Indian Outsourcing IPO:A Case Study

Business Model-

The basic business model  of  Indian outsourcing companies is labor arbitrage and billing per hour rates are much much lower than the Indian IT companies.

This labor arbitrage model has suffered due to

high  wage inflation in India,

high asset inflation in real estate prices, and

nearly 20 % fall in the dollar versus the rupee over the past one year. Revenues of this sector are mostly in dollars while costs are mostly in rupees.

Ownership-Most top management at atleast smaller outsourcing companies consists of ex consultants , who flocked to this sector after the decline in business consulting in 2001 economic downturn.

In the US , where nearly everyone who the company wants to retain  is given stock options.

In the outsourcing sector, most stock options are very heavily concentrated in the hands of a few senior managers . This is unlike the Indian IT sector where even junior managers are given stock options.

Majority (or greater than 50 %) Ownership  of nearly all Indian outsourcing companies is with non Indian promoters or PE funds .

Historic Post IPO Performance-

Valuations in the outsourcing industry for BPOs listed abroad but working in India can be calculated from this link. I did a basic analysis using yahoo finance at

IPO Analysis-

 Only early stage VC, PE funds made money from Indian BPO/KPO ipo’s. International IPos of BPOs in India have destroyed value for most investors who bought it, except for EXL’s IPO.

It is thus more profitable to buy shares in Indian stock exhange than buy Indian company shares in  an IPO listed aborad

Take a case study for the next Indian outsourcing company about to be listed on the NYSE.


 (BPO COMPANY ) is owned by An German, 1 American, 1Indians. It has been in operation since 2000, and it has slowly and steadily ramped up a 2000 strong employee company in 5 years

BPO COMPANY has the following approach to IPO’s  .  It has been plagued by high attrition  of junior employees, relatively less diversification in the past but it needs to fix these before the IPO happens.



Since basic revenues are dependent on labor , the metric of attrition is closely tracked by potential investment bankers and prospective investors. The BPO company cliams to solve the industry wide problem by having the lowest attrition in the industry, despite having low average salary per employee and high revenue per employee.

BPO COMPANY claims to have lowest attrition numbers but it mis calculates many attrition as terminations and over calculates them as performance based  go or grow exits.


The core business unit for BPO Company is business research which consists of writing content based on freely available sources . Newsletters writing and intranet content creation are also big revenue streams. Unfortunately most of them are under threat as free online tools on the internet enable both newsletters, and intranet installation for Content Management System.

As a low paymaster, it had significant problems ramping up non-business research business units like data analytics, which shrank from 50 to 3 in 2005-6. The legal outsourcing arm hasn’t reached any double digit numbers too.However by having these additional units, the BPO company can claim to provide wing to wing solution and aim for higher valuation.

IPO FIX 3-RETENTION The company announced promotions to all levels, thus giving many people double promotions within 6 months..This is planned to help smoothen attrition numbers just before the IPO. It also announced ad hoc raises to people, out of turn of normal bi yearly appraisal cycles.

It increased top management ranks internally by disguised promotions by 15 % just to beef up size from outside (we have 30 VP’s now)!!!


The Indian ITES sector has the least level of regulation in India due to

1) it is a new sector 2) it has a lot of influential money players 3) it creates a lot of jobs.

BPO company uses this regulatory arbitrage in many ways. An example is as follws-

As per Indian law the company needs to give a certain amount of casual leaves.BPO company has a 5 day working week.

What BPO COMPANY does is it makes the last Saturday in every month a working Saturday on which it gives mass casual leave to the whole company as a cost saving measure to give casual leaves as a legal requirement to 1800 people.

 1500 people go on a casual leave on the same day!



It is currently negotiating with clients like consulting companies, for stake sales. This is expected to give a big contract announcement just before the SEC ordered silence period. It will also give it some nature of captive business as most of these big contracts are actually build operate transfer contracts with very few exit penalties for the client. The client also owns the infrastructure.

BPO Company thus creates off-balance sheet employees for the international client, and recognizes this revenue  as a steady source of revenue for BPO company.


It bought a company called PLUTO for beefing up the balance sheet nearly 9 months before the IPO announcement, but has mixed results on level of output delivered as this is supposed to be a panel of experts, and expert outsourcing is difficult. However by a small acquistion it demonstrated abilty to integrate companies .


By working at 15 $/hour, and overstaffing in the name of training (or free resources ), the profitability margins are very low but client volume remains high



. Sales happen because company pays an industry maximum of 20 % to Client Executives on commission. However both these thinsg are unsustainable in the long run, so it gives some employees a L1 visa to act as sales agents in the US, thus locking attrition and sales costs at the same time.


BPO COMPANY is known for chronic stretches, and has aimed to be a player known for GOOD TRAINING ground in recruitment so it can take engineers from DCE, IIT and makes them work hard till 3-4 yrs, but at a low salary. These people (average age <25) burn out or move on in 3 yrs, thus enabling replacement by younger staff.  The historic churn in employees is something that is not monitored , except for the last year before IPO.


BPO company claims to have international presence to reduce percpetions of country risk 

By building  2 new domestic offices in past six months, and

 2 new international  offices in last year.

 Nearly 80 % of the company is within 1 site, and business continuity plans and data disaster management are not tested due top cost of working from an off site location for a day.



BPO company creates a big public relations and proposal writing team, which is much disproportionate to size of BPO COMPANY as compared to other organization like the listed company GENPACT (G).

Activities includes modifying wikepedia to claim credit for inventing the term KPO, and dummy sites for search engine optimization.

         OPERATIONAL Transport costs are actually paid by the employees of the company as rs 4000 per month cut form their pay. this enables the company to additionally cliam having lowest cost per employee of transport.



BPO company completed a 300 million IPO in Mid 2008, rewarding it’s PE holders,owners, and its key stake holders. Under pressure to meet quarterly results, BPO company started squeezing salary costs again, depending on young demographics of India to provide a supply of cheal labor, on the job training ,a nd client management by claiming this is an industry wide practise.

Due to dollar depreciating further, BPO company began shifting some Indian employees to this locations, but after asking them to sign a bond for continued employement.IPO was followed by the exit of key senior managers who then started up their own companies.




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