure services from lower-cost locations. This is the reason why as part of the deal, UBS signed a 5-year $442 million service agreement with Cognizant under which Cognizant will provide outsourcing, I.T. and remote infrastructure management services to UBS divisions around the globe.
UBS and Cognizant’s deal is a classic model for expanding market reach in the BPO industry. The model is called the “Captive Spin-Off” (also known as “Captive Divestitures”) approach. According to Thomas Reilly, CEO of China-based outsourcing firm Next Horizon: “Spinning of a client owned share service center (a “Captive SSC”) is a classic model for growing a BPO business. Most of today’s leading BPO providers used this technique at one time or another in their growth models… Expect a wave of similar transactions to follow - as these aging Captive SSC’s look for step change at a time when their owners are more eager than ever to covert these assets into cash. At the same time the IT Outsourcing providers have seen their historic 20%-30% CAGR evaporate and are now looking for new ways to grow.”
Some of the recent captive divestitures include American International Group, Inc. (NYSE: AIG) captive to MphasiS (NSE: MPHASIS) and Schneider Logistics and Amex’s captives to EXL Service Holdings, Inc. (NASDAQ: EXLS).
While captive acquisitions are increasing, the number of global banks expanding operations from their captives is also on the rise. Credit Suisse (NYSE: CS) and Standard Chartered (LON: STAN) are setting up new KPO centers in India as Wells Fargo (NYSE: WFC) continues to expand its captive operations. An estimated 28 companies have set up captive operations in Asia, Europe, Latin America and India bringing the number of captives being set up globally to an 18-month high, reports Market Vista –a quarterly analysis of offshoring trends by Everest Research Institute.
Author: Kim G.
Tags: AIG, American International Group, BPO, Cognizant Technology Solutions Corp., Credit Suisse, CS, CTSH, EXL Service Holdings, EXLS, MphasiS, Offshoring, Outsourcing, service provider, STAN, Standard Chartered, UBS, Wells Fargo, WFC
December 2nd, 2009 at 1:40 am
Opening captive centers in other regions is indeed a good strategy for enterprises to adopt, other than giving them access to regional markets, it also helps build up the local economies of these captive facilities by providing career opportunities for the local workers or talent pool.
December 21st, 2009 at 10:44 am
I totally agree with G.Kim.
January 27th, 2010 at 1:00 am
The author of http://www.blog.infinit-o.com has written an excellent article. You have made your point and there is not much to argue about. It is like the following universal truth that you can not argue with: The nicer a day at the beach, the more cold and gritty the end of day will be. - TRUTH! Thanks for the info.