Cognizant Acquires UBS Indian Captive

Last week [on Oct 15], Cognizant announced  its intent to acquire UBS’s India Service Center subsidiary for $75 million. The subsidiary offers KPO, BPO and IT Outsourcing services through 2,000 staff from its Hyderabad offices. As part of the deal, Cognizant and UBS signed a five-year, $442 million service agreement for the continued provision of these services. UBS CEO Oswald Gruebel was quoted as stating that UBS has decided to opt for a buy rather than build strategy for its outsourcing needs, to improve efficiency, reduce costs and increase flexibility.

SSON speaks with Cognizant's Prasad Chintamaneni, Senior Vice President, and head of Banking & Financial Services Practice, who was closely involved with the deal.

SSON: Prasad, thanks for speaking to us after what must have been a grueling week. There is a lot of interest in providers buying up captives at the moment. Tell us what it means to Cognizant.

Prasad Chintamaneni:This was a very strategic acquisition for Cognizant. Let me just outline our business, to give you a better idea.We are already well known for our work in financial services as well as health care and life sciences. Our largest vertical practice is banking and financial services. In fact, banking and financial services, including insurance, make up the largest component of Cognizant’s revenue.

While we have done a lot of work in technology-oriented application development and application support, the BPO/KPO services for the financial sector mark a more recent development – of our BPO resources, only a small portion were dedicated to financial services until now. It’s an area that has been growing organically. When we looked at this opportunity, we realized that it offered us – instantly – a substantial capability in BPO, KPO and infrastructure services in the capital markets space.

SSON: Can you give us some details about this Service Center? How will it fit into your organization?

PC: The Center is impressive in terms of the skill set it offers in high-end, complex processes, such as securities operations, trade settlements, foreign exchange, collateral management, analytics and research, etc.
Cognizant already runs several centers in India – in fact, we have multiple offices in multiple cities. In terms of delivery centers, we have more than 50 worldwide.We plan to keep the India Service Center [ISC] as is for now. Our agreement is to continue to provide UBS the services they have been receiving, but given our specialization, we definitely see excess capacity in the center and will leverage this to grow the relationship with UBS. Although UBS had already been a client of ours, we had been servicing them in a much smaller capacity. This deal obviously elevates our relationship to a new level. We may even expand our work with UBS and provide services from our other centers. We see this as a mutually beneficial relationship for both parties.
Another consideration is that we may, in time, leverage the center to service other clients.

SSON: How might you expand the scope of your work with UBS?

PC: According to the terms of our agreement, we expect to get $442 million of revenue over the next five years. That includes the work we do now – and also provides for some growth. UBS has plans for more outsourcing and we expect to service them in some of the growth areas – beyond what the ISC offers today. More specifically: right now we are providing BPO, KPO and IT infrastructure. But core IT services are also expected to be a significant growth component in the future.

SSON: Have you been looking at these kinds of opportunities for a while? Is it part of your growth strategy?

PC: Yes, we have been looking at opportunities like this and have made a number of strategic acquisitions to complement our business model and make our services more comprehensive. In 2007, for example, we acquired marketRX for its high-end KPO and analytics in the life sciences vertical, which, along with banking and financial services, is one of the largest verticals for our company.

We evaluate opportunities not just from a revenue standpoint. It takes time to grow organically, and we don't want to find ourselves with capability gaps just as the market is increasing its demand. Opportunities like the UBS ISC help us fill these gaps and make our services more comprehensive. If other opportunities arise, we'd be open to them - but only for the right reason.

SSON: Do you think that we'll increasingly see offshore captives offloaded in this manner?

PC: Companies like UBS have taken this step because they realize the limitations of retaining their captive center. They realize that their center could evolve and add more value  -  value for them!  -  by becoming part of a supplier's ecosystem. By tying their center into a supplier's ecosystem, they gain greater efficiency and the option to leverage capability from a center backed up by specialist expertise -  and this is often technology expertise as well as process expertise.

Having said that, other clients with larger captives in India continue to grow these -  indeed, are opening up captives in other geographies. So it depends. There is no one trend. Clients are continually undertaking strategic reviews, and it is a matter of checking whether the sourcing model is still in line with their overall objectives. The options are to grow their operations, to diversify suppliers, or to sell their captives.

SSON: Is India the obvious marketplace for this kind of development?

PC: In some ways, yes, India is an obvious location  -  but mainly because it's been an obvious place for companies to develop their captive offshore centers; labor arbitrage and market talent have made it attractive. We obviously operate in global markets  -  we are in Shanghai, Budapest, Buenos Aires, etc  - and see similar opportunities emerging in those markets. But India is still where most larger client captives are today, so I think that short- to medium-term, it will offer the most opportunities. However, as clients look at consolidating other strategic geographies with their suppliers, we may see more of this in other regions.

