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Tiecon Bombay and Tiecon Chennai. At
both places, one played wet blanket to a crowd that believed the
sun shone out of consultant's behinds who had declared Business
Process Outsourcing (BPO) the glowing future of India. "BPO
or IPO-choose one" was my retort, partly in response to its
deification, including a cover story in a business magazine replete
with photographs of otherwise intelligent-looking entrepreneurs
posing proudly in front of cube farms full of Headset Hamsinis,
each of whom seemed to be busy persuading deadbeat delinquents in
Arkansas to pay up their Visa bills.
Don't take me amiss. There
is dignity in all sorts of labour. But I have this to say: these
might be good private businesses to run till cheaper competitors
come along, and you either match price for price or skate into new
niches, time after time.
But it's a bitch of a business to take public.
And my two words to all the VCs rushing to fund every proposal with
the words "call centre" or "BPO" in them: please
don't. You will do as badly here as you did with your dotcom investments,
and your imminent failure here too will make it that much harder
for overseas investors to put their money in this country over the
next few years.
 Please,
think about it. There is no intellectual property in these businesses.
These are sweat shops. And, yes, sweat shops do make money for a
while-but they don't go public. You, dear VC, won't get your money
out.
Such companies don't go public successfully
for very good reasons. One, margins go down very rapidly over time.
Like it services billing rates went from $100 an hour to $10 in
just a year. Only the move here is from $5 to $2-or less!
And if it's true that stock price is the sum
of discounted future earnings-yours will go down over time, not
up. There are only a couple of escapes. One, if you fix a market
for a stock with the right brokers-but I'm not sure too many VCs
in India know how our stock market actually works. And let's not
even talk of Nasdaq.
The other way, of course, is to pump the market
with hype when you show good results in year one-then dump your
stock and run. Then let the company languish out on a limb as its
profits and promoter options dry up. That's not my idea of venture
capital-but, hey, it's a way out.
The second reason why these firms are an enormous
problem to take public is that they need to grow people exponentially
to grow revenues linearly. To keep my stock price up, I might need
to double revenues. And, with margins falling, to double revenues,
I might need to quadruple staff. So what happens when a company
goes from 1,000 people to 4,000 to 20,000? A whole different set
of issues crops up. Truly, how many of us can run firms 25,000 or
more people-apart from, perhaps, our Railway Minister?
Good people always tend to desert large organisations
for small ones-leading to the average quality of your people falling
over time. Not really a good recipe for success.
IPO apart, is there any other exit? Maybe,
if you're lucky, somebody who deals in the vertical you're outsourcing
might buy you. But you have no IPR-so what they'll basically pay
for is the replacement cost of setting up your flesh farm. No huge
multiples here, my friend. And if you're BPO' ING across horizontals,
God help your VC.
A friend made an impassioned argument that
I should stop dissing BPOs as our educated masses needed jobs-though
the ads seem to say 'MBAs needed to don headsets'. If that is the
case I have no problems with nationalising them like PSUs or social
initiatives, and calling them Laloo Prasad Rozgar Yojnas.
My recommendation-keep these businesses private,
make money when the sun shines from whichever consultant orifice,
but have the flexibility to make them as small or large as you like,
or shut them as soon as you have to. Keep the flexibility. But,
please, don't take VC money as a prelude to taking public money.
Mahesh Murthy, an angel investor, heads
Passionfund. He earlier ran Channel V and, before that, helped launch
Yahoo! and Amazon at a Valley-based interactive marketing firm.
Reach him at Mahesh@passionfund.com.
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