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10/8/2008
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Citigroup, Lehman Bros. Sell India Outsourcing Units

Citibank's $505 million sale to Tata was a year in the making, while other U.S. banks may face difficulties unloading India outsourcing operations.

While the government prepares to bail out some U.S. banks, some banks are bailing out of India-based operations.

Tata Consultancy Services on Wednesday announced it's acquiring Citigroup Global Services for $505 million, a unit of Citi that provides business processing outsourcing -- including customer call centers, document imaging, and IT support -- for Citi's various global entities. The unit employs 12,500 people in Mumbai and Chennai.

The deal comes two days after Nomura Holdings of Japan said it would acquire, for an undisclosed amount, Lehman Brothers' India-based BPO and IT services organizations, which employ 3,000 people in Mumbai, nearly half of them in IT. Lehman, a central figure in the financial market crisis, filed for bankruptcy protection last month.

Citi is among the banks that have fared relatively well in the crisis, and is currently battling it out with Wells Fargo over a purchase of Wachovia Bank. Still, Citi has been trying to unload its India-based BPO operation for at least a year as part of a broader cost-cutting strategy.

In the spring of 2007, Citigroup said it would cut $10.4 billion in spending over three years, including global layoffs, moving more jobs overseas, and reductions in IT, including closing half of its 42 data centers. As part of the acquisition deal, TCS will provide offshore services to Citi -- using the newly acquired operation -- in a 9.5-year, $2.5 billion contract.

TCS has been in discussions with Citi for about a year, and has spent the past six months firming up the deal, said N. Chandrasekaran, TCS's chief operating officer, in an interview Wednesday.

Meanwhile, U.S. banks in addition to Citigroup and Lehman are believed to be trying to sell their India-based BPO operations, known as "captives." Most captives are fewer than 10 years old, and were erected to capitalize on India's low-cost talent.

But captive operations have proved more costly than expected, due to rising costs in India and high staff turnover. The talent pool in India has tightened up in the past few years as more businesses have rushed to set up shop there. Indians generally have been less loyal to U.S.-based companies as employers, as India-based firms offer more upwardly mobile career paths, according to analysts and outsourcing firm executives.

India-based IT services firms have long been considered likely buyers of U.S. captives, but those sales opportunities may be drying up, said Peter Redshaw, an analyst with Gartner. Cash-strapped banks are cutting back on complex offshore outsourcing deals in which cost reductions may not come for years, Redshaw said. Instead, they're focusing on immediate cost-saving efforts, through staff reductions, delays in hardware purchases, and better software licensing deals.

As the demand for offshore BPO and IT services for banks slows down, India firms may become less inclined to buy captives to keep up with growth. "I expect to see lots of sellers, and not as many buyers," Redshaw said.

TCS's Chandrasekaran said his company will bring in technology to automate more processes at Citigroup Global to develop more efficient operations, and adds that the acquisition brings fresh "intellectual property" to TCS. "We'll use these properties to create utilities for banking processes in the long term, and we'll take this ability to other banks around the globe," he said.

About 40% of TCS's business is in financial services, Chandrasekaran said, with a large majority of that in the area of IT and very little in BPO.

To find out how CIOs are dealing with this tough economy, InformationWeek has published an independent report on the topic. Download the report here (registration required).

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