An Advocate of Outsourcing



Way back in 1994, American business tycoon Ross Perot stood for the US
presidential election and almost turned the apple cart on two of his formidable
rivals–the eventual Democratic president Bill Clinton and the then Republican
president George Bush Sr. Apparently, his calling card was going against the
conventional policies of the day and this very novelty nearly resulted in the
biggest upset in the history of US democracy.

Today, Perot might be light years away from politics, (or maybe not if some
US media reports are to believed) but in his business avatar he seems to have
hardly changed his stripes. Especially in another election year, when both
presidential candidates George Bush Jr. and John Kerry have jumped on to the
anti-outsourcing brigade, Perot again seems to be swimming against the tide by
projecting himself as a strong advocate of offshore outsourcing.

Nothing proves this better than the recent decision by Perot Systems, his
Plano-based company, to buy out HCL Technologies’ 43-44 % stake in the JV HCL
Perot Systems (HPS) for $105 million that effectively announced Perot’s
increasing presence in India. The move reiterates Perot’s anti-establishment
credo even in the world of business, and perhaps proves once more that the US
anti-outsourcing backlash is only a transitional phenomenon bound to die its
natural death once a new incumbent for the White House has been decided.

Where Perot Scores
Cutting down to brass tacks, what Perot Systems has done now is only a
logical conclusion to what some of its large competitors on the global scale
have done years back. Illustrious names like IBM Global Services, EDS, Accenture
or Computer Sciences Corporation already have offshore development centers as
well as back office processing units in India. While Perot did have some sort of
presence through HPS, in today’s scale of economics it was just time before it
also took the full plunge in India. Only that the decision, which coincides with
the current anti-outsourcing wave (particularly to India) prevailing in the US,
gives it a rather interesting color.

The HPS JV was formed between Perot Systems and HCL Technologies way back in
1996–when the first signs of Advantage India for offshore outsourcing were
being felt. For most of the global outsourcing leaders, barring IBM, having a
offshore development center in India was still a distant dream.

How
the Divestment Helps HCL
n Removes
channel and brand confusion
n Allows
it to pursue outsourcing goals independently
n Resolves
hassles about composition of management team
n Results
in fresh cash inflow
How
the Acquisition Helps Perot
n Serves
a strong go-to-market component
n Provides
a stronger integration across all levels of its business
n Strengthens
its global onshore/offshore presence
n Grow
its presence in the Asian market and increases geographic footprint

In the words of Brian Maloney, COO, Perot Systems Corporation, the company
had the foresight and vision at that point of time to judge the advantages of
India’s growing number of engineering graduates. However, much water has flown
down the Atlantic during the past eight years. Today, not only is India
acknowledged as the global offshore outsourcing destination no.1, many customers
are asking their outsourcing partners to renegotiate contracts to include
offshore work to India, as they believe that there will be substantial savings
with offshore labor. So despite all the hype about backlash, a senior Frost
& Sullivan analyst feels that market demands dictated Perot Systems to own
the entire Indian operation instead of continuing to maintain it as a JV where
not only there is an uncertain future, even strategies cannot be enforced
unilaterally.

As of December 2003, when the HCL divestment in HPS was announced, the JV had
cash and short-term investment assets of $45 million and sales of nearly $80
million in the first three quarters of 2003-04. In the light of these assets and
considering the brand equity of India as an offshore destination as well as that
of HCL Technologies, David Garrity, analyst with American Technology Research
feels that $105 million was a pretty good price at which Perot Systems managed
to buy out HCL’s stake in the venture. Earlier in July 2003, Perot Systems has
dished out $10 million for Chennai-based Vision HealthSource, a BPO firm working
in the healthcare sector. This gave Perot Systems the complete India offshore
outsourcing bouquet, starting from IT services to BPO.

Further more, HPS had sold off its 49.5% stake in its JV, Aircom HPS Wireless
Services, to UK-based Aircom International in January 2004. Apart from cash
inflow, it also enabled Perot to move out of wireless services, which anyway was
never considered a focus area.

The advantages for Perot Systems Technology Solutions (India) (the new name),
are neatly summed up by Maloney. “Acquiring HPS was a logical step in the
development of our onshore/offshore application outsourcing model. Not only does
this expand our global software team, but it also provides us with new clients
to serve and expands our geographic footprint. The reason for the buy out is
primarily our desire to reinforce our application capability. We believe that
having run its life as a JV for seven years, it made sense for us to have
complete control of it and to consolidate it under Perot.”

