Daksh and IBM Case

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ALI FARHOOMAND
DAKSH AND IBM: BUSINESS PROCESS

TRANSFORMATION IN INDIA. PART 2—THE
POST-BUYOUT YEARS
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While pondering whether or not to go public, Daksh eServices (“Daksh”), one of India’s
largest independent business process outsourcing (“BPO”) service providers, received a
buyout offer from IBM in July 2004. After due consideration, the founders decided to accept
the IBM offer in favour of an initial public offering (“IPO”). The deal, estimated at US$170
million, marked the coming of age of the Indian BPO industry as it was the first buyout of an
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Indian outfit by a multinational corporation (“MNC”) on this scale. Furthermore, it put to rest
fears about MNCs going slow on offshoring, given the much-publicised backlash, especially
in the US. Speaking on the occasion, Abraham Thomas, managing director of IBM India, said:
India is one of the fastest growing economies in the world and an important
marketplace for IBM. This investment is indicative of our commitment to
supporting our clients in this region and leveraging local capabilities to
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extend our leadership position in the business transformation services

marketplace.1
In mid-2004, the global software industry was going through a fundamental transformation.
The spread of computer networks, built on the internet’s open standards, had far-reaching
effects on the way companies wanted to organise their economic activity. Addressing this
shift in the industry, IBM was strategically reinventing itself to strengthen its position in the
emerging higher-value spaces such as service-oriented architecture, information on demand,
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business process services and open modular systems for organisations of all sizes. The market
was being defined by customers who, through legacy contracts, were increasingly looking for
service providers who could help them transform their operations, as well as take up
responsibility for managing many of their business processes. These included support
functions such as human resources, finance and accounting, supply chain, risk management
and new product development. This reorganisation into configurable and responsive business
1
As quoted in The Statesman (8 April 2004) “IBM Plans to Buy Daksh”, New Delhi.
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Dr Kavita Sethi prepared this case under the supervision of Prof. Ali Farhoomand for class discussion. This case is not intended
to show effective or ineffective handling of decision or business processes.
© 2007 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
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07/360C DAKSH & IBM: Business Process Transformation in India. Part 2—The Post-Buyout Years
systems supported by an equally responsive IT infrastructure is what IBM labelled an “on
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demand mode of operation”.2 Seeking to help customers manage their processes end to end,
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either in-house or through outsourcing, the on demand solution was championed by IBM
through its services offering. IBM’s managed business process services (“MBPS”) initiative
professed to offer customers innovative options to combine process, people and technology in
outsourced delivery models that created business value, which meant transforming an
organisation into a networked, on demand e-business. To successfully implement its
initiative, not only did IBM have to expand the scope of its business portfolio but it also had
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to ensure that the service delivery was cost effective. Its acquisition spree, including Daksh in
2004, seemed to be the strategic step in this direction.
Daksh, although acclaimed for effective leadership and its strong operating model, specialised
essentially in traditional BPO services, and more specifically, in customer relationship
management (“CRM”) and finance and administration (“F&A”) deliverables. IBM’s business
transformation outsourcing (“BTO”) model, however, went beyond the BPO’s limited role of
trimming costs and included outsourcing as a strategic element in business transformation.
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The question analysts were beginning to ask was whether or not the takeover of Daksh had fit
IBM’s overall on demand strategy, and, more importantly, how successful IBM would be in
orchestrating the post-merger integration. Given the continued lacklustre financial results for
IBM’s global services division (“IGS”), which anchored IBM’s service offerings, all eyes
were on IBM Daksh—in donning the IBM colours, would it be able to offer the value-added
services expected from IBM’s BTO offering?
IGS: IBM’s “Jewel in the Crown＂

