Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
The
acquisition by TCS of Citigroup's captive BPO operations feels to us like the
latest in what's becoming a series of industry restructurings. It also
sets the tone for what's likely to become the agenda in 2009 for the financial services
industry and certain outsourcing service providers.
Following on from the Aviva-WNS transaction, although that deal occurred
moderately in advance of the current meltdown in the global financial services
markets, the TCS-Citi transaction represents a strategy to fundamentally
restructure and realign certain assets. These assets maintain essential
operations for the likely survivors of the turmoil in today's market. Their
realignments will touch many balance sheets, especially in the case of Citi, as
it reinvents itself through acquisitions and adjustments to its market
offerings, and TCS which has a strong cash position and relatively little debt.
The service provider universe will certainly grow through creative combinations
such as defined in this deal - an asset purchase with a companion, long-term,
services agreement. This transaction comprises a 9.5 year commitment by
Citi to buy services from TCS, which represents a $2.5 billion "mega-deal".
So, Citi is making a significant commitment to the ongoing viability of the
offshore FSO market as well as a restructuring of its cost profile.
But
not all of the service providers can marshal the financial resources to
implement such a deal. With tightening access to scarce capital, it will
be those providers who carry little debt and lots of cash that are in the prime
position to step up to such an arrangement.
Service providers will be making decisions based on the likely long-term
viability of their prospective clients such as the financial services firms that are selling
their operations. No one wants to take over someone's back-office
operations only to have those assets stranded when the client meets an untimely
demise.
The signs of survival among the strongest players on both the buy-side and
provider-side of outsourcing are there for 2009. Don't look for the
weaker players to participate in the games though.
