Companies Selling Off Captive IT Shops In India To Outsourcers - InformationWeek

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IT Leadership // CIO Insights & Innovation
Commentary
6/8/2009
07:21 AM
Bob Evans
Bob Evans
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Companies Selling Off Captive IT Shops In India To Outsourcers

A rapidly growing number of Western companies are selling to outsourcers their India-based "captive" software and IT operations because the model is no longer profitable or the sellers need cash or both. One U.S. outsourcer said it's done six such deals this year and has 15 more in its pipeline.

A rapidly growing number of Western companies are selling to outsourcers their India-based "captive" software and IT operations because the model is no longer profitable or the sellers need cash or both. One U.S. outsourcer said it's done six such deals this year and has 15 more in its pipeline.This new pattern of U.S. companies selling off what they expected would be low-cost development centers reverses "a decade-long trend as companies look to slash costs and eliminate headaches during the recession," the Wall Street Journal reports.

"Some have received hundreds of millions of dollars for their centers, while others have sold their sites for the cost of the equipment inside," the Journal articles says. "Almost always, the buyer gets a multiyear contract to provide the same services back to the seller."

As is happening more and more in our highly interdependent global economy, the fundamental business model behind the captive India-based IT centers has changed significantly in a short period of time. The original idea of tapping into a workforce at a dramatically lower labor cost is no longer valid in many cases, and in fact has become counterproductive: Forrester Research says it is now 25% more expensive for companies to operate their own offshore captive centers than it is to have an outsourcer do the work.

And the Journal article indicates the trend is accelerating - rapidly. It cites two outsourcing companies that are based in the U.S. but have most of their operations in India as being eager acquirers of such captive centers because for these outsourcing companies, such work is not a one-off specialty project: it's their sole business.

Symphony Services Corp. CEO Gordon Brooks said his Palo Alto-based company "has taken over six offshore facilities for clients during the past six months and has 15 deals in the pipeline," writes the Journal's always insightful Ben Worthen.

"For outsourcers, taking on facilities is a way to bring in experience and lock up a customer "for at least two years," says Peter Harrison, CEO of GlobalLogic Inc., an outsourcing company based in Vienna, Va., that operates centers in India. Mr. Harrison expects to close on two such deals this month."

In very high-profile deal that fits this pattern, Global CIO reported last month that HP was close to buying the huge captive unit of Fidelity for $150 million:

Hewlett-Packard's EDS services unit is close to buying Fidelity's India-based IT operations for $150 million plus a long-term outsourcing deal from Fidelity, the world's biggest mutual-fund company. IBM had the inside track earlier this year, and Infosys, which has 3,000 people on the Fidelity account, could lose one of its largest clients.

If the deal goes through, the 2,000 employees of Fidelity Management Research India in Bangalore and Chennai would play a central role in a reported $500 million, multiyear outsourcing deal that is being rolled into the overall transaction, according to a report in the Economic Times of India.

The deal would become the latest in a series that has seen global financial-services companies sell the India-based back-office IT operations they've built in recent years. In each case, the transactions have also included long-term outsourcing deals between the seller and buyer, and also in each case the seller has said its rationale in making the deal was a desire to return its focus to its core business.

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