Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: Hi everyone, it's Anthony Caparino.
Today we're here with another session of conversations with Anthony. And today I'm with my partner Samir Alualia. And Samir leads our global delivery network in India with A and M. And today we're going to talk about the value of global delivery networks for private equity.
And in today's environment, over the last few years there's been a slowdown in deal activity, volatile times with geopolitical concerns. So what is private equity doing with value creation and how do they go about doing it? One of those levers that's been pulled has been global delivery networks and the establishment of those for both services at the HE fund level as well as with portfolio companies.
So today that is the topic at hand and we'll dive into that with Samir. But before we do that, Sameer, why don't you give us your background and introduction and then we'll get into our content today.
[00:01:01] Speaker A: Perfect. Thank you Anthony and good morning. Good evening everybody. Sameer Aluwalia.
I'm joining this conversation with Anthony from Delhi, India.
Though I spent last 20 years in New York myself and very recently kind of transitioned into this new role at A and M which I'm running from Delhi.
My professional career has been at the intersection of how enterprises have used outsourcing and managed services going all the way back into dot com days and in today's era of AI, very excited to kind of unpack some of our learnings and experiences and kind of fingerprint them on how private equity is using that tool. So Anthony, thank you for inviting and really excited to have this chat.
[00:01:52] Speaker B: Great.
So Sameer, as we know private equity is all about speed, scale capabilities at various levels.
Why does PE need the global delivery concept and how have they benefited over time?
[00:02:09] Speaker A: Great question, right? I mean as we kind of apply ourselves and as we engage with more and more PEs and I think there is a little bit of education that we do first. Anthony, what is global delivery Network?
When we unpack that umbrella term, think of it that it is a new operating model which allows the headquarter to consume interconnected services which spans across enterprise functions.
FNA procurement, HR marketing, digital IT and new skills like cloud, cybersecurity and many others.
These services that are being consumed in a new operating model by the headquarters could be solving either the cost equation for the client or could be creating a new capability for the client or it could be help them create a continuous innovation platform or a combination of them.
As we solve some of these metrics for our clients, there are two or three formats that can be applied. One of the formats is can we use outsourcing with a third party as a tool to drive some of that? Or the other one could be can we create a capability center which is controlled by the client themselves and there are multiple avatars in between these two formats and multiple features that can be applied. But broadly these are two, I would say four service lines. One is helping clients define design and decide whether they want to go in an outsourcing route on a GDN or they want to go into a captive setup route on a gdn.
So that's, I would say at a very broad level is how a GDN is defined.
Now to your question, why does PE need it? Right. When we look at these two formats that I spoke about, historically corporates have been the consumer and users of these formats.
Outsourcing by itself is 600 billion plus industry. And when we look at capability centers, they themselves are anywhere between 4 to 5,000 all over the world today.
This is not a new concept. It's 30 years old and been actively consumed by corporates. In the past seven, eight, ten years we saw an active participation by mid market corporates as well. So there are lot of outsourcing contracts and a lot of captive creations which are being done by mid market.
In the past few we see a very active interest by private equity as well and how they use this tool not only at a portfolio level but also at a fund level as well.
Right. So as I kind of reflect on this, there is a continuous consumption by Fortune 500 of this tool, there is an increasing consumption by mid market corporates and there is a very active interest and participation by private equity clients as well.
[00:05:20] Speaker B: Samir, let me ask you because I think a common misconception is global delivery and you mentioned it before, it's all about outsourcing. But in our experience, as we've seen with private equity and your take here is quite interesting, but it's really more about value creation, the talent that's in India and we'll get into why India in a second, but the talent, the abilities, it's more than just outsourcing. So maybe can you talk a little bit about that aspect of it? Because I think relative to at least pe, the genesis is outsourcing. But the thesis overall would be value creation. And that's really shifted I think between the two parameters that you outline.
[00:06:09] Speaker A: Yes, yes, very well said.
See, I think again not trying to overcomplicate the situation here, but the Evolution of this tool has moved from being a cost solver to a capability creation to a continuous innovation.
Now there are many enterprises and many private equity clients which are still at the cost solver situation.
We call them Generation 0 users.
Many customers have moved from cost to capability and are now actively looking at innovation. Right.
