Size Matters!! Possibility of Cognizant’s acquisition of Genpact.

There is a rumor in the industry circles for possible acquisition of Genpact by Cognizant.

Onwards to the possibility of a Cognizant-Genpact combination. Why might this be a very good combination? Lets look at the reasons:

The businesses are very complementary. Genpact is less than 15% IT Services. Cognizant is 5% BPO. The lack of overlap means a few things, all of them major factors:

• In one stroke Cognizant as the acquirer becomes one of the largest and most sophisticated BPO service providers. In addition to already being a large high-growth IT Service providers.
• One of the worries in Services acquisitions is that you will end up offering the same services at the same clients at different rates and then the client will move all services to the lower of the two rates. That overlap is going to be minimal in this case.
• The senior teams of both companies will find homes in the combined company. In the medium term they should not have to merge leadership of business units.

General thinking is that the BPO culture is quite different from the IT Services culture and that will not bode well for a merger. I can’t see why they would think this. Both companies have a dynamic, growth-oriented culture and have professional management.

Also, on a related matter, both Genpact and Cognizant are listed in the US with no float in India. This makes things easier. Acquiring a company 100% in India is a little messier, procedurally.

The fact that GE is 40% of Genpact’s revenue is known and will be priced in to the acquisition price, post due diligence.

The rumor may or may not be true and even if it is true, the deal may or may not happen. But on the face of it, it makes sense. The combined company will be on target to be the second largest in the Offshore industry after TCS within less than a year based upon projected growth rates.

And in this industry size matters.

Obama, Ohio and Outsourcing

Political pressure in the US spell tough times for India’s technology companies; primarily the Ohio ban on outsourcing and Obama’s tax rebate plan for companies who are creating jobs in US.

Question is; how this will impact the offshoring business in general?
Let’s look at some facts and figures. The India’s IT export in 2009-2010 stands at $64 billion, out of which 61% business comes from US geography. Overall IT business of India estimates to 51% of the total software business of the world. There are 2.3 million jobs created in IT and close to 900 multinationals have their captive centers in India. Sizable numbers in any sense.

The fundamental reason that drives offshoring business is the skill availability, quality deliverables and the costs (70% less costly compared to locations in developed countries)

Why US government projects are important in first place?
• Business from government is fastest growing segment for IT companies
• Governments across the world are expected to spend close to $175 billion
• The IT budget of US federal government is around $35 billion

Now, is this the end of IT offshoring? Not really. While political obstacles may rise, India continues to provide key cost advantages. And the major cost saved is pushed back to US companies, so US business is saving more money. In addition to this, Indian companies have already started moving up in the value chain and have started providing key differentiator through calibrating the business processes of the customers. This would drive more savings.

After this news, worried IT companies went back to the drawing boards to redraft the growth strategies and revenue projections, but experts suggests it makes more sense to set up ‘near shore’ centers to drive more business there by creating more jobs in US.

But, really speaking, do we really need to take this? I mean, we are living in free world trade era and multinationals are allowed to do business at the cost of India companies as well? How about giving tax benefit if you don’t buy from US companies? Does that sounds good for US Inc?

I can’t stop thinking about this question, then why we need to buy from US companies?

Singapore Airlines: Cost leadership coupled with Premium Service

Last few years have been real tough for airline industry across the globe; increased cost impacted the whole industry in common. But there are few airlines which have shown that innovation and operational efficiency can lead in to profitable business.

Singapore Airlines is one such example which demonstrated the growth even in this worst period. SIA never reported annual loss since its inception.

SIA has combined the supposedly incompatible strategies of differentiation- which it pursues through service excellence and continuous innovation- and cost leadership.

SIA manages its two main assets- planes and people- so that its service is better than rivals and its costs are lower. The airline invests heavily in the areas of business that touch the customer in order to enhance SIA’s premium positioning. Everything behind the scene is subjected to rigorous cost control.

SIA spends more than its rivals in key areas, it follows a 4-3-3 rule of spending, 40% on training, 30% on revising processes and procedures and 30% in creating new products and services.

• Buying new aircraft: SIA replaces its fleet more frequently there by reducing the maintenance budget and improve customer experience. New aircrafts are expected to be more fuel efficient as well.
• Training: The airline invests heavily in to training and retaining its employees.
• Labor Costs: SIA staffs more crew per flight compared to its competitors, this helps in improving the customer experience and enables to provide more customized and personalized services to customers.
• Innovation: It invests in both radical and incremental innovation.

On the same way, it spends less on following things which are not directly touching customers:-
• Price Per Aircraft: It places large orders and generally pays in cash, thus reducing the purchase price of the customer.
• Fuel, maintenance and repair: SIA’s operating costs are much lower because it has newer fleet and energy efficient.
• Salaries: SIA keeps salaries lower by offering bonus up to 50% depending on SIA’s profitability. And also employs much younger crew thus keeping salaries low.
• Sales and administration: SIA doesn’t have a fancy, mid-city head quarters!! And keeps cutting the cost where ever possible.
• Back office technologies: SIA chooses to lag behind rivals in areas that don’t affect the customer experience. They quickly stop the use of technologies that customers don’t like.

This is a clear example of how pure operational efficiency, coupled with great strategy can help companies reinvent themselves.