How To Buy A U.S. Outsourcing Company

Buying a U.S. company offers a quick and easy way for IT and IT enabled services (ITeS) firms to acquire a client base without having to undertake traditional sales and marketing efforts, efforts that can be expensive, time consuming and not always successful.

Buyers can take a modestly-performing U.S. company and shift some or all production and service operations to cheaper locations, cutting operations costs and increasing profit rates. This trend of buying and globalizing the operations of U.S. companies that have not made offshore tie ups or have made expensive ones is called the acquisition plus globalization (A+G) business model.

The A+G business model is particularly effective for firms such as call center or business process outsourcing companies that seek rapid growth without spending money on sales and advertising. For promoters of new ITeS and software services firms, the acquisition route to growth is the only way to quickly become a major player on a global level.

In this two series article, we begin by examining the advantages gained by both buyers and sellers. Next month's update will look at The role of investment banks in managing deal steps followed by a description of each principal deal step.

Advantages of Buying an Existing Firm

1. Instant sales force

The first advantage that an acquisition provides is an experienced U.S. sales force. Why do sales staff need to be localized? The answer is the same in all major markets.

In Japan, the Japanese prefer to buy from other Japanese. In Canada, Canadians prefer to buy from Canadians. The same is true in the U.S., where Americans like to buy from other Americans. Acquiring a U.S. firm and retaining the sales force and client relations managers (while moving production or service operations offshore) provides the best of both worlds: American sales expertise and cost-effective international talent.

2. Familiarity with market conditions

Familiarity with market conditions and client communities can be achieved by making a strategic acquisition. The advantages that non-U.S. firms bring to the global marketplace stem from access to highly-motivated, well educated labor forces that can outperform U.S.-based employees on a dollar-for-dollar basis. U.S. firms enjoy sales and marketing advantages bolstered by intimate familiarity with the U.S. economy and by long-standing client connections.

3. Instant client base

For most buyers from outside the U.S., the biggest advantage of buying an American firm comes from the acquisition of an established client base. This saves the buyer the time and money normally associated with having to build or expand their market presence from the ground up. The cost to operate a small U.S. sales and marketing office for outsourcing services can easily exceed half a million U.S. dollars per year. As many information-technology enabled services firms from outside the U.S. have discovered, even spending several times this amount every year can be insufficient to generate the type or amount of business that an ITeS firm is designed to be capable of handling.

4. Save time

It can save time buying an existing company versus attempting to win contracts through traditional means. Identifying outsourcing leads and beginning the sales cycle can easily take six months or more. The sales cycle for major inbound call center or business process outsourcing (BPO) contracts usually ranges from 6 to 18 months. At the end of this process, a firm can burn through more than a million dollars in sales and marketing expenses, spend two years in limbo—and still fail to gain any business. Meanwhile there is usually a professionally staffed outsourcing facility sitting idle somewhere, consuming additional funds.

Once a firm becomes established in the U.S. market, sales efforts can become self sustaining. But growth beyond a steady state can require incredible amounts of time and money. Strategic acquisitions of firms with established client bases offer a proven alternative that if properly conducted, is cheaper and less risky.

5. Avoid image problems

Buying an existing outsourcing services provider is a proven technique for avoiding the image problems that commonly handicap ITeS companies that are new or from emerging outsourcing destinations. Outsourcing service providers from outside the U.S. who have little or no U.S. experience are unlikely to reach high levels of growth and profitability in a market that is already staked out by well known Indian call centers and BPO service providers who are already well established in the U.S. Market entrants from emerging destinations outside India are finding that some potential clients are turning them down until those destinations have become more established and have proven themselves with major U.S. clients.

6. Gain an instant track record

An acquisition provides a buyer with an instant track record. New firms from established destinations are finding that without already having a strong track record with widely-respected clients, they are unable to establish themselves in the market. An acquisition of firm with a good client base can solve that problem.

7. Access capital

Buying an existing business can enable the new owners to borrow funds or raise additional capital. Additional capital can support moving production or service operations to more competitive locations. Buying a healthy public company in the U.S. enables more acquisitions to be made largely on the basis of stock trades, thereby allowing a company to generate its own expansion capital.

