Leave Outsourcing to the Pros: Citi Sells to Tata

♠ Posted by Emmanuel in at 10/09/2008 11:58:00 AM
Many Western companies had generally positive experiences offshoring their backroom operations to Indian firms. These positive experiences led them to think, "Why the !%$^ should we hire these outsourcing firms when we ourselves can set up shop in India?" For a time, the likes of Tata Consulting Services (TCS), Infosys, and Wipro were given pause by the entry of Western companies in their backyard, luring away employees with higher salaries and more benefits. However, it now appears that the Americans and the Europeans have been nowhere near as much a threat to the indigenous industry as some had feared.

Today, I bring you a case in point: especially after the subprime crisis inflicted major damage on the balance sheets of big banks, some have started selling off their backroom operations en masse. Some think this outsourcing gig is simple: get a high-speed communications line to the US or Europe going, buy some computer equipment, hire comparatively inexpensive LDC labor, and off you go. As Citigroup and many other MNCs are finding out, matters are not that simple. When it comes to offshoring, it's better to leave things to the pros--Indian firms. From Bloomberg:
Citigroup Inc., reeling from $61 billion in credit-related losses, agreed to sell its back-office unit in India for $505 million to Tata Consultancy Services Ltd. as the deepening financial crisis forces banks to raise funds. As part of the accord, Citigroup will award orders worth $2.5 billion over 9 1/2 years to Mumbai-based Tata Consultancy, India's largest software-services provider said in an e-mailed statement today.

The sale may help Chief Executive Officer Vikram Pandit fund acquisitions such as the proposed purchase of Wachovia Corp.'s branch operations. The deal allows Tata Consultancy to more than double its number of back-office workers, helping the company widen its lead over Infosys Technologies Ltd. and Wipro Ltd.

``We view this as a positive move for Tata Consultancy,'' Diviya Nagarajan, a Mumbai-based analyst at JM Financial Ltd., said in an e-mailed note to clients. The deal gives the Indian provider ``much needed visibility and stability with a top client in the context of the current demand environment,'' she wrote.

Citigroup Global Services Ltd., formerly known as E-serve International, employs 12,000 back-office workers that offer transaction processing and customer services for the New York- based financial firm's businesses globally, according to its Web site. Tata Consultancy employed about 8,000 back-office workers, N.V.K. Raman, head of Tata's back-office outsourcing unit, said in a February interview...

In 2004, General Electric Co. sold 60 percent of its Indian back-office unit, now Genpact, for $500 million to buyout firms General Atlantic LLC and Oak Hill Capital Partners LP. British Airways Plc sold its controlling stake in WNS Holdings Ltd. in 2002.

Citigroup has the largest amount of losses tied to the collapse of the mortgage market with $61 billion, followed by Wachovia Corp.'s $53 billion, according to data compiled by Bloomberg. Globally, asset writedowns and credit losses have cost the world's biggest banks and securities firms a combined $593 billion, according to Bloomberg data.
TCS's press release about the acquisition is also available online. I am kind of confused by Tata's terminology about what it's acquiring, calling it "Citigroup Global Services Limited (CGSL), the India-based captive business processing outsourcing (BPO) arm of Citi." Although the terms outsourcing and offshoring are sometimes used interchangeably, I have a slightly different interpretation of them: Outsourcing means contracting things previously done in-house to another firm--it can be done by another firm in the same country or another country. Offshoring, however, means having these tasks done in another country; that is, these tasks may still be done by the same firm, but in a different location.

Using Emmanuel-speak®, what's happening here is that Citigroup's offshored but in-house operations will now become outsourced offshore operations (as they have been sold to another firm). There is a meaningful distinction here that I believe should be followed to avoid semantic confusion.