As competition to seal lucrative outsourcing contracts heats up, a number of major vendors have taken to acquiring clients’ assets or offering cash upfront in order to seal big deals. The main advantages of this tactic include expanding capabilities and capacity and establishing physical presence in strategic locations, while risk is relatively low given the value of the contracts and the additional revenue to be drawn on.
There have been relatively few examples of this trend in Latin America to date, but one analyst described it as “only a matter of time” before it becomes more common, while a Wipro vice-president confirmed the region as “definitely in our plans” when it comes to similar acquisitions.
A Major Development
“The way in which Indian outsourcers are pursuing new business of late is a major new development. They have become more open to taking over the IT arms of clients and they are also investing money upfront in these initiatives that involve taking over infrastructure and people – kind of going back to the tactics of the pre-recession era. There is also more focus on developing intellectual property assets to facilitate their platform as service offerings,” industry expert and former Forrester analyst Hansa Iyengar told Nearshore Americas.
The most notable recent example of this trend was Wipro’s acquisition of the IT subsidiary of Canada’s business conglomerate ATCO last month. “Wipro is spending about $195 million USD on this,” Iyengar noted. Subbi Lakshmanan, vice-president and domain head of energy, utilities and natural resources at Wipro, confirmed that the 10-year contract is about $1.2 billion CAD ($1.1 billion USD), making it the company’s single biggest outsourcing deal to date.
Wipro’s acquisition of ATCO’s IT subsidiary followed the earlier acquisition of the IT services arm of the McLean, Virginia-based Science Applications International Corporation. Such acquisitions were “the result of a longer term strategy because we’ve always wanted to establish a local presence in the region,” Lakshmanan told Nearshore Americas. “This particular opportunity was aligned with our longer term goal to establish a local nearshore presence in western Canada and also western Australia,” he added, referring to ATCO, which has operations in both locations.
Beyond establishing a physical presence in key markets, the primary benefits of the latest deal included the acquisition of “acquired skills and indeed competency throughout the oil and gas domain” plus physical infrastructure such as Big Data centers. “I don’t think there’s a risk because our business case is essentially based on the foundation of revenue that we would be getting from the actual group,” Lakshmanan said. This additional revenue means that Wipro has “a head-start in terms of the business and this gives us an opportunity to expand further.”
A Low-Risk Tactic
Regarding the risks that outsources take on by acquiring clients’ assets, Peter Ryan, principal analyst in IT services at London-based consultancy firm Ovum, said, “There’s always the possibility of getting in over your head but if you’re talking about potentially one or two acquisitions I don’t see that happening. These are in many cases multi-million-dollar companies and you’d have to be acquiring a lot of capacity in one particular market in order to overstretch yourself or even be in a position where you’re going to be facing a lot of challenges from a standpoint of economic or political stability.”
Moreover, “outsourcers don’t spend money easily in regard to investment, but when they do they’re relatively certain that there’s going to be some benefit … To my mind when occurrences like this do happen it’s because a fair amount of due diligence has gone into this decision,” Ryan added.
Wipro’s acquisition of ATCO assets was the latest of a string of similar deals by big Indian outsourcing firms. In May, HCL Technologies sealed a seven-year contract with PepsiCo worth $500 million USD, having reportedly offered cash upfront to seal the deal ahead of rivals such as IBM. And in April, TCS merged its Japanese subsidiary with Mitsubishi’s IT Frontier Corp (ITF). “TCS is spending $500 to $600 million USD on this,” Iyengar noted, in return for taking on a 51% stake in the new entity. Elsewhere, “Infosys is also on the lookout for some similar opportunities and Tech Mahindra is forming a joint venture in Saudi Arabia, so this trend is gaining ground,” Iyengar said.
Will This Catch On in LATAM?
One of the earliest examples of this trend came in Latin America, with IBM’s huge US$1 billion, 10-year deal to overhaul the IT operations of Mexico’s Cemex construction firm in 2012.
“That was one of the first examples where we started to see that happening,” Iyengar said. The win-win deal enabled IBM to expand its Latin American operations while saving Cemex $90 million USD annually throughout the duration of the contract. Although IBM did not pay upfront to secure the deal or acquire Cemex’s IT subsidiary Neoris, Iyengar noted that “they did agree to take over the assets, so there are variations in approach.”
That instance aside, Iyengar noted that “for now this trend is happening more with European, Asian and U.S. clients. It hasn’t yet hit Latin America, but I believe that the vendors are just waiting for the right opportunity to come along. It’s only a matter of time.” Wipro is of the same mind, Lakshmanan said: “Latin America definitely figures in our plans so when there’s an opportunity we would definitely like to explore that.”
However, Iyengar noted that “the one bottleneck in Latin America is still the wariness about sending work offshore, and to add to that, there are not many Latin American vendors who would be ready to invest so much upfront, not to mention the risk of taking over the assets and people. The Indian vendors have much more experience they can leverage. They have done this before; they know the risks and rewards. Latin American corporations would likely open up if 1) the regulatory atmosphere is conducive; 2) there is more openness to work with an offshore player; or 3) if local Latin American vendors warm up to taking risk and offer similar services.”
Ryan added that he did not see this relatively nascent trend as being more prevalent in any specific region of the world, “but given the amount of investments that happen with regard to nearshore in the Latin American region, it’s certainly a part of the world that’s setting itself up nicely for these types of tactical acquisitions to take place.”
“There’s a couple of advantages from the outsourcers’ perspective: it gives them more capacity and in my opinion the ability to grow capacity in a region like Central or South America is very important. Because it’s not just going to be the servicing of the overseas customers or clients that you need to be concentrating on – it’s also the fact that many of these local economies are growing very rapidly and the domestic opportunity is going to be big. Therefore, having that increased capacity that comes with the acquisition of a client’s operation is really the main advantage,” Ryan explained. “The other fact of the matter is that when you’re acquiring that capacity you’re also acquiring in many cases some really good technology, some really good hardware, and you’re potentially acquiring some good facilities in very strategically located parts of a particular city too.”