Satyam (NYSE:SAY) integrated its business process outsourcing subsidiary Nipuna with itself last year and has renamed it as Satyam BPO. Infosys (Nasdaq: INFY) integrated its BPO arm – Progeon – now Infosys BPO - in 2006.

The BPO subsidiaries of most of the large IT companies, which were separate entities until a few years ago, are now being integrated with the parent company to leverage the opportunity presented in the “integrated IT+BPO space”. So far, the service providers preferred to keep the two separate as the two businesses called for distinct processes, resources and management. However, there was significant cross selling between the two divisions.

Closing in on integrated offerings
The integration of software and business process outsourcing (and increasingly even knowledge services) has been anticipated for a while now. Customers of outsourcing services are moving on from piecemeal outsourcing to transferring ownership of processes to their vendor “partners”, and prefer not to go shopping for services that can be provided under one roof by end-to-end service providers.

In fact, a few initial contracts in the integrated space are sending out positive signals in the industry. Infosys has won a few integrated deals in 2007, though not many details are available about the clients and the services offered. Tata Consultancy Services (TCS) signed a ten-year $1.2 billion deal with Neilsen Company, in October 2007. The deal will see TCS provide integrated IT and BPO services and help Nielsen integrate and centralize multiple systems, technologies and processes on a global scale. TCS will deliver outsourced finance and accounting and HR services on proprietary platforms built by TCS.

Platforms may be the starting point
A key ingredient of the “integrated” offering will be the creation of platforms, especially for back-office and transaction processing services. Platform-based BPO will allow vendors to de-linearize growth through large-scale productivity payoffs and pay-per-use revenue models, besides building their own IP.

While new platform development is already among strategic plans of most major software companies, acquisitions of companies with proprietary platforms are also picking up. Though acquisitions cannot eliminate minimum investments in capabilities for customization and backward integration, it can be an option for companies that do not want to build their own platforms from scratch.

Going forward
The software vendor segment globally is most suited to leverage the opportunity due to their in-house software development capabilities and scale in BPO operations, besides the investment capability. Some of the vendors have also started knowledge services / analytics practices that will help them add the “consulting” angle to the integrated offerings going forward. This will make them compete more favorably with their global counterparts like IBM, Accenture, whose consulting services sit on top of the IT services offerings and help earn better billing rates. In the long run, that is the value chain that Indian companies will be looking to scale.

Despite the prevailing optimism, these are still early days for the new trend. As they move on to offer the end-to-end suite of services, the challenge for the larger providers will lie in developing the domain expertise, critical to maintain their competitiveness vis-à-vis the focused and /or niche players in the IT as well as BPO space. 

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

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