IBM's India Acquisition Seen As Stamp Of Recognition For Outsourcing

The acquisition of Daksh eServices could trigger similar moves by other U.S. companies.
BANGALORE, India (AP) -- IBM Corp.'s acquisition of an Indian outsourcing firm could trigger similar deals and strengthen the practice of "offshoring" white-collar work to India, industry experts said Thursday.

"We will see more such deals," said Pawan Kumar, who worked with IBM in 1996-2000, helping it establish outsourcing operations in India.

Scores of U.S. firms have cut costs by farming out routine office jobs to India and other countries where wages are significantly lower.

The outsourcing practice has ignited the resentment of labor unions and politicians in the United States, who criticize the loss of American jobs to cheap overseas labor. They say workers are made to pay with their livelihood for increased profits of corporations.

IBM announced Wednesday that its subsidiary, IBM Business Consulting, would buy Daksh eServices, a back-office services firm with 6,000 employees. The deal's expected to close in May.

The Wall Street Journal put the deal at between $100 million and $150 million. IBM India wouldn't discuss such details.

"Our shareholders expect us to tap opportunities in the developing world," said IBM India spokeswoman Varsha Chainani. "And we are aggressively expanding our reach in India."

Despite U.S. criticisms of outsourcing, companies are showing an increased interest in using India as a base for outsourced operations, industry leaders said.

Many Indian outsourcing firms lack the funds to expand and are looking for investments from big players or venture capital funds. Some are also considering share offers to the public.

On the other hand, global giants such as IBM are looking to acquire several thousand low-paid employees in a short time to provide outsourcing services to their clients.

"This industry is investment hungry," said Raman Roy, an outsourcing veteran who sold his call-center firm, Spectramind, for $126 million to Indian technology firm Wipro last year. "If (Indian) companies have aspirations and want to have a certain size, they have to look for deep pockets."

The IBM acquisition has shown that U.S. corporations are determined to outsource their operations to India and become service providers by setting up or acquiring Indian operations, Roy said.

"This shows that even global majors have to find a way to play in this market place," he said.

Kumar, now founder and chairman of Bangalore-based software firm VMoksha, said the price cited in the media suggested that Daksh had got a good deal, signaling India's growing status as an outsourcing provider.

"The price shows that confidence in India as a destination for outsourcing has gone up," Kumar said.

The deal has generated excitement in India, where information technology minister Arun Shourie and the main software trade body, National Association of Software and Service Companies, saw it as an affirmation of the outsourcing trend.

"It signifies the coming of age of India as the preferred destination for offshore services in terms of talent pool and infrastructure," NASSCOM said in a statement.

The Indian Express newspaper reported that Shourie said the deal was "great news for India," but also brought up the issue of the U.S. backlash and India's dependence on the United States in this field.

"Having 60 percent of your business coming from one source is not good news as one will suffer from these threats and other threats like political pressures at some time and recession at others," the newspaper quoted him as saying in New Delhi.

Daksh is India's third-largest outsourcing company. The firm, with head offices in Gurgaon near the capital, New Delhi, handles customer calls and transactions such as payroll accounting for firms abroad. It does not reveal the names of its clients.

For the fiscal year ending March 31, 2003, Daksh had revenues of $29.5 million. The privately held company has so far raised about $29 million from venture capitalists CDC Capital Partners of Britain, Citigroup, and U.S.-based General Atlantic Partners.

Daksh earlier had said it would come out with a public issue of equity shares to raise money for expansion. The fate of this earlier plan after the IBM acquisition is unknown.