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When Lou Gerstner took over the reigns of IBM in 1992, it was a loose confederation of
hardware and software businesses working autonomously and often at cross purposes with
each other. Reinventing Big Blue, as IBM was commonly referred to, he introduced a number
of strategic initiatives that resulted in knitting the pieces together and transforming the
crumbling monolith into one of the largest integrated computing solutions providers in the
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world. Prominent among these was the creation of the services division, later renamed IGS.
Selling “solutions” rather than “products” became IBM’s new strategic thrust, and on demand
solutions its au courant slogan. In 2002, when Samuel Palmisano took over as chief executive
officer (“CEO”) of IBM, the on demand concept initiated by his predecessor became a
personal crusade for him. He, however, realised that there were two critical pieces missing
which would prevent IGS from providing a complete range of solutions to its customers: one,
IBM did not have a presence in high-end consulting, and two, it lacked a low-cost base for
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executing technology-driven services support.
Realigning capabilities with the new focus, Palmisano pushed through the acquisition of
PricewaterhouseCooper’s (“PwC”) consulting arm. This addressed one weakness. With
30,000 PwC consultants on board, IBM could bid as aggressively for high-end consulting
projects as could its largest competitors, Electronic Data Systems (“EDS”) and Accenture. In
efforts to neutralise its second weakness, Palmisano drafted a blueprint to create four delivery
hubs in the BRIC countries—Brazil, Russia, India and China. Using these four hubs to bring
down the cost of operations, IBM planned to offer clients the best solutions at extremely
competitive prices. At the same time, Big Blue also divested its low-growth commoditising
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product lines and acquired higher value opportunities to leverage its existing infrastructure
and to extend its market reach [see Exhibit 1]. Attempting to move outsourcing beyond the
basic “lift and shift” model, IBM integrated its IT, consulting and technological capabilities to
2
For further details of IBM’s global initiatives and turnaround strategies, see Farhoomand, A. (2007) “IBM’s ‘On Demand
Business’ Strategy”, Business Case 05/257C, Asia Case Research Centre, The University of Hong Kong, www.acrc.org.hk.
offer clients end-to-end outsourcing solutions with guaranteed results—a process it called
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business transformation outsourcing (“BTO”).
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According to company statements, these initiatives helped IGS develop capabilities that
catered to the entire spectrum of customers’ business needs, thus enabling them to maximise
the opportunities of an on demand business environment. In the summer of 2005, IBM
created a new operating model for IGS to simultaneously drive greater focus within the major
elements of the services portfolio and to improve integration across each major services unit.
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In January 2006, that model was further refined with a more integrated management and
measurement system for the applications business, unifying all of IBM’s applications
capability within its professional services organisation. Finally, in spring 2006, the two major
units within IGS adopted parallel organisational names—Global Technology Services (“GTS”)
and Global Business Services (“GBS”). GTS primarily included infrastructure services,
delivering value through the company’s global scale, standardisation and automation. It also
included outsourcing services, integrated technology services and maintenance. The GBS
segment extended to professional services, delivering business value and innovation to clients
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through solutions that leveraged industry- and business-process expertise. It included
consulting, systems integration and application management services.
While IGS, Big Blue’s “jewel in the crown”, was acknowledged as a critical component of
IBM’s strategy of providing insight and solutions to clients, financial results indicated that it
was not delivering envisaged results. In fiscal year ending in 2004, it missed both its revenue
and earnings targets. Attributing the miss to high costs of operations in Europe and the
sluggish European markets, the company initiated a massive restructuring exercise. This
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included shedding 14,500 jobs from its European operations, while at the same time adding
15,550 people to its India operations (a key growth diver was IBM Daksh, accounting for
over half of IBM’s presence in India). Despite the trade-off, financial results for the next two
consecutive years were a disappointment. Although IGS continued to contribute to more than
half of the total revenues, the net increase in sales continued to decline [see Exhibit 2].
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IBM in India
IBM’s tryst with India dated back to 1962, when it operated through a liaison office in the
country’s capital, Delhi. Not willing to dilute its control with local equity, as was the
requirement of the government then, IBM quit India in 1978. After the liberalisation of the
economy, it re-entered the country through a joint venture with the Tata Group.3 Even though
IBM bought out Tata’s share in the joint venture in 1997, until 2001 its presence in India was
fairly slothful. Sales had crawled to a mere US$300 million, and with a staff strength of 4,000,
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IBM’s global strategy to redefine itself as a services player had not made much difference to
its India operations. Although Abraham Thomas,4 who took charge of IBM India in 2001, set
an ambitious target of US$1 billion for fiscal 2002, annual results showed that Big Blue was
nowhere close to establishing a meaningful presence in India.
However, Palmisano’s landmark visit in May 2003, the first that any senior official of IBM
had ever made to India, bespoke of changes to come. His game plan for future growth of the
company betted heavily on three tenets: Linux, on demand computing and emerging markets.
And India, with its army of IT-savvy graduates, programmers and well-developed offshoring
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capabilities, could offer significant contributions in all three spheres—way ahead of the other
3
The Tata Group was one of India’s oldest, largest and most respected business conglomerates with interests in a diverse range
of sectors including information systems and communications, engineering, consumer products and
chemicals
4
Shankar Annaswamy took over from Abraham Thomas as head of IBM India in July 2004.
three BRIC players. India’s importance in IBM’s process transformation and management
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operations was highlighted by it being named as one of the company’s four emerging
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business opportunities (“EBO”)—the first time in IBM’s history that geographies rather than
technologies or verticals were identified as opportunities. Translated, EBO implied that IBM
in India could at any time seek advice, counsel and source ideas from any of the company’s
operations around the world.
IBM provides high value and commodity services to clients, from wherever
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those skills exist. India is an important part of IBM’s globally integrated
company model. We are not just here to leverage the talent available for
exports, but for also the fast growing domestic market for IT solutions and
services.
- Shankar Annaswamy, managing director, IBM India5
Two events indubitably heralded IBM’s new growth drive in India. First, in March 2004, IBM
India clinched a US$750 million outsourcing contract from Indian telecom major, Bharti
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Tele-Ventures, beating aggressive bidding from rivals HP and Oracle. Second, a month later
IBM acquired Daksh, a leading player in the Indian BPO landscape. While the Bharti deal
gave IBM India a much-needed inroad into the domestic Indian market, acquiring Daksh
catapulted IBM into the top five BPO service providers from India. In realigning the Indian
team to drive growth in line with IBM’s global objectives, Annaswamy, the managing
director of IBM India, was responsible for the domestic market, while Amitabh Ray, head of
IGS India, reported directly to IGS worldwide chief Ginni Rometty. “This helps get rid of the
bureaucracy and makes decision-making faster.”6 Inderpreet Thukral, director of strategy and
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business development, was deputed to drive growth in emerging business opportunities in
India. This focus was further emphasised with Shanghai-based Michael Cannon-Brookes, an
old IBM hand in Asia, being given special charge of China and India. Looking into the
longer-term strategic imperatives, Cannon-Brookes’ mandate was to oversee strategy for both
these markets and align them with IBM’s globally integrated services offering. The
decentralised structure enabled each unit to function independently and thus grow faster.
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In line with the master plan, IBM’s revenues in India had crossed the US$1.5 billion mark by
2005 [see Exhibit 3]. Continuing its expansion, by mid-2006, with over 43,000 employees,
IBM was the leading multinational and the fourth-largest IT company in India, only behind
the Indian top three—Tata Consultancy Services (“TCS”), Wipro Technologies (“Wipro”)
and Infosys Technologies (“Infosys”). IBM Daksh, with over 20,000 employees, ranked as
the second-largest BPO vendor in India, in terms of the number of staff. Holding IBM’s 2006
analysts’ summit in India’s Silicon Valley, Bangalore (the first time the annual summit had
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been held outside the US and Europe), Palmisano reinforced IBM’s big India push, pledging
that Big Blue would triple its investment in India to almost US$6 billion by 2009.
The investment will ensure that we make the most of the opportunity to grow
this marketplace, while it also enables IBM to fulfil its vision to become a
globally integrated company.7
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5
As quoted in Singh, S. (21 January 2006) “Big Blue India Headcount to Touch 50,000 in a Year”, Knight Ridder Tribune
Business News, Washington.
6
Company source, as quoted in Sengupta, S. (26 May 2006) “IBM’s Tryst with India”, Business World.
7
Samuel Palmisano, CEO of IBM, as quoted in Financial Express (6 June 2006) “IBM Triples Investment in India to US$6
billion”. (The investment announcement punctuated a pomp-filled event attended by the then president of India, A.P.J. Abdul
Kalam, and hosted by a beauty queen).
Major Competitors
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Palmisano’s strategy was based on the premise that IBM’s consultants in the US would be
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able to sell high-end, high-margin consulting solutions to clients across the globe and then
have those solutions implemented out of its low-cost bases in the BRIC countries, more
specifically India. However, it was not something that others had not thought of. Practically
every one of IBM’s competitors eyeing the market was following the same route. By the end
of August 2006, Accenture, with an employee base of 25,000, had extended its foothold in
India to provide integrated global services through a network of eight facilities located in
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Mumbai, Bangalore, Hyderabad and Chennai. Meanwhile, EDS had acquired Bangalore-
based applications and BPO services firm MphasiS BFL, taking its Indian staff count to over
20,000. Establishing a global presence, Indian software services companies like TCS, Wipro
and Infosys were also ramping up to transform themselves into end-to-end solution providers
by adding outsourcing and consulting services to their traditional range of IT offerings.
While competitors may have had stronger track records in solving customers’ business
problems than IBM,8 the weapon IBM hoped to use to bludgeon its rivals was the sheer size
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and depth of its offerings. With revenues of US$47.36 billion, IGS towered over its next
competitor, EDS, at revenues of US$19.76 billion [see Exhibit 4 for how the competition
stacked up against IBM].
IBM’s Acquisition of Daksh