8. Improved process migration

In the ITeS field, attempts to ramp up customer service or BPO programs too fast can lead to outsourcing program failures. Buying an existing operation enables programs to be shifted gradually and for new staff offshore to be trained and coached in small batches, easing workloads for recruiters, trainers, and quality assurance staff. New programs can be tested and baselined in the U.S. before some or all of the work is shifted offshore. The U.S. facility can also provide quality assurance and an escalation path for offshore staff, or the offshore facility can serve in the same role for the U.S.-based operation.

9. Access to training and management staff

An acquired firm or business unit can help with process migration, training, and institution building. A constraint facing specialized operations offshore is the inability to find senior North American staff who are willing to spend long periods of time onsite. Buying an existing operation makes it easier to manage initial process migration and long-term program implementation. Managers from a purchased facility can be assigned to go overseas (possibly in month-long rotations) and managers and trainers from overseas can spend time at an acquired facility in the U.S.

The buyer's offshore managers and trainers should spend time at the newly acquired North American facility in order to gain the following:

* Domain expertise in the subject matter of the acquired firm
* Operations training
* Immersion in the corporate culture of both the acquired firm and its clients
* Personal contacts that unify business operations

In summary, growth through acquisitions may be the only feasible option for new entrants to Western markets. For existing offshore outsourcing service providers, growth through acquisitions can offer the cheapest, quickest route to expansion.

From here we turn to the advantages for sellers from selling their business, followed by a list of pitfalls facing buyers. The role of investment banks will then be outlined and the two principal types of investment banks will be distinguished. Last but not least, the process of completing an acquisition is described in eleven deal steps.

Advantages For Sellers

Owners can receive the following benefits from selling their business:

Exit strategy: Selling allows a seller to convert the equity built up in a firm to personal assets and to do so without damaging the firm. Going public and issuing stock as an exit strategy is now less feasible for mid-market firms in the U.S. because of the increased costs of maintaining a public company in compliance with the Sarbanes-Oxley Act of 2002.

Diversification: Business owners may have narrowly concentrated their personal assets in the company being sold. It is risky to concentrate assets in one or two companies, market sectors, or business models. Selling a business allows the seller to diversify their holdings, reducing risks and safeguarding their assets.

End liabilities: Owning a business entails major responsibilities and liabilities. Selling ends those responsibilities and liabilities. This is a principal motive for founders of small or mid-size Internet service providers and website hosting firms in the U.S., who are burned out and want an end to the responsibilities of running a high tech business.

Globalization: U.S. business owners may not have been able to develop their business through access to low-cost offshore production or service centers. The true value or potential of the business may not be realized until the business is sold. Selling a business to an international company that can globalize the business may be the best way to add value to a business and to make that business instantly more competitive. Even when an owner intends to step back from a business after it is sold, they may want their long-time colleagues to be able to profit from having the business globalized.

Pitfalls For Buyers

Buyers face the following pitfalls:

• Buying firms that are cheap but that face restrictions in their contracts with clients—restrictions that block processes from being shifted to any other location. These provisions may not be ‘stoppers’ but need to be carefully identified and considered.

• Approaching acquisitions randomly, entertaining offers from the first firms that present themselves for sale, and failing to contract for 75-125 prospects to be screened and vetted simultaneously. This often leads to overpaying for an acquisition.

• Failure to be properly advised about market entry strategies, current prices, and proper deal structures.

• Buying a firm that is too small to globalize production or service operations. In the collection and accounts receivables outsourcing industry, for example, firms with under 25 employees should generally be avoided.

• Buying a troubled firm that is cheap, but requires more intervention than a buyer is immediately capable of providing. Buyers risk assuming excessive financial liabilities from buying a troubled company.

• Only looking at companies that are already on the market and are therefore more expensive. An outsourcing firm that has already been put up for sale will likely be overvalued and suffering from sales stagnation or even client flight, since clients will be hesitant to do business with an outsourcing company whose future is uncertain.