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TCS-Citi Deal: Foreshadowing the 2009 Games

By on October 9, 2008 in Business Process Outsourcing (BPO), Current Affairs, Finance & Accounting Outsourcing (FAO)

Today's blog comes from Peter Allen,
Partner and Managing Director, TPI

The
acquisition by TCS of Citigroup’s captive BPO operations feels to us like the
latest in what’s becoming a series of industry restructurings.  It also
sets the tone for what’s likely to become the agenda in 2009 for the financial services
industry and certain outsourcing service providers.

Following on from the Aviva-WNS transaction, although that deal occurred
moderately in advance of the current meltdown in the global financial services
markets, the TCS-Citi transaction represents a strategy to fundamentally
restructure and realign certain assets. These assets maintain essential
operations for the likely survivors of the turmoil in today’s market. Their
realignments will touch many balance sheets, especially in the case of Citi, as
it reinvents itself through acquisitions and adjustments to its market
offerings, and TCS which has a strong cash position and relatively little debt.

The service provider universe will certainly grow through creative combinations
such as defined in this deal – an asset purchase with a companion, long-term,
services agreement.  This transaction comprises a 9.5 year commitment by
Citi to buy services from TCS, which represents a $2.5 billion “mega-deal.” 
So, Citi is making a significant commitment to the ongoing viability of the
offshore FSO market as well as a restructuring of its cost profile.  

But
not all of the service providers can marshal the financial resources to
implement such a deal.  With tightening access to scarce capital, it will
be those providers who carry little debt and lots of cash that are in the prime
position to step up to such an arrangement.

Service providers will be making decisions based on the likely long-term
viability of their prospective clients such as  the financial services firms that are selling
their operations.  No one wants to take over someone’s back-office
operations only to have those assets stranded when the client meets an untimely
demise.

The signs of survival among the strongest players on both the buy-side and
provider-side of outsourcing are there for 2009.  Don’t look for the
weaker players to participate in the games though.

About isg

Analyst at ISG.
View all posts by isg →
  • Dinesh Goel

    Peter,
    Valuable comments. The current situation is going to increase the pace of such transactions in the marketplace. In my view, captive monetization activity was going to accelerate anyway even in the absence of such a financial crisis purely from the cost-value economics standpoint. However, this deal raises another pertinent question – Is TCS taking a call as long term as 9.5 years on the survival of Citi? What happens if that doesn’t come true? Thoughts?

  • http://www.considerthesourceblog.com Peter Allen

    Hi, Dinesh.
    I agree that the wave of captive conversions was predetermined for many companies, largely because they’ve harvested most of the first-generation benefits and need to deploy sustained and continuous improvements that can best come through an outsourcing relationship.
    As for the bet that TCS is making regarding the long-term viability of their client (Citi), I’m afraid that that’s the nature of the market today. Customarily, it has been the Clients that weigh the viability of their Providers. Now, the coin is turned. We’re seeing Providers scrutinize the viability of the Clients.
    TCS and Citi are two companies that know each other very well. Not unlike WNS and Aviva. That familiarity is important when both parties are making a wager on their collective, and distinct, futures.
    Peter

  • http://www.fersht.typepad.com Phil Fersht

    Peter – some good thoughts here. JP Morgan, Lehman Brothers, Deutsche Bank, UBS, Goldman Sachs and Morgan Stanley each have between 1500 – 7000 employees supporting banking operations in Indian captive service centers. The trading volumes in some instruments are practically negligible in this economic climate. Take, for example, OTC (over-the-counter) derivatives confirmations and settlement processes; these teams were significantly ramped-up towards the end of 2005 to meet regulatory requirements, in view of very high-volume spikes in demand. Now, in some cases, nearly three-quarters of these team members have literally nothing to do with the short fall in business volume. Consequently, employee attrition has reduced significantly, as there are not as many jobs on the market offering higher salaries. Moreover, the back-office-cost-per-trade ratio continues to rise as this economic situation fleshes out.
    Hence, many of these captive operations are in a quandary aslarge scale lay-offs are not an easy option in India.
    Outsourcing provides the flexibility to scale-up and down and keep the cost-per-trade at a minimum. The crux of the issue now is whether service providers want to invest in any of these captive operations – which, as you point out, all depends on their resources and desire to go down this path. For the ambitious service providers, they need to calculate their growth strategy. Buying up financial services captives is a great foray into this sector, that is practically untouched by wide-scale BPO, but it is also an expensive avenue into the sector. The opportunity cost is to acquire other service providers, particularly those that have suffered de-valuations recently (I can name a few…). My forecast is that we will see a bit of both taking place in the coming weeks and months,
    PF.

  • Bill Huber

    Peter,
    I see this as a watershed event on another level as well. The current market turmoil is forcing firms to rethink fundamental issues around the captive vs. outsource equation: What is my core business? What capabilities do I need to protect? How good am I at process management compared to the service providers? Can I afford the luxury of carrying costs on my balance sheet that could be variablized? Can I achieve a superior utility value from an internal capability than a service provider can obtain from the same capability in the marketplace?
    These times tend to strip away the unrealistic arguments that various stakeholders tend to put forth in easier times and force a reexamination of the fundamentals. Ultimately, once we see some stability in the markets at whatever level, I would look for an acceleration in overall transaction volume as the market will demand higher performance through unlocking and optimizing the internal capability investments of the past five years.

  • http://www.saibposervices.com/ BPO Services

    Along with other industries BPO is also a field that can be take these type of high marketing evolutions
    Regards
    SBL – BPO Services

  • Nimish Hirawat

    It was interesting to view everyones thoughts on Citi-TCS deal. The market turmoil we are seeing today is an outcome of ruthless capitalist economies. What has happened with developed economies today will happen with developing nations 50 years from now.
    What is more interesting to see is how both Citi and TCS are going to maximize benefits of this deal. While on one side Citi is on a selling spree to re-structure is global business, TCS on the other end has well received the offer. A USD 505MM value for Citi’s revenue is twice its revenue… couple that up with 9 years of assured business makes it a perfect deal for TCS. What is intangible here is the new business TCS would get due to this acquisition. Re-engineering initiatives, cost cutting, re-structuring, intergration of system etc would further lower costs for TCS’s acquisition.
    Like a jungle where only the fittest survive, Citi and TCS have emerged as smart barters..

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