IBM’s new vision was to offer end-to-end services, including efficient back and front office
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operations to clients on a global scale. Competencies to do so had to be achieved quickly
since a number of global outsourcing contracts were coming up for renewal. Competition was
also threatening to catch up. 9 However, the trigger which sent IBM on the prowl for an
acqusition in India seemed to be the multi-billion-dollar, five-year deal of IBM with Sprint to
manage its customer service processes and operations globally. Given the strategic nature of
the deal, IBM did not have time to build capabilities from the ground up—it had to move
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swiftly to acquire the scale and the skills required to manage the Sprint contract. Concurrently,
IBM also secured the much-coveted Bharti Tele-Ventures outsourcing contract in India.10
While Big Blue did have a BTO centre located in Bangalore, with staff strength of 450,
operations were still in their infancy. Acquisition of Daksh, reputed for its efficient business
model, greatly shortened IBM’s time to critical mass. Two factors swung in favour of the
Daksh acqusition over other independent BPOs. First, IBM had primary knowledge of the
internal functioning of Daksh, having been the implementation partner for its enterprise
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resource planning (“ERP”) implementation. And second, Sprint was already a major Daksh
client, accounting for nearly a third of the BPO’s revenues. Daksh’s muscle lay in its role as
a dominant service provider of offshore customer support to Sprint, including some processes
that were to be handled by IBM under the new contract.
At the time of the acqusition, Daksh, with reported revenues of US$53 million, was clocking
in profits of US$10.6 million. Driven by the need to gain scale and time to market advantages,
IBM decided to go after the biggest player in the market and seemed willing to pay a
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8
Hamm, S. and Ante, S.E. (18 April 2005) “Beyond Blue”, Business Week,
http://www.businessweek.com/magazine/content/05_16/b3929001_mz001.htm (accessed 6 February 2007).
9
At the time of the Daksh acquisition, Accenture had 8,000 employees in India and was growing at the rate of 250 people every
month. Also, EDS was on the lookout for an independent BPO acquisition.
10
Bharti Tele-Ventures was one of India’s leading private sector providers of telecommunication services. The company was the
only operator to provide mobile services in all the 23 circles in India, as also telephone services and internet access in 15 circles.
premium.11 However, according to some industry analysts, IBM struck a good deal as against
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the potential post-IPO open market price Daksh would have commanded. Market estimates
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put the post-IPO market cap of Daksh at a 50–60% premium vs US$170 million paid by
IBM.12
Changing Industry Dynamics: From BPO to BTO

