BOT deals on the rise in outsourcing market
N JAYALAKSHMI
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report in August 2002 talked about Parsec, the call centre solutions company, looking at the export market. It added that the company was offering to set up call centres on a build-operate-transfer (BOT) basis. That part of the news was tucked away somewhere in the middle of the report. But it may be pointing to a trend especially in the business process outsourcing (BPO) segment. According to another report, BOT contracts will increase with companies getting contracts to set up, run and hand over BPO operations. Many IT professionals are not as yet willing to place their bets on this trend even in the IT services/BPO segment, but many do agree that the model offers advantages and business benefits that could well augment the services/BPO segment.
Says Avinash Vashistha, MD & Sourcing Advisor, neoIT, "We work with a portfolio of business models for our clients, like outsourcing, helping build-own operations, JV and BOT and we are seeing a strong move towards BOT for BPO and in IT by technology companies." He adds, "We are seeing the strongest interest from technology and product development companies in either setting up their own operations or doing a BOT. The same applies to BPO space. Also, non-technology or product companies that have started their own BPO operations may look at BOT for their IT to leverage the presence and critical mass that would develop over time."
We all know that at a basic level, a BOT model involves taking up the project of a client company by building the infrastructure/facilities for it, operating it, and finally transferring it to the client company. According to Mr Avinash Vashistha, some of the typical outsourcing models are:
- Build-It-Yourself (BIY)
- Build-Operate-Transfer (BOT)
- Spinout or Joint Venture (JV)
- Offshore Dedicated Center (ODC)
- Outsourcing Contract (OC)
Further, according to Mr. Bharat Shah, Offshore Consultant, neoIT , "With the increasing emphasis on offshore outsourcing by foreign customers, BOT is likely to be preferred by those who continue to have concerns on IP related issues as well as those who would like to have greater and more involved oversight on the outsourced work."
According to Mr. Raju Bhatnagar of Cognizant Technology Solutions, there are three commonly used instances where BOT is used. These are:
First, the project has a huge initial outlay of cost and an organisation is unable to fund the cost of setting up the project. In such a situation the organisation seeks funding from an external source to set up the project and run it for some time to recoup its costs. Thereafter the project is transferred to the parent organisation at a predetermined cost. This is usually the case with infrastructure projects and this model is often used by governmental organisations to get the project off the ground.
Second, work that is being done by an organisation is core in nature and therefore while in the initial stages the work is done in a set-up situation by a vendor, thereafter it is pulled back by the organisation into its own fold.
Third, an organisation wishes to commence business in a country where it does not have any base at all. The organisation would look at getting a local company to de-risk its venture into the new country. The organisation would tie up with a local service provider to set up the project, run it for some time till the project stabilises, and then take it over from the vendor who has set up the project.
He adds that the second and the third are the more "commonly" used models in the IT space though the instances of these being used are few and the only instance where this is used as a "standard" model is in the first category.
Executing a BOT model would basically involve the following steps, as listed by Mr. Raju Bhatnagar:
First an organisation determines whether it will set up a project on its own or whether it will look to work on a BOT model. Having decided on the BOT model, the company then decides on the parameters. According to Mr. Raju Bhatnagar, it is simpler to float a separate company to handle the work because he says this makes it easier for the transfer to be done when the time for it matures.
Second, service providers are shortlisted and a dialogue is initiated with them.
Third, the parameters are shared with the service providers and their intent is ascertained - whether or not they would be keen to proceed with such an arrangement.
Fourth, the initial agreement is signed which spells out the nature of contribution that each of the contributors will bring to the table. It also spells out the time period for the transfer. This is referred to as the `put' or `call' options i.e, whether one of the participants to the venture would put their shares to be taken up by the other or will they call for the shares of the other partner.
Fifth, Other factors are addressed - like who has the controlling stake when the project starts off; what would be the composition of the board; which of the partners would have what kind of say on the board appointments; any milestones that would need to be tracked to ensure that the project is delivering what it is required to be delivering; etc.
The investments for a BOT project are usually made by vendor who offers the solution.
Sometimes the customer shares the initial investment. Says Mr. Bharat Shah of neoIT, "In this model, the size of the team grows in a step-by-step manner and hence the vendor doesn't need to make significant investments upfront." According to Mr. Raju Bhatnagar, "For a service provider it is likely that a large chunk of the investment would be borne by them. However, it is also possible that a separate venture is set up and both partners share the financial burden."
Some key challenges involved while implementing a BOT project, according to Mr. Bharat Shah, are to do with transfer of employees from vendor to customer's entity in the transfer stage, the transfer price and fair return to the vendor for the efforts in the Build and Operate stages. According to Mr. Raju Bhatnagar, the challenge is any BOT operation is "to make sure that both parties feel that they have been equitably recompensed for the work that they have put into setting up the project." He adds, "There is no formula by which this can be addressed since each BOT deal is custom-built to suit the requirements of the project. To my mind the only way to tackle these issues is to surface all issues and discuss them threadbare and then capture the discussions on a document / contract which would bind both the parties to the covenants. Apart from these there needs to be a constant review and ongoing communication throughout the duration of the BOT term."
But having said that there are some key advantages that this models offers. Some in the industry feel that this model addresses some of the important concerns of software product companies which include retention and protection of IPR, greater say on retention of key technical staff, and substantial savings in direct costs and scalability and availability of resources. Some others feel that one of the prime advantages this model offers is the ability to launch a complete end-to-end solution in short time. According to Mr. Raju Bhatnagar, other advantages include, "opportunity to capture market share rapidly or address a crying need in a short period of time, advantage of not getting distracted while setting up a new venture and being able to continue to focus on the organisation's core competency, possibility of accessing best in class skill-sets, conservation of capital expenditure, cost effective outsourcing during the initial period of build out and operating, and reduced operating risk and knowledge retention when related to sensitive processes".
And while BOT may not be the buzz word yet, it sure is generating interest in the IT outsourcing/offshoring segment.
(N Jayalaksmi is a freelance writer, who writes for dailies like Times of India)
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