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Merger call

IBM's acquisition of Daksh sets up a new business model for MNC BPOs

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Emcee Mumbai
One persistent question by analysts at the conference call on the MphasiS fourth quarter results was on IBM's Daksh acquisition, and the difference it would make to the competition that BPO companies like MsourcE face.
 
With the Daksh acquisition being the first one where an MNC has taken over one of the largest Indian BPO companies, such questions are natural. Also inevitable will be apocalyptic visions of MNCs swallowing the best and brightest of Indian third party BPOs. How valid are these fears?
 
It wasn't so long ago that Daksh, with its centre in the Philippines, was being hailed as an example of an Indian BPO company turning into an MNC. At Nasscom 2003, while all the Indian companies expressed their confidence about taking on the MNCs on Indian soil, Spectramind's Raman Roy said that they needed to ally with larger Indian companies, justifying his company's merger with Wipro.
 
Daksh CEO Sanjeev Aggarwal however strongly defended his business model of remaining independent. Clearly, the IBM offer was too good to refuse.
 
More importantly, the IBM acquisition builds a BPO model that successfully addresses some of the key problems confronted by captive MNC BPO units. It is well-known that captive units suffer from higher costs, higher attrition because of the lack of new work and avenues for growth, a lack of marketing skills, and they operate in a business which is not a core area for their parent companies. They are cost centres.
 
These problems have so far been crcumvented by sub-contracting some of the work to third-party vendors. But that strategy brings with it its own concerns about security and lack of control. The alternative for MNCs "" set up a third-party BPO company in India.
 
But setting up a new unit would take at least a year or two, while the company would also have to pitch for new business from scratch. Far better, therefore to go in for the acquisition route. That would, at one stroke, eliminate many of the disadvantages that MNC captive units labour under"" it would lower costs and get new business, therefore enabling economies of scale, while at the same time, it would ensure control and security.
 
Nevertheless, not every MNC would like to focus on a non-core area like business processes. Bill Gates, for instance, had said that the Microsoft-Wipro combine can take on IBM.
 
And MphasiS chairman and CEO Jerry Rao, replying to analysts, insisted that IBM's takeover of Daksh was good for his company. "Not every foreign company would like to outource work to an MNC," he said.
 
Perhaps, but there's no question that MNCs have found a better model than setting up captive units.
 
The petrol price pinch
 
Crude oil prices have been rising sharply in the first quarter of calendar year 2004. However, the government has not revised domestic fuel prices, for political reasons in the run-up to the elections. The moot question is, when the general elections are over, by how much would fuel prices have to be raised?
 
Analysts point out that a clue to the quantum of the rise will be available from looking at the Singapore gasoline prices. These have risen from around $ 37 a barrel in mid- November '03 to approximately $38.75 by the first fortnight of December "" in India, it resulted in oil marketing companies' cost of purchasing fuel rising by Rs 0.5 per litre excluding taxes.
 
Higher import costs were transferred to the consumer in the form of fuel prices being raised by a Rupee per litre on December 16, 2003 "" Mumbai's diesel prices rose to Rs 26.23 and that of petrol to Rs 37.74. However, since then, the trend of rising crude prices did not show any signs of abating "" Singapore gasoline prices had reached around $40.75 per barrel by the end of December 2003.
 
Once again, oil marketing companies faced additional costs to the tune of Rs 0.56 per litre, excluding taxes "" fuel prices were hiked by around a rupee on December 31 "" Mumbai's diesel prices were raised to Rs 27.43 and that of petrol to Rs 38.83. However, with elections round the corner, the government has not been keen to raise domestic prices in tandem with the rise in international crude prices witnessed in the first quarter of calendar year 2004.
 
Singapore gasoline prices have reached around $42.25 per barrel by the end of March 04. As a result, oil marketing companies have been absorbing the rising cost of imported fuel amounting to Rs 0.43 paise per litre, excluding taxes. With consumption of petroleum products in Q4 FY04 amounting to an estimated 22.25 million tonne, analysts estimate losses accruing to the oil marketing companies would amount to approximately Rs 3,600 crore.
 
It is therefore anticipated that the government would have to raise fuel prices by approximately Rs 0.80- Rs 0.92 per litre (including relevant taxes) to offset the losses of the oil marketing companies.
 
With contributions from Amriteshwar Mathur

 
 

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First Published: Apr 10 2004 | 12:00 AM IST

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