By 2004, the term outsourcing had become synonymous with India. Given its cheap and
abundantly available skilled manpower, India offered tremendous advantages to companies
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seeking to achieve cost reductions by outsourcing business processes. 13 Concurrently, the
domestic BPO industry, clocking an annual growth rate of 85%, was also booming. This was
evident from mega deals, such as the Bharti contract awarded to IBM. Showing signs of
consolidation, key trends that categorised the changing BPO environment in India were:
• The India advantage was rapidly commoditising, forcing vendors to differentiate based on
proprietary capabilities.
• With customers looking for brand equity, deep pockets and strong balance sheets,
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captives14 and large industry players were driving industry growth.
• Customers looking for end-to-end solutions were also looking to outsource processes.
Moving from a tactical to a strategic approach in deciding the nature and scope of their
offshoring, their preference was for global players that offered services over multiple
shores, processes and expertises.
• With high attrition rates, employees were looking for career growth opportunities and
MNCs were an attractive option.
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Wipro’s acquisition of Spectramind, IBM’s acquisition of Daksh, and subsequently EDS’s
acquisition of MphasiS BFL underscored the importance of scale and size in the business, as
well as the perceived need by global majors to scale and ramp up operations in India. With
the changing demands of customers, the raison d’être of BPOs seemed to be undergoing an
amelioration. Increasingly, companies were looking for outsourcing partners that not only had
the ability to cut costs, but could also add value to their business processes. From being a
mere cost-saving operation, outsourcing was moving up the value chain to what was being
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referred to by IBM as BTO and by other vendors as integrated offshore outsourcing (“IOO”)
or integrated services offering (“ISO”). At this level of BPO involvement, customers felt
more comfortable with well-known names like IBM, Accenture, EDC etc, and with more
well-established Indian players like Infosys and Wipro. Quite clearly, the BPO business in
India had grown out of its entrepreneurial mode. Pavan Vaish, CEO of IBM Daksh and co-
founder of Daksh.com, put it aptly when he said:
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There is a stratification in market. There are tier one players, which have
attained a critical mass and then there are the niche players who are
addressing segments where the volumes are small and it is a specialised play.
Anyone that is in between is either going to die or is going to consolidate.15
Four likely business models were expected to define the Indian outsourcing landscape. As
shown in Figure 1, on one end was the typical Indian entrepreneurial provider, offering plain
11
Sengupta, S. (August 2004) “Hot Deals, Cool Valuations”, BPO Buzz, Business World,
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www.businessworldindia.com/aug3004/news09.asp (accessed 1 March 2006).

12
ValueNotes Database Private Ltd (January 2005) “2004: The Year That Marked Industry Consolidation”, ValueNotes
Outsourcing Digest.
13
For details, see Farhoomand, A. (2007) “IBM and Daksh: Business Process Outsourcing in India. Part 1—The Formative
Years”, Asia Case Research Centre, The University of Hong Kong, www.acrc.org.hk.
14
“Captive operations” was the practice of running back office or other business processes by companies in their own facilities
at offshore locations as opposed to using third party operators.
15
Interview with Pavan Vaish, ACRC, June 2006.
vanilla BPO services. Capitalising on labour arbitrage, these pure-play local BPO companies
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focused on certain core competencies with specific processing capabilities. In the changing
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landscape, their key to success was to either ally with a larger global player or operate in a
niche segment. On the other end of the gamut were integrated service providers like IBM,
Accenture and EDS, who were positioning themselves to offer custom solutions afforded
through multiple functions and processes. Moving from labour arbitrage to strategic
transformation, besides reinforcing confidence through a strong brand name, these companies
promised improved business results through their BTO offerings. In between lay a host of
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other BPO third party service providers, including global players like Convergys and local IT
giants like Infosys and Wipro, who, capitalising on their existing client base, offered
platform-based solutions across specific processes and functions.
IBM, EDS,
Accenture
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Insight-led
solution
custom
2 1
How to compete
Platform-
solution
based
3 4
Replication-
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execution
Typical US call
based
centre provider
Typical Indian
entrepreneurial Activity/Task 1 or 2 end-to- Multiple
Based end processes/ processes/
provider
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functions functions
Where to compete
Figure 1: Four Likely Outsourcing Models16
The Missing Link

