PEs push firms for outsourcing, deter Obama's move
By siliconindia   |   Friday, 19 June 2009, 00:33 IST   |    2 Comments
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PEs push firms for outsourcing, deter Obama's move
Bangalore: Private Equity (PE) is untying the move of U.S. President Barack Obama by pushing companies to send their IT and back-office operations to cheaper destinations, reports Economic Times. This has helped Indian outsourcing companies to close a number of deals with pharma, manufacturing, retail and energy utility companies. Global downturn has forced large number of private companies to drive companies where they hold a significant stake, to outsource systems and back-office activities that can bring down operational expenses by up to 20 percent, said people connected with the trend. "The slowdown has increased the equity investors' return on investment (RoI) period to seven years from the earlier three years," said Mark Hodges, Chairman, EquaTerra, an international sourcing advisory firm based in Houston. "Private equity firms are focused on creating value in the portfolio companies. One of the ways to accomplish this objective is to partner with companies that allow use of global talent pool for cost-effectiveness as well as speed, which enables them to stay competitive," said a Director of a large U.S.-based equity house who did not want to be quoted. Most of these portfolio firms, which are small, did not consider outsourcing earlier, as they believed that their in-house IT and back-office costs were not too much. But the slowdown has resulted in making them more cautious Expenses on IT hardware, systems and data centers now need not be incurred as these can be handled by a third-party vendor at a fraction of the costs. "These portfolio firms earlier managed their IT in-house, but realised it's more cost-effective to outsource their IT. Over the past 6-9 months we have seen them facing cost issues and being more aggressive in their outsourcing," said Milan Sheth, Advisory Business Services Partner, Ernst & Young. Syntel, the global IT and knowledge process outsourcing provider set up by Bharat Desai, recently won a three year deal with one of the world's largest music retailers backed by a PE firm. "We have engaged with private equity firms for deals involving their investee firms and do some work with such companies," its Chief Executive Officer, Keshav R Murugesh said. "These are typically $10-15 million outcome-based deals, spanning over five to seven years," said Sheth . The return on investment is 10-15% or sometimes even higher.

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