Genpact to cut verticals, focus on new ones

Written By Unknown on Sabtu, 15 Maret 2014 | 21.43

MUMBAI: Genpact, one of the biggest back-office outsourcing names in India, will more than halve the number of verticals it will focus on, in an effort to target its growth investments into areas that hold the most promise.

Of a total of 23 verticals, the company will focus its efforts, including re-allocating sales staff, to nine verticals that account for about 85% of its business, including banking, financial services and manufacturing. The New York-listed $2 billion BPO provider came for some flak after its latest earnings results and outlook disappointed investors, and has offered a $300 million share buy back with its own money and borrowings from existing loan facilities.

"In our history, we've always spread our investments out, but to go from $2 billion and beyond now, we think it's necessary to concentrate on those investments," chief executive NV Tyagarajan told investors on March 6 in a conference, according to the transcript of the comments seen by ET. Genpact started out as a GE unit in 1997, and spun out into a separate company in 2005 and listed on the New York Stock Exchange in 2007.

For years,its GE connection gave it the skills and heft to outgrow other Indian-based, US-listed competition such as WNS and EXL. However, the financial crisis hurt GE's financial business — a major source of Genpact's revenue — and a shift to managing more complicated contracts had the side-effect of cramping revenue growth as the deals took longer to negotiate, Genpact has said.

As Genpact tried to get its groove back,it hired McKinsey, a management consultancy, to help it map out a new path to growth, Tyagarajan told investors. The McKinsey engagement came shortly after private equity firm Bain Capital bought 30%of the BPO provider in August 2012. In addition to slashing the number of verticals to focus on, Genpact will halve the number of point solutions it offers.

Point solutions, as their name suggests, are software and back-office applications for specific processes. The company had also cut the number of salespeople focused on the China market, a much-talked about geography under former CEO Pramod Bhasin, ET had reported.

At the investor meeting, Tyagarajan added : "It allows us to free up resources who are thinking about their little space that would end up contributing maybe $1 million extra over the next couple of years, and 50 people thinking about those little things, trying to win those little battles."

Sales investments
The company will grow its sales force by a quarter and revamp its compensation model for sales staff, investing $45 million in its sales this year and making further incremental investments, Tyagarajan said.

"I think refining their sales strategy based on certain core verticals is the right strategy to pursue," as Genpact focusses on winning large contracts, said Rahul Bhangare, an analyst at New York brokerage William Blair. "In the near term it clearly has affected them in terms of those deals not necessarily closing as quickly anticipated and hence not ramping as quickly as anticipated. So that will affect 2014-15," Bhangare added.

That has led to some analysts, such as Edward Caso at Wells Fargo, a large US bank, to reduce their rating on the stock: While GE's December quarter growth of 10% and earnings per share of $0.25 were slightly above his estimates, the longer-term concerns led Caso to reduce his rating on Genpact to "market perform", which is equivalent to "hold" from "outperform " that is a "buy".

Caso in a February note to clients, after Genpact's results, said: "CEO introduced investment plan that may not return non-GE revenue to teens growth for three years. GE outlook now for down 5% in 2014 from flat," according to streetinsider.com. Ben Trowbridge, chairman of outsourcing advisory Alsbridge, said in an email, "The challenge for Genpact and all market leaders is to capitalize on proven markets while looking for uncharted ground to create the real growth of tomorrow."

William Blair's Bhangare added : "Longer-term to really get global client growth to re-accelerate to the mid-teens, it is to win these larger deals and I think it's going to be a wait-and-see if it does end up working."


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