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For IBM, “on demand” was a label that described a company’s behaviour and operating
strategy in the networked economy. According to Big Blue, the global services industry was
being reshaped by two trends. The first was the emergence of a new services model, based on
the integration of software and services, and the breaking-up of formerly monolithic business
processes into components that could be delivered over the web. The second trend was a shift
to smaller deals of shorter duration, higher profitability and more industry-specific focus.
Under the umbrella of IGS, IBM’s on demand strategy offered solutions to clients through its
MBPS offering. Encompassing both BPO and BTO services, MBPS also included a set of
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standardised, highly automated, asset-based offerings that were focused specifically on the
mid-market and on small- and medium-sized businesses. The MBPS business model sought to
improve segmentation of target clients, to manage IBM’s business process competencies
across functions and to develop its applications on demand capability.
16
Adapted from internal company presentations of IBM Daksh.
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Although IBM’s BTO service professed to deliver improved business results through
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continuous strategic change as well as to operate and transform the client’s business
processes, applications and infrastructure as measured against business outcomes, Big Blue
realised that not every client defined “transformation” in the same way. For many, the more
straightforward BPO offering was about reducing costs and investment in business processes
while improving efficiency and customer satisfaction. A key part of the business process
services offering therefore boiled down to BPO services across functions such as human
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resources, logistics, procurement and supply chain management [see Exhibit 5 for key
differentiators of BPO and BTO as defined by IBM].
BPO and BTO are two very distinct offerings that we as IBM bring to the
market, so let me explain what is BTO. Let us say you are a pharmaceutical
company. Then we will go to you and say, why is it that you are running your
finance department? We as IBM have all the capability to run the complete
shop end to end and we will sign up for business metrics. If you have people,
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we will take them over, if you have invested in a platform, say an ERP
platform, we will take it over and run it for you. Over a ten-year horizon, we
will guarantee performance benefits and business metrics. Now in order to do
this you need deep consulting skills, which IBM has by virtue of its PwC
acqusition. You need great technology skills, and who better than IBM, be it
hardware, middleware or software. And then you need the operate skills—the
operate piece of it is what is BPO. When you look at it end to end, the
complete offering is BTO. But if a company says rather than do BTO, I just
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want you to run my accounts receivable and accounts payable, then that is
BPO, because then we are taking a process and outsourcing it, doing it better
by bringing in efficiency, but we are not taking the end-to-end function by
itself. In BTO, you are taking complete responsibility. So, you are not a
consulting company coming in giving advice and then leaving it for you to
deliver, because really it is execution that is the hard part.
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- Pavan Vaish, CEO, IBM Daksh17
While IBM had established BTO centres across the globe, it had a relatively low presence in
the customer contact space. IBM’s buyout of Daksh, however, added this missing piece to its
service portfolio. According to IBM spokesman Clint Roswell, the deal was not an
“offshoring story” but a “strategic foothold” that would allow IBM to offer cost arbitrage as
well as strategic transformation to its clients.18 At the time of the acquisition, Daksh employed
over 6,000 people at its five facilities and boasted an enviable clientele that included many
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Fortune 500 companies. Describing the role of IBM Daksh in Big Blue’s service offering,
Sanjeev Aggarwal, CEO of IBM Daksh (until June 2006) quipped, “We are the delivery
engine providing customer service to clients won by the IBM sales team”.19
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17
As told by Pavan Vaish in an interview with ACRC, June 2006.
18
As quoted in Kessler, M. (8 April 2004) “IBM to Acquire India Firm with 6,000 Employees”, USA Today.
19
As quoted in Financial Express (23 January 2006) “Our Processes Are Now Married to IBM Tech”.
IBM Daksh: Post-Acquisition Integration
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The Integration Approach
Pavan Vaish, co-founder of Daksh and CEO of IBM Daksh, attributed the initial success of
the integration to the flexible approach adopted by IBM after its acquisition.20 Acknowledging
that Daksh was a high-growth engine, IBM had not followed its customary integration model
in the case of Daksh. Instead of enforcing the “all glue” approach, where it transported all its
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systems across all functions, it had gone in for a “light touch integration”.21 Thus, at the time
of acquisition, integration was initiated for only those services that were considered
absolutely necessary. For example, IBM’s single profit-and-loss reporting necessitated the
integration of finance systems as well as market controls and compliance needs. In contrast,
operational business units were completely insulated from the integration process. This
ensured that performance metrics were not affected by the takeover. Gradually aligning other
processes with the IBM way, 80% integration was achieved only two years after the
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acquisition.
However, looking ahead, the major concern of the top management was how to manage
future growth while leveraging the process excellence developed in India coupled with the
management talent that understood the business as well as the resources available within the
global IBM network. In the words of Pavan Vaish:
From six years back to today, we have restructured the company many times
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in terms of organisation structure. What would be the structure of tomorrow
in a global delivery network, so that we can be integrated yet free footed?—I
think that would be something playing on my mind.22
Realigning Values
Prior to the acquisition, the Daksh value system was based on six core tenets that all
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employees greatly identified with. These, among others, included living by the customer,
being entrepreneurial and having a high degree of honesty and integrity. According to the
founders, these values were what set Daksh apart from its competitors.
When the IBM acquisition took place, according to Pavan Vaish, “in all candidness we did
not really connect with the three values that IBM had”. 23 While the first two values—
dedication to every client’s success, and trust and personal responsibility in all relationships—
were easy to understand and fell in line with the original Daksh values, most employees
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struggled to relate innovation, the third IBM value, to the Daksh context. To arrive at a
solution, 30 senior leaders of the core team were collectively asked to define descriptors
under the three IBM values which they thought were right for the business and would bring to
life the culture, environment and values that were the very foundation of Daksh [see Exhibit
