business

Indian Outsourcing Companies Aim for Target's Business

India's top tech firms Tata Consultancy Services (TCS), Wipro and several others are pursuing Target's captive technology centre for a potential acquisition, in what could be a transaction bundled with a long-term outsourcing contract worth $300-400 million. America's second-biggest discount retailer Target has around 1,500 staff employed at its Bangalore centre, currently doing software development and maintenance work.

"We have been in discussions with them for the past few months and the dialogue is still open," a senior executive at one of the tech firms exploring this transaction told ET on conditions of anonymity. "There is no conclusion yet about how this transaction can be structured, and it's very early days," he added. Both TCS and Wipro count Target as one of their top retail customers.

Some of the world's top retailers, including UK's Tesco and America's speciality retailer Home Depot, have been outsourcing projects to Indian third-party service providers, including TCS and Infosys, apart from their own captive centres in order to support their existing IT systems and also develop newer applications. Tesco, for instance, saves over $100 million every year by outsourcing its IT projects to India, and primarily drives projects from its own captive in Bangalore.

"Target's India centre could be doing at least $100 million worth of projects (revenues) every year," another person familiar with the retailer's India operations told ET on conditions of anonymity. Officials at Target did not reply to an email query sent by ET. TCS, Infosys and Wipro also declined to comment. Few years ago, many retailers started with an Indian captive operation as there were not many service providers who could understand their core operations better. Target entered India in 2004 through a JV with ANSRSource, a Texas-based BPO outsourcing company.

"There is a certain equity in building up the operations (captive) initially, but over the course of time, there is the objective of monetising the operations," said Avinash Vashistha, CEO, Tholons, an offshore advisory firm.

"Once a particular process becomes commoditised, then any adding of additional resources is not justified as it adds up to the costs."

TCS, one of Target's Indian suppliers, supports the retailer's operations from its delivery centres in Uruguay and Chile, apart from India. Target, which competes with Walmart Stores, reported quarterly revenues of $14.6 billion for the second quarter ended August this year.

Over the past few months, many companies have sold their technology captives in India. Divesting non-core captive operations is a strategy adopted by banks such as Citigroup and UBS for focusing better on their core operations, and also gain better outsourcing rates by bundling such transactions with a multi-year contract. An upfront payment also helps them unlock value from non-core assets. Citibank sold its Indian back-office business to TCS for around $505 million in October last year, and Citi Technology Services for around $127 million to Wipro in December last year. Both these transactions came with assured outsourcing business of around $3 billion together for these vendors.

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