Most of the IT folks are aware that Automation can lead to reduction of operational costs especially in services industries such as financial services, Healthcare, Travel etc. But no where in the world you will find regulations and market dynamics as complicated and challenging as Insurance.   

High levels of Automation are key weapon in overcoming the regulatory and market challenges faced by Insurance companies.  BRMS if properly used by Insurers especially P&C carriers can result in significant operational cost savings and provide good competitive positioning in the market.  But unfortunately majority of the IT departments around the world are yet to embrace this technology completely thus critical mass appeal for this technology is non-existent in this industry vertical.

Think about it, if most of the Organizational Rules and Policies are captured into the existing IT system then very little human touch is required to execute any organizational process which in turn would save substantial financial and human resources for any enterprise.    

More on this shortly

From a glamorous world of Outsourcing I joined a small company called “YASU” which means ”Yet Another Start Up”. Although this is a small company they do absolutely world class Software Product Development.

YASU’s products are called “QuickRules BRMS” (BRMS = Business Rules Management System) and this product help enterprises to separate and externalize business rules from the application code. Also this product come with integrated development and deployment environment which essentially means QuickRules BRMS have inbuilt tools required to write, edit, and test business rules. For lot of IT Folks understanding “what is a Business Rule?” itself is a challenge, thus understanding how to use and benefits from a BRMS product will a different aspect altogether. I would be writing more on this

Regards

But the real issue is all the music played commercial and meant for dance. For folks like me who would like to listen to Rock…life will become bit boring

Every CIO survey this year has pointed out that “Offshoring” will be a crucial component of outsourcing world. For companies who do not have “India Strategy” it would have been a big drawback when trying to attract CIO’s Dollars.   2 of the top 5 IT Outsourcing companies Viz., EDS and Cap Gemini did not have credible offshore presence and they in different ways have ramped up their India presence. EDS picked up predominantly BPO firm MphasiS focusing on BFSI, Hitech, Healthcare and Telecom verticals and Cap Gemini picked up Kanbay a pure play IT services companies focusing on BFSI, Manufacturing, Life sciences and Telecom verticals.  

What about other global firms who do not have substantial offshore presence? There are only two ways of creating this. First is straightforward way of setting up the office in India and then start hiring the people. But before they hit the number of 10K or more it will easily three or more years. Second is to acquire India based service providers. 

Given the current valuations, India based providers can be brought at 2.5 to 3 times their annual earnings and it is not surprising that there are quite a few companies which are very attractive from Domain skills and expertise perspective.  Some of the companies which I think will cease to exist in the market in few years are as follows 

Syntel, Hexaware, L&T Infotech, NIIT Technologies, Polaris, App Labs, Mindtree and Igate 

Among the BPO firms who are still pure play companies better watch out, they are up for grabs as well. Among them I suspect are the following companies which will cease to exist.   

Intelenet, EXL Service Holdings and 24/7 Customer

As I have written in my last Blog, I was supposed to write a comprehensive article on Indian Outsourcing Industry’s Q2 results, but anyways I am most interested in writing my view point on Kanbay in this Blog.

Kanbay (NASDAQ: KBAY) is one of the few pure play professional IT services firm operating thru global delivery model. They had a meaningful growth when compared to their peer group (they did not chase Y2K, they did not go after multiple verticals, their success in achieving high retention rates etc).Their blue chip client base in FSI vertical is second to none. It is also interesting to note that their operating margins for last few years are in the region of 15-19 % which is reasonably good given their operating structure (companies with similar structure have margins between 8 – 12%).The recent Kanbay’s acquisition of “Adjoined Consulting” was a major transformational event for Outsourcing industry. Also this was endorsed by leading analysts such as Forrester as a path breaking event.  Thus this firm had everything going good, leading towards a highly matured $ 1 billion organization by year 2010.

If everything is going good for Kanbay then why this sudden sellout to Cap Gemini? Raymond Spencer CEO of Kanbay in his email to Kanbay’s associates has said “bearing in mind the boards’ primary fiduciary responsibility is to its shareholders, we believe that an all cash deal at $29 per share and vested options is a deal that must be recommended to the shareholders“. Email also says that Kanbay will piggy ride Cap Gemini (CG) to transform existing client’s business and performance thru technology adoption. Lastly Raymond will be joining CG’s top management as Head of their FSI Practice directly reporting to CG’s CEO Paul Hermelin.

Given this background my take on this acquistion

1. Kanbay has been trading at low PE ( 28 before CG offer, a similar firm like IGate Corp is trading at 55 PE) made it attractive target
2. Lack of clarity in terms of 2007 and 2008 goals, lead to this sellout (just stating $ 1 billion revenue by 2010 is not good enough)
3. The very positioning of Kanbay is confusing (it not an Offshoring firm or a full fledged outsourcing company as per current positioning)
4. Lastly Kanbay is victim of its own success (successful IPO, some major client wins in North American Market)

All the above factors lead to Kanbay’s selling out but I felt $ 1.3 Billion (3 times 2006 annual earnings) is low, ideally Kanbay should have been valued at 5 times of 2006 earnings or $ 2.5 billion for this acquistion

What I did not understand is why Cap Gemini? Here are the few questions which remain unanswered  

1. It’s a known fact that Cap Gemini is struggling with their American operations including failed E&Y’s acquisition. They also sold their North American Healthcare practice couple of years back to Accenture. So why do another acquisition? I am sure this is will be as risky as E&Y transaction.
2. Why 100% cash deal?  If the idea of is to acquire Kanbay for their FSI expertise and domain experts then why not empower them with Stock and Cash deal? Like what Kanbay did with Adjoined Consulting (as per the available information Adjoined’s integration with Kanbay was highly successful)
3. North American economic growth rates especially housing sector is indicating possible slow down / moving towards recession in 2007 and 2008. So does this make sense for CG to acquire Kanbay at this point of time? (CG acquired E&Y’s consulting business at the height of Dot com boom)
4. Why should HSBC recommend that Kanbay should sell out to CG? (As reported by Economic Times FRIDAY, OCTOBER 27) was there a danger of Kanbay not renewing their $ 65 million outsourcing contact slated for 2007? I suspect this could be crucial missing piece in whole deal.  

Anyhow only time will tell if this acquisition is successful or not.

Regards

Mothu