SSON: What was UBS's rationale for selling the ISC?

PC: From UBS's standpoint, they had achieved a significant level of cost efficiency and savings through a BPO/KPO focus with some IT infrastructure. However, I think they felt that, when looking at the relative efficiencies gained from the ISC compared to other strategic suppliers, a couple of things stood out.

First, to reach the next step in value-add and efficiency, the ISC would require significant IT capabilities. Given how mature the IT side of offshoring is in India, UBS realized that a supplier could help bring that in - and do so at a much higher level and in a much faster timeframe. So, IT enablement was a factor.

Second, UBS realized that with the talent and ecosystem they had built up, there was an opportunity to serve other clients and become a leading industry utility. This would be a good match for the capability and talent they had developed -  but would be hard to achieve under the UBS brand, given competition in the banking sector. Moving the facility to a third party would provide a better career path for the professionals at ISC.

And third, if ISC stayed within UBS, it would be dependent on UBS's ability to make sufficient investments to expand. As part of a supplier ecosystem, on the other hand, with a P&L focus, it will benefit from an investment orientation and will scale up faster. Again, UBS will benefit through services we supply them.

So there is a bigger market opportunity outside the UBS ecosystem - greater efficiencies, higher cost savings, longer-term career and growth plans for talent, etc. The right supplier would become a long-term provider and partner to take the center to the next level.

SSON: What kind of commitment did you make to UBS?

PC: The roadmap we are working to focuses on significantly enhancing their current trajectory and taking the service provision to a different level, through technological enabling and automation.

SSON: Where do you believe your growth markets are? Has there been a shift in your delivery center strategy?

PC: Last year was a tough year – but despite that, we have seen continued growth in financial services and insurance. The market is now stabilizing and even financial services are starting to look good. In terms of our core business, all of the verticals are doing well. Some of the smaller verticals are growing more aggressively than expected – retail or information, media and entertainment, for example.

From a market perspective the UK and Continental Europe have grown substantially for us over the past four to five years. We were smaller in Europe a few years back – when the revenue split was probably 90% North America and 10% Europe. Now it is more in the range of 80/20. We are seeing North America stabilize, and believe it will become a significant growth driver again. APAC too, is increasingly a business driver. We expect to see it take a meaningful share of revenue over time.

In terms of service lines, the biggest opportunities beyond our bread and butter IT business is in the BPO/KPO, and IT infrastructure space – hence our recent acquisitions to acquire complementary capabilities. Whereas until recently, these areas accounted for over 10% of global revenue, I see this becoming a more substantial component of global revenue over the medium term.

So five years from now, if we evaluate the contribution of Europe/APAC relative to North America, or how much revenue has come from BPO, KPO and IT infrastructure relative to our traditional bread and butter business – I think the numbers will look quite different. So we have been taking steps to position us to take on that growth.

Another significant trend, I believe, is the tremendous growth we’ve seen in consulting. We have about 1,800 consultants today – many domain specialists in either verticals or horizontals. They are increasingly helping us engage in front end activities relating to a large implementation or project. We are making investments in that space. In fact, most BPO engagements start as consulting projects. Consulting is certainly seen as a lead-in for IT and IT infrastructure opportunities. This is very important from a BPO or KPO standpoint.

SSON: Which geographies do you see as becoming more or less relevant? How will delivery models be shifting in the short to medium term?

PC: While India is still where the vast majority of delivery is based, we are now seeing clients becoming much more comfortable in leveraging China. In the past two years we've also seen an increased interest in near-shore capability -  so, for the US markets that would be Argentina and Mexico, for example. We've increased our capacity in Toronto accordingly, as well as in Budapest for our West European clients.

In three to five years, I believe we'll see a shift to a smaller onsite component, and then parts shifting near-shore, with a larger component in India or China, offshore. It's a hybrid 'on-shore, near-shore, off-shore model,' all working seamlessly, in synch, and leveraging global platforms. The important thing will be to have all three of these models integrated in one holistic delivery process. Clients won't care where their delivery is coming from  - but will go by true business outcomes.

Prasad Chintamaneni - Senior Vice President, Head of Banking & Financial Services Practice - Cognizant

Prasad Chintamaneni has 17 years' experience in the banking and financial services and information technology industries in India, Asia Pacific and North America. He is a Senior Vice President at Cognizant and heads Cognizant's Banking & Financial Services (BFS) Practice for North America, responsible for the sales, business development, and client relationship management organization with full P&L management responsibility. Previously, Prasad led the company's U.S. Eastern Region for the BFS Practice. 

Prior to joining Cognizant in 1999, Prasad spent seven years in investment banking and financial services, the last five of which were with Merrill Lynch as an investment banker and a member of Merrill's business strategy committee in India.