It started life as the sleepy, India-based financial shared-services center for British Airways. And then the most improbable thing happened: It commercialized and went public on the New York Stock Exchange. But the FAO Cinderella story of WNS was not without its hairy moments.

by Jay Whitehead

When I first met veteran Warburg Pincus investor Jeremy Young, I quickly caught a big whiff of his well-earned reputation for disarming candor. “One of the benefits of experience,” he recently told me at his firm’s giant, circular conference table, “is being able to identify an attractive and compelling opportunity before others see it. But an even bigger benefit is having the financial staying power to invest in that opportunity, work with it, improve it, and take it to market.”

But the story of how Young and his firm backed an FAO jewel-in-the-rough and took it public on the NYSE this August is not about gems and garbage. It is much more about sheer grit and some luck in its timing. And it is also a cautionary tale for the thousands of shared-services center managers worldwide who have commercial dreams for their baby The lessons learned here are numerous.

At the same time, the story of WNS may be an indicator of things to come in the FAO marketplace. A number of India-based providers appear on the cusp of going public and have built significant momentum in this young sector. Companies such as Genpact and others are being carefully followed for their own market-shaping plays—whether in new client signings, acquisitions, or rolling out IPOs.

PRIVATE EQUITY PEDIGREE
During the dot-com days of 1999 and 2000, Jeremy Young seemed an odd duck among the private equity and venture crowd. While other investors were pouring billions into anything web-based, Young and Warburg Pincus were hunting business process outsourcing opportunities. “We had identified BPO as an investment thesis, but we were not about to back five bright guys and a Powerpoint slide deck,” he recalled. “BPO is all about credibility. We needed a credible platform.”

Since 1994, Warburg Pincus has been the dominant international private equity player on the Indian continent. So it seemed natural to Young, a Londoner, to pursue opportunities in India. After all, government-backed Nasscom was pouring tens of millions into backing and marketing India’s fast-growing ITO capabilities. To Young, FAO was a natural extension of those well-honed Indian ITO skills. And Warburg’s local knowledge made an Indian FAO play a surer bet. Surer, but not certain. It was December 2000 when Young and a Warburg Pincus entrepreneur-in-residence named David Tibble discovered the British Airways (BA) shared-services center—a discovery that was the first step in creating today’s WNS Global Services, one of the leading companies in the BPO industry.

“David was helping us think through transaction processing themes, and as the WNS opportunity arose, it was clear that David had the experience to take it to the next level,” Young recalled of Tibble’s ideas of transforming BA’s shared-services operation. “This made sense since David had board experience at Hays, a large British business services firm, and had built offshore operations centers in Sri Lanka and India. So when we discovered the BA situation, David and I decided to pursue it together with Neeraj Bhargava, another resident entrepreneur here at Warburg Pincus who was working on moving shared services offshore from the U.S.”

And so, with his two entrepreneurs in tow, Young started the long march toward convincing BA to take its financial shared-services center commercial. In retrospect, Young said he knew he was facing a twisty, bumpy road. “But I never expected it would take quite as long as it did,” he admitted.

For 15 long months, the talks with BA continued, culminating with the launch of WNS.

“We finally closed our investment in May 2002,” he recalled. “One of the reasons it took so much time is that BA is a huge enterprise from which we had to carve out 1,200 people into a new entity. But the bigger reason was that we had to create over 100 service level agreements, or SLAs, with the BA departments that WNS would be serving.

Warburg’s May 2002 investment earned it the majority position in a new company called WNS Global services, a name adapted from the former unit BA called World Network Services. BA held the rest of the stock not owned by Warburg Pincus and the WNS management team. Young and his teammates understood that quality shared-services centers were quite rare.

“Hey, if this were easy, there would be a lot more around,” Young said. But he and his team also knew that as a former in-house center, WNS was dangerously over-dependent on one client.

“Correction,” Young amended, “two clients.” As it turns out, BA was also doing a bit of transaction processing business with Royal & Sun Insurance.

“While modest,” he pointed out, “the fact that WNS had a third-party client was encouraging.”

With two clients, credibility, and cash in hand, WNS set out to win some other clients, one industry segment at a time. Yet despite the experience of Tibble, Bhargava, and Steve Dunning, who ultimately built the entire airline segment for the firm, WNS faced major challenges in changing the attitudes and the cultural focus of the center’s large staff. “We were all surprised at how long the culture change took,” Young admits. “As BA employees, our people were internally focused. We had no outwardly focused people, no sales organization. Because we had not historically sold to outside businesses, the lack of market-facing employees prevented market awareness from rippling through. There were no SLA expectations, for example.”

It took until mid-2003, Young recalled, to build a management team and culture that he thought would be able to go the distance in a competitive market.

“The ‘a-ha moment’ for me was a board meeting in Mumbai about nine months after we made the investment,” Young said. “I got to meet the 15 managers supporting the senior team. Among them was the firm’s current SVP Shilpa Kulkarni. They were all new to the firm, and all brought an outward focus. But it was the energy and the quality of people that truly impressed me. As an investor, you fail to appreciate how difficult it is to build a scalable operations team. But at that moment, I knew we had what it would take.”

