René Seifert - Entrepreneur & Global Citizen

Today I had I meeting with a mid-size Indian IT-company (undisclosed name) out on Bangalore’s Hosur Road. Mid-size company in India does not correspond remotely with the scale of e.g. Germany’s “Mittelstand”. In India mid-size means e.g. 2,200 employees and US-$ 60 mn annual revenue. That’s by the way, the view from the company’s terrasse with cantina down to the (in-)famous Hosur Road where plenty of IT- and BPO-companies are located.

I had the opportunity to talk to the Head of Investor Relations, but the meeting was mainly with the Head of European Sales which related to an ongoing deal we discussed. They shared some interesting aspects to the status quo of the industry which basically confirm recommendations we give to our European clients: Don’t even waste a second about thinking to outsource unless you have a mininum team of 5 people. Increasingy, the outsourcing industry is demanding 10+ people to justify the infrastructural framework for building and maintaining the team. “Maintaining” can be understood synonymously with “compensating for attrition”.

There are typically two engagement models: T&M (”time & material”) and fixed price for a defined project. Expect for the latter to be charged a premium of 25-30 % which acts as a risk buffer for the supplier. Then there is an engagement model called Build-Operate-Transfer (BOT) which is almost always T&M-based, but offers an interesting option: At some point in the future, the client might decide to take over the entire team. Hence, the unit become transferred from a customer-supplier relationship into a fully owned captive centre. Mostly, clients with a strong IP and control-requirement would opt for this scenario. The catch, however, is that unless you have a team of 300 people minimum, a captive centre in India is sub-critical and it is not worth running your own subsidiary.

There are caveats for the outsourcer, too. Albeit financial markets should anticipate available information in the current stock-price, this does not always hold true. In the case of the company I met today and which is publicly listed, one client which provided 10 % of the revenue decided to use his option and took the team into a captive. Although the financial markets could have “known” about this possibility and discounted for it with a certain likelihood, they knocked off 35 % of the market cap when the transfer had to be announced. 10 % revenue loss becoming amplified to a 35 % value destruction is quite painful. Therefore, as I got to know, Indian outsourcing providers are becoming less and less keen to enter in such “all options open” BOT-models.