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March 08, 2008

Valuing MNC BPOs

Businessworld has an article on why it has been difficult for MNC banks to sell their captive Indian BPO units.
The sale or the valuation for these captive units are not easy to realise. Citigroup has been trying to sell its BPO operations in India for almost a year now, but has not been successful so far. A captive can only be acquired by one of the Indian third-party BPO service vendors; foreign BPO companies are not interested in these operations. It’s a difficult sale not because of the valuation, but because of the complication involved.

Captive operations are run as cost centres and there is no focus on profitability. Their objective is to provide certain back-office operations to the parent company in the US or Europe. The focus is on quality of service, and the service level agreements (SLA s) are high and demanding. When a third party vendor plans to take over these captives, the revenues and profits for each process have to be calculated. The SLAs and the liability on not achieving them also have to be reworked since third-party vendors do not like unlimited liability.

Calculating the revenues is a tedious process and is quite unlike the routine due diligence process carried out for acquiring a company. Moreover, real agreements with realistic SLAs have to be signed with the parent organisation to fix the revenues, profitability and liabilities. As this has to be done for each process and there are several hundred processes in each captive, it takes a long time to come to a number. Every process and the revenues or billing for it has to be renegotiated with the parent company, which is not an easy task as the parent is bleeding and is trying to control costs, while the acquirer or the third party vendor is looking for profits. So while the intent may be there, it is unlikely that a sale will happen anytime soon.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.