The work that we do with our clients specifically for private equity and their portco is the value that they are looking at is not about can I do a $1 job that I was doing in the US at 40 cents in India?
No, they are looking at okay, how do I do something that is increasing the enterprise valuation?
How do I create something which is motivating the investment thesis that they have as part of that value creation plan, GDN is now becoming a very, very important tool.
As an example, we ran a survey with a premium mid market private equity client and spoke to I think more than 50 plus CEOs in their portfolio trying to understand what are the top two priorities they are trying to solve for in 2025 entering 2026.
And the two responses we got were all around the letter G which is GCC and Generative AI.
Is there a way to kind of combine the two together to solve their value plans? I think that is where we step in. It's not only about making $1.50, it's about how do we create that $1 of EBITDA improvement to improve the enterprise valuations.
[00:08:18] Speaker B: Yeah, that makes sense. And speaking of AI, obviously that's the topic at hand and there's been a lot of global investment in that area. But in your view, does AI complement a GDN or could it potentially take the place of in certain aspects a gdn?
[00:08:41] Speaker A: Great. I mean I think two or three specific questions that are coming our way as we engage with more and more PE sponsors and CXO teams of portfolio companies.
One is, is it AI versus GDN or it is AI first and GDN or is it GDN first and AI?
I think there is no right or wrong answer honestly. But what we have seen as a success so far, that the client gets the most value and the benefits if they do GDN plus AI together.
So how do you create an operating model that gives you access to the right skill, the right talent at the right speed and scale and also use this entire setup as an incubation engine for new capabilities that then you can release and launch in your broader enterprise? Right. So my response to you and the success that I have seen so far is a combination of GDN plus AI versus one over the other.
And the next question that we get from most of the clients is how do we do this?
Right? I mean, what should be the engagement model?
Do we do it ourselves?
Do we hire a partner to do it? That is, do we do a build, operate, transfer?
Do we go for a special purpose vehicle? Do we create a jv? And hence there are multiple formats that are applicable.
We always end up educating our clients that just because you see somebody who has done a format A, that does not mean that is applicable for you. Right.
So there is a little bit of inspiration that we can pick from what our neighbors are doing, but that doesn't mean that we need to kind of apply the same level of inspiration on what we want to do in our business.
[00:10:47] Speaker B: Okay, great.
Why don't we move on to the next topic? So you obviously sit in India and India is at the forefront. So I'd like to understand why India is at the forefront. But the second part of the question is there's also other geographies in the world where a GDN network has formed and depending on the situation might be more applicable than say in India. So maybe it's a two part question. Why India and then why the rest of the world?
[00:11:16] Speaker A: Yes, I mean, I think when we talk about outsourcing, offshoring, capability center, in most of the cases, the first organic answer is India.
I'm not saying that is a wrong answer, but the reality is when we look at a function in a client environment, the decoupling of that function becomes very important.
And we then identify within that function what are the process candidates that should remain onshore, what are the process candidates that can go nearshore, and then what are the candidates that should go offshore?
When we look at us as a market, the near shore could be Mexico, near shore could be Costa Rica, nearshore could be Colombia. But when we look at offshore from a US market perspective, it could be Philippines, it could be India. Right. So decoupling of function is very important. And then tagging that decoupled function to the right service location, I think that is where customers need lot of thinking and lot of help. And that we kind of step in the second point, right.
India does bring a little bit of edge and benefits on some of the metrics. One is talent itself.
There are almost one and a half or two million new engineers that are coming out of universities and schools.
When a customer is creating a center that they want to use for new age skills, product development, software development, cybersecurity, Then I think is an easy access to that scale that is there.
The ecosystem is very mature. I'm not saying that Philippines or Poland for Europe market or Mexico for nearshore is not. But yes, over the last 30, 35 years, there are certain cities and states that provide a lot of advantage for incoming capability centers and outsourcing programs. Right. Bangalore as an example, Hyderabad as an example. There are a lot of those cities.
There is a touch and feel factor as well. Today in India itself, there are anywhere between three to 4,000 captives. Right.
So it is easy to see some of the folks who started on this journey 10, 12 years back, what has been their lessons, their battle scars, their experiences, and we can provision all of that as we start our own journey with our clients. Right.
