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Offshore Business Process Outsourcing At The Crossroads

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Capgemini buys majority stake in Unilever's India BPO, scream the headlines all over. For starters, business process outsourcing (BPO) is the leveraging of technology or specialist process vendors to provide and manage enterprise processes and applications, both critical and non-critical. Common examples include the likes of call centres, human resources, accounting and payroll outsourcing. Generally speaking, business process outsourcing may also involve the use of off-shore resources.

The Unilever India Shared Services (Indigo), is a captive BPO company set up by Unilever in India with around 600 employees in Chennai (India) at its development centre. The captive centre carries out finance and accounting-related processing for Unilever companies in 45 countries. Paul Hermelin, CEO of Capgemini, says that he would look at acquiring the remaining stake at a later date. While the cost of the acquisition (sellout?) was not known, it is expected that since the deal includes the price of acquisition of the stake and a revenue contract for future business, the total cost may not be very high.

Indigo had revenues of Rs 22.3 crore for the year ending December 2005, with the average per head revenue of Indigo at e20,000 (Rs 17.4 lakh). Since captive BPO units are primarily cost centres, revenues or earnings are not likely to be the relevant benchmarks in valuing the deal. Instead, the valuation is likely to be based more on land, building and other infrastructure. The news also said that Capgemini and the Unilever group have also entered into a seven-year agreement to deliver the full range of BPO F&A services to all the Unilever companies, which Indigo currently serves.

As I see it, many are looking at this as a strategy beneficial to CG for scaling up in India. I would also urge readers to look at it through a different lens – that of HLL; unarguably India’s corporate icon and Unilever’s crown jewel would not have taken such a decision without working out its near and medium term benefits. Its likely the case that HLL must have thought that sustaining a captive BPO center may not be the best option available in front of it – seen from an expertise, economics, and scaling up perspective. I like Lever's approach – unlock the value/renounce management control where the operational challenges cannot be managed with its existing core competency.

There are lessons for several multinationals who are setting up /scaling up their captive centers in India. No MNC can understand India better than Unilever. HLL has been in the country for several decades and is perhaps the largest non-government oil/IT services corporation in India. While the captive option may look attractive for some software product vendors and others in a limited way and for short duration, in reality, we see that captive option falls short on one most important dimension – arresting turnovers, repeatedly cited as a matter of concern. The ability to support a wide range of operations may also be doubtful with captive models. Dell may be a notable exception.

Those who look at offshoring as just a means to shave off some costs and hope to improve on savings with passing time would definitely fail to achieve their goal measured over a period of time, unless they manage to work on the ability to manage it in a concerted way. In my experience, I find that maximizing productivity and minimizing risk seems to be the most prudent option that enterprises choose to pursue while attempting offshoring and the ability of the captives on that front to outperform outsourcing is still an open question. The process of offshore outsourcing may be more evolutionary and a determined pursuit to engage more wide and deep would be a sure way to reap consistent benefits. I echoed similar views when I wrote that when Apple chose to close down its India-based support operations that there is no merit in keeping support as a captive unit where scale is not there – whichever part of the world it might be – outsourcing support may be the long term option for Apple (all other industry majors across verticals). Clearly those investing in captive centers may need to review the options in front of them more carefully.

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