Tag: Headstrong

Genpact co may get Hexaware, Mphasis bids | In the News

Hexaware Technologies, Mphasis and L&T Infotech are among the potential suitors evaluating a bid to acquire IT services and consulting business Headstrong, put on the block by the NYSE-listed Genpact, people directly aware of the matter said.

US-based Everest Group’s CEO Peter Bendor-Samuel said the Headstrong acquisition has been problematic from the start as it did not have enough scale to succeed inside Genpact. It struggled with being a small IT fish in a large BPO pond. “It also had cultural differences and was focused in capital markets, which is not an area of strength for Genpact.”

Genpact Acquires Headstrong – End of Pure-Play BPOs? | Sherpas in Blue Shirts

Earlier today, Genpact (a global BPO-centric service provider) announced a definitive agreement to acquire Headstrong (an IT services player with a focus on capital markets) for US$550 million. Genpact has scaled ITO capabilities, but more than 85% of its US$1.2 billion+ revenues is still driven by BPO. Moreover, Genpact’s ITO revenues have been flat over the last few years. So I think it is only fair to call them a pure-play BPO – that was until today! With the acquisition of Headstrong, the split between BPO and ITO for Genpact will be closer to 70:30.

Genpact’s topline growth has fallen from 25-35% in 2007-2008 to 7.5-12.5% in 2009-2010. Not bad considering a growing denominator; stable to increasing margins; and a bad economy. But growth is slowing, and I believe this acquisition will be important for Genpact to ensure scalability in the medium to long term. Here is why:

  • BPO-only services have a strong value proposition for the first 3-5 years of an engagement driven by arbitrage and operational efficiencies and effectiveness – and Genpact has been successful in riding this wave. However, it is often difficult to drive the next wave of value from pure BPO and often this requires integrated IT-BPO capabilities. With a majority of Genpact’s BPO client base entering this end-of-term phase, Headstrong’s capabilities will allow Genpact to present an integrated value proposition. Genpact’s proprietary add-on tools for BPO (remember the acquisitions of Creditek, Avolent and Symphony) and process capabilities (from Six Sigma and Lean expertise to SEP) with Headstrong’s IT capabilities will be a strong combination.
  • This acquisition will also help Genpact ride the potentially disruptive trends in the areas of cloud, SaaS and BPaaS. Their partnership with NetSuite last year was another step in this direction.
  • Headstrong’s acquisition is also interesting from an industry expertise perspective. BPO is fast morphing from being a horizontal service to a more industry-specific offering. Even in traditional BPO services like F&A, more and more industry-flavors are being included – be it around revenue cycle management for healthcare providers or meter-to-cash for utilities. Within financial services (one of the largest recipients of global services), our research shows that capital markets BPO is the fastest-growing segment. This is where most of Headstrong’s capabilities reside. Healthcare (another strong area for Headstrong) is another industry poised for strong global services growth in the near term.

There are potential challenges (as with all acquisitions) essentially around the integration of the two organizations. Genpact has been running successful sales and marketing engine focused around BPO. With a significant IT component – will it get distracted from its focus? Its differentiation in the market is around process excellence, and it remains to be seen how successful the go-to-market for an integrated ITO+BPO offering will be. Headstrong’s existing clients will also have questions on Genpact’s vision and strategy for them.

Look around the BPO industry and you’ll not find any major pure-play BPOs left. Consider the leaders on Everest’s PEAK matrix for FAO – Accenture, IBM, Capgemini, Genpact, HP, and Infosys. No pure-play BPO except Genpact (until this morning). What will happen to others in the same bucket (WNS, EXL and the likes)? For the moment WNS will probably take the tag of becoming the largest pure-play BPO – but for how long? Will it acquire or get acquired?

Life in the Mid-Tier IT Services Log Jam | Sherpas in Blue Shirts

When Harvard Business School professor Michael Porter said, “Operational excellence may be at the heart of much of today’s business thinking, but it has little to do with what it takes to make a company truly successful,” he could easily have been speaking directly about and to the mid-tier IT service provider community.

Think about it. All 15-20 players in this US$100 million+/sub billion dollar revenue segment have gotten the basics of low costs and high productivity right. Not much differentiation there. In a space as crowded as the malls of Mumbai on a Saturday evening, the key to success lies in finding and strongly demonstrating a truly distinctive market position in terms of business mix, sales and account management capabilities, strategy and leadership. Let’s look at several examples for corroboration.

mid tier IT service provider community feb 2011

MindTree, with a three-year CAGR (2007-2010) of ~25 percent and EBITDA margins at 20 percent, has been doing well. Further, more than 50 percent of its revenues come from high margin and high growth non-ADM services such as product engineering. With recent IT infrastructure management service deal wins amounting to over US$70 million, MindTree is in the news for all the right reasons. Its strategic focus on building an engineering and R&D services business, and a leadership team that has largely remained consistent and reputed, have ensured it is one of the front-runners making a differentiating mark in this space.

In the same cluster, it is clear that Syntel is the biggie among the small guys. It is also one of the few companies to have seen steady growth through the turbulent 2008 – 2009 time period. It has had a three-year CAGR of 16 percent and EBITDA margins ranging between 25 and 30 percent. More than 60 percent of its revenue is in the BFSI sector, and ~25 percent comes from non-ADM segments; its successful joint venture with State Street Bank accounts for more than 20 percent of its revenue; and it has a consistent contribution at ~20 percent from American Express…these are only a few of the factors going right for Syntel. With a strategic focus on BFSI and healthcare, both high-growth, high opportunity verticals, it seems to be attacking the market in the right direction.

On the lower end of the spectrum is Headstrong, a privately held company, small even in size as compared to US$0.5 billion+ players like Syntel. A cursory skim through the company’s financials does not reveal anything incredible – growth bordering around 17 percent, and EBITDA margins in the range of 15-17 percent. However, the company does have some distinctive strengths. An active provider of IT services in the sell-side capital markets, it garners more than 70 percent of its revenue from this space. It is also foraying into business consulting, where most of its activity comes from Japan. With a capable leadership, Headstrong is a great example of a niche-focused company driving success.

The last one we’ll look at here is Hexaware, a company whose current financials are not very impressive. BFSI exposure of over 50 percent of revenue battered it during the chaotic times of 2008-2009. Yet that focus is likely to help it rebound as the markets recover driven by BFSI. Further, Hexaware’s considerable presence in enterprise services (~28 percent of revenue) and sizeable European focus (almost 30 percent of revenue) does make it a differentiated play in this market. However, its focus on eight areas may not be a very prudent strategy given its sub-US$300 million revenue base.

Clearly, these companies demonstrate the key ingredients of success through differentiation — a focus on high growth business segments like BFSI, healthcare and product engineering, consistent leadership, account management and mining capabilities, and delivery competence in terms of tools and domain knowledge.

However, given their sizes and the cluttered nature of the IT services sector, the industry is eagerly awaiting a game-changing move. Against the backdrop of the Patni-iGate merger, the market is abuzz with the big question, “What’s next in this space?” Is it a consolidation of complements following closely on the heels of Patni-iGate? Is it an acquisition of one or more of these companies by an Indian Tier-1 player? Revival of the markets, and the presence of maturing private equity investments in several of these firms, continue to fuel to these questions.

The rumor mills are making the rounds with news of assets in play on the deal street. This industry definitely seems to be heading toward some very interesting times.

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