The HCL Angle
The official version from HCL behind its divestment in HPS has been a terse
two-liner issued by Shiv Nadar. “By this equitable agreement arrived at
with Perot Systems, we also resolve channel and brand conflicts in the
marketplace. It will help both the partners to pursue their goals
independently.” The brand conflict issue has been plaguing HCL for a long
time especially considering that HCL Technologies also has ambitions to emerge
as a large global outsourcing partner. While there is little doubt over HCL
technologies blue-chip progeny as a global player in this space, the confusion
over two brands from the same stable could have stymied its ambitions to reach
the league of an IBM, EDS or Accenture in the long run.

Probably this inherent contradiction over two HCL brands has led to reports
emanating from various sections of Indian media over the last two years about an
impending conflict between HCL Technologies and Perot Systems. Some reports
claimed that differences had cropped up once Perot Systems had pushed HCL for
changes in the senior management level of the JV, a gesture that obviously did
not go too well with India’s fifth largest software exporter. Though official
HCL spokespersons are not willing to comment on this issue, there have been
rumors floating about HCL itself buying out Perot’s stake in HPS and merging
it with HCL Technologies to have only one entity in the outsourcing space.

How it Would Work
While it is easy to analyze how the two players gained from the arrangement,
it is perhaps more pertinent to investigate how Perot Systems Technology
Solutions (PSTS) plan to function in India and what role it would play in the
overall functioning of Perot Systems. It is easier to address the second point.
HPS itself was slated to grow by 30% in 2003-04 and the formation of PSTS would
result in nearly 40% growth for Perot Systems during the same fiscal. This is
because though Perot Systems has only now been able to blend its operations with
HPS with the formation of PSTS, it has started recording profits from HPS
immediately. Beginning with the Q4 results, Perot Systems has started
consolidating PSTS earnings into its own. For the record, PSTS, or the erstwhile
HPS, recorded revenues of Rs 78.7 crore and a net income of Rs 9.3 crore for the
first nine months of 2003-04.

Adds Mindy Brown, Perot Systems spokesperson, “PSTS will help grow our
presence in the Asian market, providing opportunities that will flow both
ways.”

Speaking about business synergies, Maloney agreed that PSTS would augment
Perot in its traditionally strong verticals like healthcare, financial services,
manufacturing and strategic markets like telecom services. The new company is
expected to generate 50% of its revenues from North America, 40% from Europe and
10% from Asia. “In the onsite-offshore model, this is one of the best mixes
one can have,” he claims. HPS brought with it 75% of its 70 active clients
to the Perot stable. This includes customers in the US, India, UK, Singapore,
Switzerland, Luxembourg, Germany, Thailand, Malaysia, Japan and Australia.

Regarding realignment of India operations, C P Gurnani, COO, PSTS, informs
that the company would add about 2,700 people in the next 12 months, mainly to
augment its BPO activities that came from its Vision acquisition. Currently,
PSTS has about 3,300 people out of which 2,500 are from the erstwhile HPS, while
800 are from Vision HealthSource. It has established a new facility in Chennai
that would primarily cater to its BPO activities, while IT services would still
be handled out of the Noida and Bangalore facilities. So far, the Bangalore
development center was working on applications development and according to
Maloney the company is likely to move gradually into remote infrastructure
management, leveraging Perot’s worldwide expertise in infrastructure. PSTS
would have two separate business units- the Technology Practices handling the IT
services and Business Processes handling the BPO part.

On whether the company would increase its outsourcing to India, Maloney sums
up, “We will continue to grow our application work on an offshore basis. By
virtue of owning this company, we will also consider infrastructure outsourcing,
but we will take that question gradually.”

PSTS is also betting big on its BPO operations. According to Maloney, the
company is also open to acquisitions in India to strengthen its BPO services in
the space of manufacturing, telecom and financial services. Vision has been one
particularly successful acquisition on the healthcare front. With a client base
of more than 25 US-based healthcare billing companies, Vision handles more than
$1 billion in healthcare provider claims per year for physicians and
hospital-based and physician specialties across the US. The company’s ISO-9001
certified claims processing centers and call centers in Chennai process more
than 25 million transactions and 670,000 phone calls per year. 

All these point towards a bright future for PSTS and its increasing
importance in the Perot Systems fold. If the integration over the next 12 months
is seamless, this can turn out to be an exemplary case to shut off the mouths
off the anti-outsourcing brigade. Ross Perot might never become the president of
the United States, but if PSTS succeeds he might be remembered as one of the
foremost evangelists in the outsourcing Hall of Fame.

Rajneesh De in Mumbai

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