August 30, 2007 (FinancialWire) (ValueNotes Outsourcing Watch: Insights for Investors)

Major Indian BPO vendors WNS (NYSE:WNS) and Infosys (Nasdaq: INFY) have lost a customer each to the US sub-prime mortgage crisis this month.

WNS has rolled back its revenue guidance by $20 million as its customer First Magnus Corporation filed for bankruptcy due to the collapse of the secondary mortgage market. The customer was expected to contribute 5% to the revenues of WNS. Another company GreenPoint Mortgage, taken over by Capital One last year, filed for bankruptcy, laying off 1900 employees in the U.S. However, offshore vendor Infosys said that the company would be minimally affected. GreenPoint was also a customer of iGate Corporation, which has significantly more exposure to the mortgage space. About 10% of iGate’s revenue comes from mortgage, which is likely to go down to 7% as two other clients apart from GreenPoint have indicated a lower volume of offshore business.

Impact on Indian firms

The mortgage BPO space in India has been witnessing heavy activity from Indian vendors. Most of the larger vendors have made acquisitions in this space in the U.S. in the last two years – WNS bought Trinity Partners in 2005, Genpact bought MoneyLine Lending Services in 2006. Smaller, more focused firms, such as Adventity, i-flex, iGate, OfficeTiger have also acquired, ramped up and added newer clients in the last few months. The sub-prime crisis has now left these players speculating about the impact and a probable arrest in momentum.

The larger, more diversified vendors have less to fear and are likely to bear out the crisis:

• The larger vendors in the mortgage space cater to large, and diversified, mortgage processing clients in the U.S. Some of these U.S companies are capable of tiding over the crisis and will continue to send work offshore, although volumes may come down. Larger vendors like EXL Service and Genpact are likely to be set back by no more than about 1-2% of their revenues.
• The scale of business of the larger vendors allows them to spread the risks over a larger customer and industry base. These companies will be able to re-deploy resources to other clients / projects. Infosys has announced that it will re-deploy 100 employees working for GreenPoint to other areas. WNS faces the challenge of diverting a much larger number of employees (around 500). However, this is bound to entail some cost, as employees will have to be retrained on other processes.
• Greater cost pressures on U.S. mortgage firms going forward are likely to lead to more offshoring in future. Thus, albeit the crisis may have some short-term impact, vendors are looking up to prospects of more business from mortgage companies in the long run. If the situation shows signs of correction in the next few months, it may also lead to a few acquisitions in this space while valuations will still be low.

Going forward

Speculation is rife at the moment in the U.S. and there are at least two contrasting schools of thought – those who believe that the crisis will end at the mortgage industry and those who believe that it will spread to other sectors in financial services making the crisis more deep-rooted. Even optimistically, coupled with pressures due to rupee appreciation, the Indian industry is looking at a near term hiccup.

In the more pessimistic scenario, there is a lot at stake. Currently, the banking, financial services and insurance (BFSI) segment accounts for over 40 percent of the revenues of the Indian BPO industry. Twenty to fifty percent, or even more, of the revenues of top vendors comes from BFSI clients. Those with higher exposure to BFSI will be forced to invest in diversification into newer services and into newer markets such as Europe, Latin America and Asia.

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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