6]. The initiative seemed to work. Employees, including some at very senior positions, who
had left Daksh at the time of the acqusition, returned to join the IBM Daksh team.
Providing opportunities to work with a diverse portfolio of clients, IBM Daksh identified six
traits necessary for assuming leadership roles in the BPO/BTO industry: entrepreneurial
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behaviour, team building and team working, strategic thinking, communication and
20
Pavan Vaish was the only founding member of the Daksh team to continue with the company and was named CEO of IBM
Daksh on 7 December 2006.
21
22
23
influencing, self awareness and corrective actions, and a focus on the company values.
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Incorporating a rigorous training schedule based on developing these traits, the company
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offered growth opportunities both within IBM Daksh as well as with the parent company,
IBM. Recognised by Dataquest IDC as the number one employer in the Indian BPO industry,
IBM Daksh was also ranked as the “Best Managed Outsourcing Vendor in the World” by the
Black Book of Outsourcing.24
Developing Synergies
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Subsequent to the acquisition, IBM Daksh—besides emerging as a significant player in the
outsourcing landscape—also looked to be playing an important part in IBM’s global game
plan. Integrating erstwhile Daksh capabilities with IBM’s strengths across hardware, software,
research and development, and consulting segments, IBM Daksh’s BTO practise was awarded
the eSourcing Capability Model for Service Providers (“eSCM-SP”) certification, Level 4, in
March 2006. Professing to deliver operational transformation and improvement in addition to
cost efficiencies, the subsidiary catered to a number of Big Blue’s accounts out of India. For
example, for D&B, a business intelligence and consulting firm (with whom IBM had signed a
yo
seven-year US$180 million business transformation deal), IBM Daksh helped innovate and
manage more than 100,000 customer relationships, as well as selected financial and business
functions.
While staff strength had increased 234% to cross the 20,000 milestone, estimated revenues
had jumped by 55%, from US$83.26 million in 2004 to US$128.94 million in 2005. 25
Increasing its installed customer base by over 100% from the time of the acquisition, IBM
op
Daksh serviced more than 30 Fortune-500 clients from 14 centres located across seven cities
in India.
IBM Daksh has grown dramatically over the last two years as a result of
tremendous demand for our ability to deliver high-value transformation
services that leverage many of IBM’s unique skills such as consulting and
research.
tC
- Pavan Vaish, CEO, IBM Daksh26
Also deviating from the norm followed by most other MNC operators, the subsidiary had
aggressive expansion plans in the fast-growing domestic outsourcing sector in India. “In case
of our domestic plans, we will not just function as a BPO. We will do more of BTO, servicing
our clients on a more end-to-end basis.”27
No
A key factor fuelling demand for its services was its outsourcing model that professed to
deliver “continuous improvement BPO”. According to IBM Daksh, through the expert use of
Six Sigma and re-engineering initiatives, continuous improvement BPO increased the
efficiencies of outsourced business processes and delivered improved operational and
business results on an ongoing basis. In addition, synergies across IBM’s diverse
competencies resulted in the development of a number of high-value solutions and replicable
24
Market Wire (30 May 2006) “IBM Daksh More Than Triples Employee Base in India to 20,000 in Two Years”, IBM Press
Release. (Dataquest IDC is acknowledged as a credible source of information on trends and research in the Indian BPO industry,
Do
whereas the Black Book of Outsourcing by Douglas Brown and Scott Wilson is a comprehensive publication on outsourcing that
annually lists the 50 best managed outsourcing vendors globally.
25
While IBM did not report individual segment revenues, these figures were industry estimates. India Business Insight (23
September 2006) “IBM Daksh Plays a Major Part in IBM’s Global Game Plan”.
26
Market Wire (30 May 2006) “IBM Daksh More Than Triples Employee Base in India to 20,000 in Two Years”, IBM Press
Release.
27
Pavan Vaish, as quoted in, Shekhar, M. (11 January 2006) “Well, IBM Daksh Dreams Big Things”, Knight Ridder Tribune
Business News, Washington.
10
tools. For example, successfully leveraging IBM’s research capabilities, Sensi—a web-based,
t
interactive, language assessment software—improved grammar and pronunciation of front-
os
line service providers. ProAct, another tool that had been developed in-house, automated the
analysis of customer satisfaction surveys. Besides being offered to customers, such tools were
also deployed at IBM Daksh to improve efficiency and raise service standards.
Realistic Expectations?
rP
On paper, Palmisano’s strategy promised a neat escape. Instead of battling in cutthroat
markets, IBM would take advantage of existing technology and infrastructure by packaging it,
augmenting it with sophisticated hardware and software, and selling it to customers in a slew
called business transformation services. That way, Big Blue would ride atop the commodity
wave without drowning in it. The challenge was to turn a grand vision that sounded
threatening or full of hype into a must-have. For instance, in 2004 McDonald’s decided not to
hand over its accounting and finance operations after IBM promoted the idea, opting to keep
yo
everything in-house instead.28 In this position, in order to win over lukewarm customers, IBM
may also be tempted to offer overly favourable terms for unpredictable long-term contracts.
This would pose another risk. The successful delivery of IBM’s on demand strategy cascaded
down to its ability to provide integrated, cost-effective, outsourced solutions for business
processes across functional silos. Positioning IBM Daksh as a “Global + Local” integrated
service provider, it hoped to leverage India’s cost arbitrage and integrate erstwhile Daksh’s
operations expertise into its global delivery platform to offer services to clients across the
globe.
op
However, the road ahead for IBM Daksh was not going to be easy. As part of the larger IBM
identity, operations at IBM Daksh were moving out of the entrepreneurial mode. The company
had to cope with internal growing pains associated with such integration. Remaining
untrammeled while at the same time putting in place an organisational structure that would
dovetail into other IBM operations as well as meet the demands of exponential growth, was a
challenge. There was also the onus of moving up the value chain to become a successful BTO
tC
player. Given the continued paltry performance of IGS, the key question was whether IBM
would successfully be able to manage the acquisition to deliver the expected benefits to its on
demand strategy.
No
Do
28
Hamm, S. and Ante, S.E. (18 April 2005) “Beyond Blue”, Business Week, ,
http://www.businessweek.com/magazine/content/05_16/b3929001_mz001.htm (accessed 6 February 2007).
11
EXHIBIT 1: IBM’S PORTFOLIO ACTIONS: ACQUIRING HIGH VALUE
t
CAPABILITIES
os
Pre-2004 2004 2005 2006
Business Value Leadership Capabilities Consolidation New
Opportunity Market
Entry
PwC Corio Maersk IT Daksh
rP
Infrastructure Lotus Logical Healthlink Micromuse
Tivoli Networks SRD FileNet
Value Rational Cyanea Ascential MRO
Acquisitions Informix Candle DWL CIMS Labs
- Services Sector7 Trigo Tech DataPower Language
- Software Access360 Venetica Isogon Analysis
- Hardware Schlumberger Collation System
Meiosys Unicorn
REMBO
BuildForge
yo
Webify
ISS
Component Network
HDD
Value DRAM
Divestitures
Displays
EDI Services
4xx Power PC
PCs
op
tC
Business Value Business Performance Services Firms

