Back Office for Sale

Companies that have opted to build wholly owned shared-service centers instead of outsourcing back-office functions may be sitting on gold mines.

Eager to gain scale in a consolidating industry, service providers are searching for sellers. In September, Capgemini bought 51 percent of Unilever's Indian captive. Earlier this year, the Worldwide Securities Services division of JPMorgan Chase snapped up the back-office operations of the U.S. hedge fund Paloma Partners Management Co. in order to build its own hedge fund services business. Sensing an opportunity for profit, private-equity firms and hedge funds are also on the prowl.

Many companies have a strong incentive to sell, says Chaz Foster of outsourcing advisory firm TPI. As service providers in China, India, and Indonesia expand, workers are increasingly less interested in sticking with the smaller captives. "Experienced employees want to go somewhere bigger because there's more opportunity," he explains.

Companies typically retain a stake in the operation after selling, which could mean extra profit if the commercial venture makes money. For example, GE still owns 40 percent of the successful shared-services operation (Genpact) that it sold for $500 million to two private-equity firms. Sellers typically hire the new owners to continue to provide services to them, often at a reduced cost.

Clearly, a sale isn't always appropriate, particularly if there are security worries or if the work involved differentiates a company in the market. (For these reasons, many financial-services firms are establishing more, not fewer, captives.) But John Halvey, a partner with Milbank Tweed, foresees many more such deals in the coming years. "There are 400 captive entities in India — at least 100 will get spun out," he predicts. "There's economic value in these operations, and at the end of the day, someone will want to unlock it."