And last, I would say the government, okay. Some of the state governments here is also very active. Right. So there are incentives, there are special tax policies, special tax corridors that are being created to kind of promote and motivate some of these center creations locally as well.
[00:14:17] Speaker B: Interesting.
I know in speaking with you over the last few months, I've certainly learned there's a lot more than just India. But some of the specific characteristics you mentioned are quite interesting.
Why don't we talk a little bit more about value to private equity?
A little while ago you talked about some of the levers that could be pulled and the concept of improving enterprise value. But maybe if we get a little bit more detail, when you talk about creating value, maybe you could focus a little bit on scale.
So if you are a private equity fund and you have a portfolio company that you're just starting to think about, or maybe dabble in a gdn, talk a little bit about how you could potentially scale that in 12 months. And in your mind, what is the best way to get into it, but maybe not take on so much so soon.
[00:15:14] Speaker A: Yeah.
See, there was a time, Anthony, when setting up a center used to take years and quarters, Right. And in today's time, depending upon how we decouple a function and we design the placement strategy of work, I think some of these centers are getting ready In a quarter, 100 days, 120 days. Right. So there is that ease of adoption, there is that scale to use, and there are those best practices that are available to be leveraged.
Going back to your earlier question, right.
How is the value getting unlocked right now, when we look at it purely from a fund level, there are definitely portfolio synergies that come.
We create cost improvement plans, EBIT improvement plans, we execute them and eventually help them have A better EBITDA multiplier for their exits.
We've also worked with clients. In fact, there are two life situations where we are involved today wherein the private equity is evaluating an asset to be acquired and the asset has multiple outsourcing relationships as well as their own captives in India and Poland.
And the question that we are trying to solve here is that if the private equity acquires this asset, okay, should they also acquire or do an arrangement that the outsourcing relationships and the captives they have in India and in Poland come with it or they should do something else? Right.
So we are helping them create an investment thesis at the time of acquiring the asset.
There is a situation in which we are involved today wherein the asset is with this fund for almost four years and they plan to kind of start a sales process in the next six to 12 months. And we are involved in looking at how do we create a EBITDA improvement plan in the next three to four months that can be executed either by the management team which is being held by the fund today, or potentially by the new buyer. Right. So there are different situations, different entry points at the M and A and as well as at the sell side mandates.
[00:17:50] Speaker B: Yeah. And that's interesting. I guess the takeaway is it's never too early to start and it's never too small to start. I think a lot of funds, if they're not familiar with the concept, they get a little bit overwhelmed because they think, oh, I need to have 100 people and scale and basically take my hands off the wheel and outsource it. But what you're saying is there's different ways to do it, there's different starting points, there's different lengths of time and periods over which you can implement it, which I think is a lot more digestible than, okay, let's go out and outsource, hire 100 people and give them 5, 10 different functions and hope it works.
And I think the sweet spot is making sure that whatever is done is at the appetite for the private equity fund.
[00:18:46] Speaker A: Exactly. I mean, I think no size is small. I mean, there are these micro capability centers that are getting created.
Gone are the days wherein you needed at least 500, 1,000 people to kind of start a center. I mean, we've seen some of these capability centers come up where the scale is anywhere between 10 to 50 people as well.
[00:19:08] Speaker B: Right.
[00:19:08] Speaker A: So I think to your point, Absolutely right. No size is small.
It's all about how do you contextualize and apply for your environment and then very clearly identify the north Star that we are chasing here. Right. And that identification of North Star becomes very important, specifically in the PE scenario that we're talking about.
[00:19:29] Speaker B: Interesting. And you talked about a sale process a little while ago. But the same concepts would apply, for example, on a buy side opportunity where you're assessing or helping clients assess a target company's capabilities. Maybe they have a GDN network already established, maybe they don't, but we can definitely assess that and help. And so those same concepts I think would apply both on a sale process as well as a buy side.
[00:19:59] Speaker A: Absolutely. I mean, I think in sales side we have an advantage that we might in many cases know the management team. So our ability to kind of design a GDN program gets an advantage. And in buy side, I think it is still a lot of outside in versus the details that are shared.
[00:20:20] Speaker B: Right.
[00:20:20] Speaker A: So you're right. And I think we can do it in both scenarios.