Business Performance Services (BPS)
2006 Opportunity: US$1.7T, 2006–2009
CAGR: 8–10%
Infrastructure
Value
No
~$300B Overlapping
Component Traditional Enterprise IT Industry

Value 2006 Opportunity: $1.6T, 2006–2009
CAGR: 4–6%
IT Firms
Do
Source: IBM Annual Reports and Company Presentations, http://www.ibm.com (accessed 6 February 2006).
12
EXHIBIT 2: CONSOLIDATED STATEMENT OF EARNINGS, IBM (2002–2006)
t
os
(Figures in US$ million)
2002 2003 2004 2005* 200
Revenue:
Global Services 36,360 42,635 46,213 47,357 48,
Hardware 27,456 28,239 31,154 24,314 22,
Software 13,074 14,311 15.094 15,753 18,
rP
Global Financing 3,232 2,826 2,608 2,407 2,3
Enterprise Investments/Others 1,064 1,120 1,224 1,303 (94
Total Revenue 81,186 89,131 96,293 91,134 91,
Cost:
Global Services 26,812 32,304 35,038 35,070 34,
Hardware 20,020 20,453 21,976 15,771 14,
Software 2,043 1,943 1,933 1,972 2,6
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Global Financing 1,416 1,249 1,046 1,091 1,1
Enterprise Investments/Others 611 635 731 698 107
Total Cost 50,902 56,584 60,724 54,602 53,
Gross Profit 30,284 32,547 35,569 36,532 38,
Expense and Other Income:
Selling, general and administrative 18,738 18,601 20,079 21,314 20,
Research, development and engineering 4,750 5,314 5,874 5,842 6,1
Intellectual property and custom (1,100) (1,168) (1,169) (948) (90
op
development income 0)
Other (income) and expense 227 238 (23) (2,122) (76
Interest expense 145 145 139 220 278
Total Expense and Other Income 22,760 23,130 24,900 24,306 24,
Income from Continuing Operations 7,524 9,417 10,669 12,226 13,
Before Income Taxes 317
tC
Provision for income taxes 2,190 2,829 3,172 4,232 3,9

