Posted by: Mehul Srivastava on November 13, 2009
India’s second largest IT company by revenues, Infosys Technologies, says it has agreed to pay upto $58 million for Atlanta-based McCamish systems, adding some 300 U.S. staffers to its payroll, and increasing its presence in what is commonly known as back-office operations, or business process outsourcing.
The deal, which includes $38 million in cash, and another $20 million if the privately held, unprofitable McCamish is able to achieve pre-set targets in the next three years, is an acknowledgement that Infosys needs to ramp up its game in the BPO business, which currently contributes less than 1% to its revenues.
Infosys executives have said in the past that they hope to have that contribution reach as much as a fourth of the $5 billion outsourcing giants revenues.
But business process outsourcing requires a different skill set than the nearly 100,000 engineers that Infosys has, who spend most of their days developing software that allows companies in the U.S. to run their billing, inventory and manage systems like data from cell phone networks.
McCamish, for instance, handles some operations for U.S. insurance companies like the Nolan Financial Group and Heritage Union. Infosys will retain the employees at McCamish, but one can expect to see a lot of work-sharing between U.S. and Indian workers at Infosys.
Interestingly, even though Infosys has consistently said it is looking for acquisitions overseas, this is the first move it has made in the past two years to buy anything, despite the fact that it is sitting on around $2 billion of cash, all thrown off by the highly profitable tech service work it does for western clients.
When I met with Infosys executives in June, they had already been thinking about ways to diversify their revenues. Most of its customers had cut back on discretionary spending in 2008, during the recession, and the slowdown in its revenue growth - much of which is from short-term, piecemeal projects - had reminded Infosys leaders that it must step up its hunt for what the industry calls mega-deals, which are signed for 5 or ten year operations and measure in the hundreds of millions of dependable revenue, recession or not.
The BPO world in India is actually pretty scattered, compared to the tech industry, where the majority of work is shared between the three top players - Tata Consultancy, Infosys and Wipro - and a handful of smaller players like HCL. The BPO industry in India has few clear leaders, and none with the size and pull of the IT leaders. So for IT companies, already seeped in the culture of outsourcing technical work, it makes sense to grab a bit of BPO business, especially since foreign companies like CapGemini have done a great job of cornering the high-value deals in back-office work that flows to India.
Perhaps more importantly for Infosys, this acquisition helps show Americans that it is serious about investing in the U.S. and creating jobs there, considering the amount of flak that outsourcing companies have drawn in the past two years as U.S. employment numbers started to plunge.