Thursday, 15 October 2009

Cognizant snares UBS captive

(By Anthony Miller – Thursday 15th October 2009 3:15pm). Switzerland-based UBS has joined the ever-growing throng of financial services institutions divesting its ‘captive’ India service centre (ISC) as part of an outsourcing megadeal. The beneficiary is New Jersey headquartered – but to all intents and purposes India-based – SI, Cognizant, which will pay UBS $75m cash in return for UBS ISC’s 2,000 FTEs and a $442m, five-year BPO and IT services contract.

Let’s do the sums. At Cognizant’s current 19% margin, the UBS deal should generate $80-85m of EBIT over the life of the contract. Even were it all converted to cash, this doesn’t look particularly exciting. I can only assume then, like with most outsourcing deals, management expects the ‘cream’ will come from out-of-scope extras, plus any extra leverage that Cognizant can get with a deeper play in the Financial Services sector (currently 43% of total revenues).

In the current downturn I would not have been banking on the ‘extras’ any time soon, even given the miraculous (as in ‘tax-payer funded’) turn-round we are hearing about from the US banking sector. But even so, the deal makes sense and I would expect other global financial services institutions with Indian captives to follow suit, mainly to the benefit of the India-based players.

By the way, if you are doing the sums, you will also see that the revenue productivity on the deal is $44.2k p.a. per FTE. This is about 9% lower than Cognizant’s current rate of $48.6k per FTE, so there may well be scope for Cognizant to drive the UBS ISC employees somewhat harder!

As it so happens, I will be meeting Cognizant top management tomorrow and will tell you more in the next issue of OffshoreViews.

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