India's largest IT deal - the Oracle acquisition of 61% stake in core-banking software firm - iFlex worth $909 million - also hovered in the BFSI vertical.
And the reason behind India's IT and BPO boom: the global boom in BFSI sector across the world. The sector is rapidly becoming the engine powering the growth of IT in India.
BFSI sector includes banks, stock markets, hedge and mutual funds, insurance and mortgage companies, stock trading houses and Non-Banking Financial Institutions (NBFCs).
Why then is this sector becoming the buzzword amongst IT and BPO companies across the world? Why does every second deal which IT CEOs discuss in corporate meetings, happen to belong to either a bank or an insurance company?
In fact, the largest IT outsourcing contract in India, bagged by TCS and Infosys — the ABN Amro deal worth $400 million, also, belonged to the BFSI sector. We evaluate the reasons here.
From the biggest deal in IT sector to the smallest: the year 2005 for the IT industry should have been aptly named as ‘the year of the BFSI'. Major BFSI acquisition deals in 2005 were Oracle-iFlex ($909 million), TCS-FNS ($23 million), TCS-Comicrom ($26 million), Office Tiger-MortgageRamp ($35-$40 million) and WNS-Trinity Partners ($20-$25 million).
The acquisition of Trinity Partners, for instance, by India's largest travel solutions BPO, WNS, this year helped it to build a strong financial vertical with ready-made customers, in a single go. With this acquisition, WNS acquired Trinity's six clients in multiple geaographies, and a $60 million contract with First Magnus Financial Corp.
Acquisitions are an excellent way to penetrate a market. Also in areas such as pensions and insurance which are extremely sensitive and require local knowledge, acquisitions make sense.
For example: the takeover of UK-based life and pensions Pearl Group's non-voice BPO business has helped TCS to make inroads into the UK market, in a single step. It's a very clever strategic move to graduate up the value chain, from BPO to software, where margins are much higher.
Also, acquisitions make sense especially in Europe where banks and insurance companies are reluctant to outsource to third-party BPOs or IT vendors in India. Political and media backlash (like the Sun report), just make things more worse — just as the UK-based Barclays Bank that had outsourced to India, went back as its customers didn't want to be served by Indian agents.
Other firms like Royal Sun Life, Axa, Goldman Sachs, JP Morgan have set up captive units rather than outsource to third party BPOs. To tackle all this, firms like HCL BPO have devised new means to penetrate into conservative markets. HCL BPO acquired Belfast based BT's Apollo Contact Centre in December 2001, to become UK's largest employer.
The acquisition helped HCL BPO gain other business in UK, as well. Said N Ranjit, CEO, HCL BPO: “Acquisitions are important as many countries have Data Protection Acts (DPAs), which bar flow of sensitive financial data out of the country.” In the IT space, the global delivery model of TCS, helped India gain the $260 million ABN Amro deal.
Mortgage services is an emerging area. There have been two major deals in 2005, the Office Tiger's acquisition of US-based Mortgage Ramp ($35-40 million) and WNS's aquisition of Trinity ($20-$25 million). The deal helped Office Tiger gain 150 clients with 300 experts in Mortgage space. Wipro BPO is also slowly transitioning itself to the lucrative and high volume BFSI verticals.
Globally $200 billion worth of BFSI business is outsourced every year. But, India bags only 0.5% ($1.1 billion) of it, every year. The financial services vertical of IBM accounted for 15% of its revenues, which amounted to $24,339 million. Whereas, India's largest software firm, TCS' total revenues for 2003-04 were $1,198 million. Said Jain of Pipal Research: ‘‘It's not fair to compare the two. The Big Six of outsourcing like IBM and HP gain business by first providing machines to the customer.”But, Indian firms are bagging big business. The ABN Amro deal is a testimony to it.
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