‘You’ll see more captive BPO units being sold’

With the chilly portents of recession making western firms doubly cost-conscious, no one is quibbling about whether outsourcing can help them become significantly leaner and more competitive.

But British insurance giant Aviva’s sale last week of its captive south Asian outsourcing operation to New York-stock exchange listed WNS Global Services has fuelled a debate about whether western firms are better off selling their outsourcing operations to Indian tech-service specialists.

The deal marks the first sale of a large foreign-run captive BPO amidst concerns about the long-term viability of such operations against the vagaries of Indian salary and currency shifts.

“The WNS-Aviva deal reflects a trend which is here to stay,” said Neeraj Bhargava, co-founder and group CEO of WNS Global Services, who presided over one of the largest buyouts of a foreign captive BPO in India.

WNS paid $228 million for Aviva’s captive operations in Bangalore, Pune, Chennai and Sri Lanka. In return, Aviva agreed to pay up to $1 billion to WNS over eight years for handling customer service and claims processing. Bhargava offered a bullish
revenue forecast for the fiscal year ending March 31, 2009 at the firm’s annual Investor Day at the New York Stock Exchange saying revenues were expected to be between $425 million and $435 million, up from the company’s previous guidance of $373 million to $378 million.

He spoke with Uttara Choudhury in New York about western firms re-inventing their business model and moving away from running their own BPO operations and relying heavily on Indian outsourcing firms.

How has Wall Street reacted to the WNS-Aviva deal?
We had an overwhelmingly positive response here. It is reflective of the fact that the stock prices have moved up. After a big acquisition, you often see the stock move down because investors are concerned, but people are seeing a lot of value here. We have raised our revenue guidance.

Do you think western firms are getting away from running their own offshoring operations and handing them over to Indian specialists who have the scale to wring more cost efficiencies?
I think, the trend is very-very clear. It happened when WNS itself was created as a spin-out of British Airways. It happened with General Electric spinning out its captive operations as Genpact. It happened with the Infosys acquisition of Philips’ BPO operations in India and now with Aviva.

Basically, companies are saying they want to stick to their core competencies. They want to leave the responsibilities of having strong back-office operations run by specialists like us. Aviva, a pioneer in offshoring in the insurance industry, has now taken the next step — having a partner like us take charge of delivering some of their back-office needs.

Also, if you look at industry evolution, three or four years ago, none of the vendors had the capability of taking over and running a 5,000-person operation as we can do today. Now, I think we are bigger, our capabilities are stronger and we have been around — so the confidence that people will have in companies like WNS running their captive is higher. All that put together and you will see a string of captives moving on to third parties.

BusinessWeek has suggested that western firms are selling their captive BPO operations in India because they have swelled in headcount and are becoming unwieldy for the parent company to run?
I think that is right. When you look at the travel or insurance companies, the business is about managing risk not about dealing with 6,000 people in a country in which your core business doesn’t exist.

It is taxing for them to be dealing with a very large number of people in a non-core activity somewhere far away. It doesn’t make sense anymore.When a captive reaches a peak or is not growing any longer, the career opportunities for people working in it diminishes. It then makes a lot of sense to be part of a larger Indian outsourcing firm.

Are western firms more disposed to selling out because of the wild fluctuations in the Indian currency?
One of the reasons Aviva wanted to change its business model and work with WNS is because it wanted predictability and flexibility on costs. Currency is one of the drivers behind unpredictability of costs. From that perspective, if you have a larger portfolio of business, you are very focused on managing currency risk. Companies then prefer to let a big outsourcer deal with salary and currency shifts.

Earlier, foreign firms also went in for setting up their own captive offshoring operations, because they had a “trust issue” with quality and confidentiality. Has that been resolved with the maturing of the Indian BPO industry?
Nasscom, McKinsey and others have done work on that. And, market studies show no evidence of captives offering better quality of work, nor are their information security practices superior. World-class Indian companies managing data and dealing with lots of companies adhere to both quality and confidentiality. Many of our clients tell us that we do it even more effectively than they do it in their home base. That issue has gone away.

Do you see this trend extending to the US banks and consultancies that have their own captive research and knowledge process outsourcing units in India?
We are already working with several investment banks and managing their research back office activities. I think, it is a question of how forward-thinking companies are and how they look at changing their business models.

Where do you see the synergy benefits from the WNS-Aviva deal? Is it from the cost side or the revenue side?
I think we will see strong revenue growth. Aviva revenues are expected to contribute over $100 million or 20% of financial year 2010 revenues. On the cost side, there is a lot of infrastructure and resources that we can share that make the deal very attractive.