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You hear it everywhere: Today, the market for outsourcing is mainly IT outsourcing, but business process outsourcing is coming on strong and will grow faster than the venerable ITO. Just how will this happen?
Heres one example: Tata Consultancy Services scored a coup recently in the United Kingdom when the Indian company signed an $847 million, 12-year deal with Pearl Group. Pearl manages insurance and pension funds that are closed to new investments.
TCS will transfer business processes of Pearl to a new TCS subsidiary in the United Kingdom, which will take on 950 of Pearl Groups 1,100 employees, leaving about 150 with Pearl. Building on the services it will provide to Pearl, TCS will offer similar services to other life insurance and pension providers.
“Were taking 13 different platforms and rationalizing them into a single technology platform for insurance companies in global markets,” TCS CEO S. Ramadorai said in a telephone interview.
TCS is on the march to build financial industry expertise and will acquire firms to gain that expertise, said Ramadorai. The key requirement, he said: An acquired company “must have value added and be quickly integrateable.”
In a deal that carries out that strategy, TCS recently acquired Australian banking software and services provider Financial Network Services for $26 million, including 120 FNS employees. The expertise from FNS will be used by TCS as it expands in the banking market.
“Were going up against global competition in the core retail banking space,” said Ramadorai, noting that the State Bank of India uses FNS Core Banking Solution product. Though not a huge acquisition in dollar value, the deal is TCS first major international acquisition.
“The Australian acquisition goes hand in hand with the BPO push. Its not a surprise that the Indian firms are trying to expand their portfolios to get more wallet share,” said Julie Giera, an analyst at Forrester Research. If they dont go after higher-end outsourcing services such as BPO, theyll be relegated to labor arbitrage. And although offering lower-cost workers has been their stock in trade so far, it will only carry the offshore giants so far, Giera said.
“A few years ago, outsourcers were chosen by cost. Now, industry knowledge is the first or second priority. Customers are sick and tired of paying outsourcers who dont bring any value-add,” Giera explained, noting that IBM, EDS and Capgemini have all been scrambling to organize their outsourcing businesses vertically and that Computer Sciences Corp. has built a very strong practice in the insurance industry.
Bottom line: BPO is the emerging outsourcing market. Look for the big players to continue to expand their areas of vertical industry expertise and to add new industry practices.
Out and about
When you think of outsourcing in eastern Europe, you probably think of Russia, Ukraine and Belarus. But there are a bunch of other countries eager to elbow their way for space at the table.
One of these is Romania, a country of 22 million that, like its Eastern European neighbors, boasts a heritage of advanced mathematics and science education. As a smaller country in the midst of others where different languages are spoken, Romanians must become multilingual. The country includes a significant German-speaking minority, which smooths the way for German companies to outsource.
A Romanian software engineer is paid between 700 and 800 euros per month, about a quarter of German wages, according to Costin Lianu, general director of the Ministry of Economy and Commerce for Romania. And, Lianu added, thats slightly lower than wages for comparable workers in India.
The country is churning out 7,000 to 9,000 IT grads each year—per capita, more than the United States, Russia, India and China, according to Florin Vrejoiu, executive vice president of ARIES, the Romanian Association for Electronic and Software Industry. The country also has an attractive 17 percent corporate flat tax rate and will be joining the European Union in 2007.
Contact Stan Gibson at stan_gibson@ziffdavis.com.