Published: May 05, 2004 in Knowledge@Wharton Those who have been following the controversy over "offshoring" U.S. service jobs to low-cost markets like India now have new developments to consider: The takeover this month by U.S. business giants -- IBM and Citigroup -- of two major providers of business process outsourcing (BPO) services in India. On April 7, IBM bought Daksh e-services, the country's third largest back-office services firm based in Gurgaon, near New Delhi, for between $150 million and $200 million. Five days later, Citigroup consolidated its ownership of e-Serve International, a Mumbai-based company. Citigroup agreed to pay $126 million for 56% of E-Serve from the latter's promoters; it already owned the other 44% through a subsidiary.

More such changes are on the way, say experts at Wharton and A.T. Kearney, a management consulting firm headquartered in Chicago. "At this point, the BPO industry is fragmented, and you will see a consolidation in India with 10 to 12 major players emerging in the next two or three years," says Stefan Spohr, vice president of A. T. Kearney's financial institutions practice in New York City. "IBM is acquiring a delivery capability in BPO in India that it has been trying to build organically. It now appears that the company has decided it would be faster to acquire these capabilities than to build them in-house."

Ravi Aron, a professor of information and operations management at Wharton, who has been researching BPO trends for more than two years, offers a different view. He believes that while U.S. companies might acquire Indian BPO providers, many of them are moving towards a hybrid model rather than operating captive offshore centers. "GE, even though it had its own captive center in India, worked with Indian companies like Satyam," he says. According to Aron, the reason why such hybrid arrangements between U.S. and Indian companies will prevail is that captive centers and third-party BPO service providers have different strengths: captive centers are generally better at delivering quality, and BPO providers -- which operate as profit centers -- are better at lowering costs.
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