Okay.
[00:20:26] Speaker B: Two more topics I'd like to cover. So first, when you think about the concept of GDN and where it is today, what does the future hold for it and what do you expect, say over the next three to five years as this concept becomes more developed and more adopted by private equity?
[00:20:51] Speaker A: See, I think purely from a PE vantage point, Anthony, I mean, I, I already see. I mean, yes, the number can be small, but there are a lot of Day 1 AI Native Capability Centers getting created, wherein the functions and the work that is moving in is not your typical corporate function work, but some very, very highly nuanced capabilities like AI, cloud, erp, cybersecurity, yada yada, yada. Right. So there's a little bit of that that is happening.
We are also seeing clients design hybrid models between outsourcing contracts and GDN together. So there are, as an example, certain activities which are okay to be done by a third party because they do not have any competitive advantage and the third party can do it cheaper and better.
Then there are certain activities which have a lot of your own intelligence and are core to your business are being done by a captive.
Hence, we see this model between third party and captive together doing things, emerging more and more.
Last, I would see in the past there have been few instances wherein setups like these have also yielded asset monetization benefits for funds. So they spin that out as a setup and sell it in the market to drive a lot of commercial value. So I would say those are two or three things that I would see and expect more as we kind of walk this journey.
[00:22:38] Speaker B: Okay, great.
That's interesting to have A captive that's your own and perhaps sell it to someone else and create that value again, another lever that could be pulled.
[00:22:59] Speaker A: This has happened in the past. Right. And not once, but few times. I mean, I remember a very large airlines set up their own captive in India which was carved out by a private equity bulge bracket. And then they kind of did the right sophistication on that captive, made it a pure play managed services firm, scaled it to a billion dollar plus and very recently that firm has been acquired by another large firm at a multi billion dollar valuation. Right. So there are enough evidences and examples in the industry. I just called out one which is very recent, that private equity funds have kind of enjoyed the value unlock.
[00:23:47] Speaker B: Yeah, that's quite compelling.
Before I get to the last question, I guess when you think about it, while the topic at hand is specifically gdn, but at the end of the day it is a value creation lever within an overall investment thesis that can be considered now for future benefit at both fund level and across portfolio.
[00:24:14] Speaker A: Absolutely.
I mean, it's like I would say we need to think of it like an operating leverage in a box and then kind of apply it in the relevant environment and scale it up.
Yeah.
[00:24:27] Speaker B: When you think about it from that angle, it becomes a lot more digestible because it's not a foreign concept anymore.
All right, well, Samir, last question. And I always like to do this at the end of our sessions because at the end of the day we're partners at A and M. But why am. Why is A and M best suited to handle this type of work for private equity?
[00:24:51] Speaker A: See, I think this topic sits at the intersection of private equity as a sector and business and performance improvement as a capability.
This is at the intersection of these two. And A and M is PE embedded. We know pe, we live pe, we breathe pe.
And over the past so many decades, we've had enough success of driving value plans through our performance improvement teams for private equity.
This is just an added tool at the intersection of these two.
When I speak to investment teams, CFO offices, management team of portcos, we don't have to establish ourselves that we know you and we know performance improvement.
I think a starting point becomes very easy and more and more customers are kind of being appreciative that A and M has now started to kind of socialize this topic with them and help them take that execution path.
Our delivery model is also very interesting here, Anthony. Most of the programs that we sign with our clients, we create an integrated delivery model between onshore and offshore.
So our ability to work with the sending locations and the receiving locations is I would say unique in many, many ways. Right. So we can work with the management team specifically who are Generation Zero users to kind of help them navigate this path, run change management and we can work on the receiving side to ensure that whatever has been agreed in the business case get executed on the implementation plan.
So I would say those are two very important differentiators for A and M. We are at the intersection of private equity corridor and performance improvement and we create an integrated delivery model to kind of work with sending and receiving locations.
[00:26:56] Speaker B: Well Sameer, it's been a pleasure. Thank you for your insights. It's been great working with you and learning more about this concept from my perspective and look forward to doing more. So thank you for your time and thank you everyone. We'll see you again soon.
[00:27:11] Speaker A: Take care. Likewise. Thank you Anthony.
