Consolidation in outsourcing...some thoughts

July 02, 2007 | Phil Fersht

Am sure you heard the whispers regarding an Infosys / Cap Gemini merger last week - and I don't see this happening.  While I agree that the bold Indian-centric offshore suppliers will - and should - make moves to acquire Western suppliers (and vice versa), I don't buy this one. Infosys wants to develop a strong presence in North America to cement further its ITO and BPO businesses and Cap Gemini's one challenge is to strengthen its US business - which it is addressing, but will take time (the firm is already very strong in Europe and Asia). Having said that, CG is an excellent ITO/BPO firm with some innovative solutions that would add considerable strength to Infosys's global presence (outside of the US).   Infosys has so far proven to be a "build", as opposed to "buy" focused firm, and there doesn't appear to be a compelling reason why it would derail its so-far-successful growth strategy.  Surely the firm would prefer to invest in taking on global clients' shared services and captive operations, as a means to expanding its footprint?

At a future point, consolidation between BPO and ITO firms is inevitable as suppliers vie for high-end outsourcing deals of increasing complexity, scale and scope.  We are increasingly seeing more intricate and unique requirements that span IT and process requirements across finance, HR, procurement - and other process areas.  And while it may make sense for some companies to work with a multitude of suppliers, the increasing capability of global outsourcing firms to broaden their delivery scale and capabilities across multiple processes, languages and technologies is simplifying the equation for companies looking for longer - and more strategic - outsourcing relationships.

My personal view is we'll see some alliances between some of the middle-tier ITO and BPO vendors - be them partnerships or mergers, as these firms seek to bid on more complex deals.  Moreover, there is no reason why outsourcing vendors can't be successful with strategic partnerships, as opposed to outright acquisitions.  We will likely also see one or two major takeovers over the next year involving the leading Indian and Western outsourcing providers, but the aggressive evaluations of offshore firms at presence is holding back a lot of the acquisitive strategies - which are only likely to happen when we have a valuation correction in the Indian market. 

Predicting the future in a global market as truly unique as outsourcing is a science unto itself - as companies today have unique options and challenges to strip out costs and focus on their core businesses.  One thing is certain - Rome wasn't built in a day, and neither were outsourcing suppliers' global delivery capabilities...

Bush_india    

Discussing the merits of offshore captives versus outsourcing last week

Posted in: Business Process Outsourcing (BPO)

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