Kulkarni, for her part, recalled the moment as well. “We knew that the market was buying Indian call centers but not full business process outsourcing or transaction processing,” she recalled. “Jeremy may have felt confident because this team was assembled, but we were facing some massive challenges. We didn’t have any collateral. We had nothing to sell with. It probably was not until several months later, when we had our first success with a large U.S. telecommunications firm that the team finally shared Jeremy’s confidence.”

WNS’ growth continued steadily from that moment on, with new client contracts, staff added and trained to manage the increased business, and additional opportunities opening up in new vertical markets. Today, the company serves several industries, including travel, insurance, financial services, healthcare, professional services, manufacturing, distribution and retail. It also provides essential corporate functions, such as finance and accounting, human resources (payroll and benefits administration), research and analytics.

By early 2005, it was clear to Young and the rest of the management team that a seasoned chairman would go a long way to completing the team. So after a search, they brought in American Express-Shearson veteran and retired Greenpoint Bank CEO Ramesh Shah, who had traded in his suit and tie for tee time “I tried retirement,” Shah quipped, “and it did not agree with me.”

Shah first joined the company as Chairman North America and subsequently became chairman of the holding company. His job would be to help both customers—especially those in the financial sector—and the capital markets see the very tangible benefits of BPO. He would start by describing the company’s three basic vertical markets.

“Travel is 40 percent of the business, with banking, financial services, and insurance another 40 percent, and emerging business in manufacturing, retail and consumer products 20 percent. Across the verticals markets, finance and accounting account for approximately 30 percent of the business,” he said. “And 10 percent of the business is made up of knowledge services high-end research and analytic work.”

But Shah acknowledges that WNS and its competitors are still in the earliest stages of the FAO-BPO evolution. “For example,” he pointed out, “we are only now starting to see customers in manufacturing and retail who have huge back-office operations in F&A and HR who are looking at outsourcing.”

MONEY MATTERS
While Warburg spent lots of time on building the team, it also understood that management alone is not enough. It would also take money to build enough industry depth to create a significant company.

“Having depth is especially important in FAO,” Young claimed, “because more than with any other type of executive, finance people hate being guinea pigs or beta clients.”

So the global private equity firm brought the power of its balance sheet to bear. “We made three important acquisitions,” Young added. “The first was in 2002, in the U.K. insurance area. Second was in 2003 in U.S. and Indian health claims, and third was in Q4 2005 in U.S. and Indian mortgage processing.”

The results have spoken for themselves. In four years, according to the company, it has grown from two customers to 125, and from 1,200 employees to approximately 12,000.

“In that same time, we went from loss-making with less than $20 million in revenue to profitable with $202 million in revenue, with strong cash generation; and from one location to nine.”

Then on July 26 of this year, WNS went public on the New York Stock Exchange at $20 per share. It closed on its initial day of trading at $24.50, resulting in a $1.2 billion market capitalization. Something about WNS’s story seemed to have strong appeal to investors, considering that on the day of WNS’s IPO, two other companies were scheduled to price their shares but had to delay due to light market demand. At press time, very few shareholders were selling, most were buying, and the company’s shares were holding steady in the $28 to $29 range. To date, WNS is the only pure-play, offshore FAO company to go public.

But its success on Wall Street, however, may prompt others to join the fray. (See sidebar on other India-based firms on the prowl.) If more vendors garner the same kind of success, unquestionably this class of providers will indeed be a force to reckon with in the BPO market. Some speculate that it may be a matter of time before offshore providers become as well established as domestic providers.

While domestic providers have the advantage of having a “Made In the U.S.A.” label, offshore providers have a decided advantage in profitability, which pleases the all-important capital markets. WNS, for example, reports operating margins of 9.6 percent and posted net income of $18.6 million on revenues of $202 million. India-based IT outsourcer Infosys, which is five times larger than WNS in employee headcount with 52,700, has operating margins of 27.2 percent and net income of $600 million on revenues of $2.3 billion.

Compare the Indian providers’ remarkable performance to the lackluster numbers posted by EDS. The Plano, Texas-based company has $20.3 billion in revenues and a 3.1-percent operating margin. Another U.S. firm that helps elevate the Indian outsourcer story is Blue Bell, PA-based Unisys, whose $5.75 billion in revenues generate a negative margin of 1.8 percent and a recent $1.9 billion loss. Comparing the Indian providers’ margins of 10 to 30 percent to the break-even and even losses posted by domestic competitors is driving more institutional shareholders to book an Air India flight to Bangalore.

The economics are a big reason why analysts predict continued robust capital market demand for offshore-based F&A transaction processing company stocks.
“These profitable, recurring-revenue models really rock the house for shareholders,” noted Everest Group Analyst Phil Fersht. “Once payroll processor ADP got the market hooked on this model several decades ago, there has been continuous shareholder demand.”

Warburg Pincus’ Jeremy Young, for his part, is circumspect about the company’s achievements so far. Warburg Pincus is holding on to its WNS stock, having only cashed in the so-called “green shoe” block of shares at the time of the IPO. The financial markets seem to be respecting Warburg Pincus’ faith, but Young thinks the market’s faith in the company reflects something else—a high difficulty factor. “It is really hard to do what we’ve done,” he said, furrowing his brow. “I sometimes ask myself if we would have done it if we knew how challenging it was.”