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.

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