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Saturday, September 09, 2006

BPO Captives : Doubtful Future

Capgemini buys 51% in Unilever's India BPO screams the headline all over. 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.

On Valuation : Indigo had revenues of Rs 22.3 crore for the year ending December ’05. 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 from 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 captive BPO center may not be the best option available in front of it – seem from an expertise, economics and scaling up perspective. I like Lever's approach - unlock the value/renounce management control where the operational challenges can not 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. As I wrote
earlier, while captive option may look attractive for some software product vendors/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 the only 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 ability to manage it in a concerted way. In my experience, I find that maximizing productivity & minimizing risk - seems to be the most prudent option that enterprises choose to pursue while attempting Offshoring. 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 when Apple chose to close down its India based support operations that there is no merit in keeping support as 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)

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