Income from Continuing Operations 5,334 6,588 7,497 7,994 9,4
Discontinued Operations:
Loss from discontinued operations, net (1,755) (30) (18) (24) 76
of tax
Income before cumulative effect of 3,579 6,558 7,479 7,970 9,4
change in accounting principle 92
No
Cumulative effect of change in - - - (36) -

accounting principle, net of tax
Net Income 3,579 6,558 7,479 7,934 9,4
* Figures for 2005 and before do not reflect the change in accounting principles in 2006.
IGS Revenues by Segment (2006) (Figures in US$ million)

Segment Revenue* % of Total
GTS: Strategic outsourcing 17,035 35%
Integrated technology services 7,439 16%
Maintenance 5,977 12%
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Business transformation outsourcing 1,836 4%

GBS 15,960 33%
Total 48,247 100%
* Figures adjusted for currency increase as per annual report.
Source: IBM Annual Reports, http://www.ibm.com (accessed 6 February 2006).
13
EXHIBIT 3: IBM—PICKING UP SPEED IN INDIA
t
os
2005: India’s slice of the pie
Total figures India’s share
IBM’s total turnover US$91.1 billion US$1.5 billion 1.60%
IBM Global Services US$47.4 billion US$0.96 billion 2.02%
rP
turnover
IBM total headcount 329,373 38,500 11.60%
IBM Global Services 200,000 32,000 16.00%

headcount
Source: As compiled from Singh, S. (10 May 2004) “IBM in India”, Business World; and Sengupta, S.
(26 May 2006) “IBM’s Tryst with India”, Business World.
yo
IBM’s revenue growth in BRIC countries
op
70%
61%
60% 55%
48%
50% 45%
40% 37%
29%
30% 27%
19%
15%
tC
20% 13%
8%
10% 7% 3%
1%
0%
-3%
-10% Q405 Q106 Q206 Q306 -7%
-20%
Brazil China India Russia

No
Source: Towns, S. “IBM: India Revenue Growth Strongest Among BRIC Countries”,
IBM’s Q306 Earnings Conference Calls, Seeking Alpha,
http://china.seekingalpha.com/article/18712, (accessed 30 November 2006).
Do
14
EXHIBIT 4: PERFORMANCE COMPARISON—IBM AND KEY COMPETITORS
t
(2005–2006)
os
50 40
Revenues (US$ Billion) 45 47.36 35.2 35
Revenue Growth (%)

40 30
35 25
rP
30 20
17.8
25 13.8 15
19.76 18.23
20 10
6.6
15 2.5 5
10 0
5 -4.4 2.53 -5
2.15 1.64
0 -10
yo
IGS EDS Accenture TCS Infosys Wipro
Revenues Revenue Growth (%)
Note: Figures for Wipro, TCS and Infosys are for fiscal year ending March 2006; Figures for Accenture are for fiscal year
ending August 2006. Figures for IGS and EDS are for fiscal year ending December 2005.
Source: Individual company annual reports.
EXHIBIT 5: KEY DIFFERENTIATORS BETWEEN BPO AND BTO AS DEFINED BY

op
IBM
Extended enterprise
tC
BTO Continuous strategic change

while outsourcing
Process Change
Process enhancement
Process improvement while
outsourcing
No
Cost reduction
“Lift and Shift”
BPO
Do
Return on Investment
Source: Internal company presentations.
15
EXHIBIT 6: VALUES AT IBM DAKSH
t
os
IBM VALUE DAKSH DESCRIPTOR
Dedication to every client’s - Deliver an outstanding client experience
success - Add value to our client’s business
- Demonstrate speed of execution
Trust and personal responsibility - Display initiative and self leadership

in all relationships - Emphasise team success over individual
rP
triumphs
- Value integrity, meritocracy and transparency,
both in spirit and in letter
- Respect for people across all levels
- Demonstrate a passion for excellence
- Adhere to our Business Conduct Guidelines
(BCG)
yo
Innovation that matters—for our - Proactively leverage uncertainty, ambiguity
company and for the world and change opportunities for growth
- Challenge status quo
- Build an environment of collaboration and best
practice sharing to create value for our
customers, employees and shareholders
- Promote a culture that fosters creativity and
risk taking
op
Source: Internal company presentations.
tC
No
Do
16

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HKU755

DAKSH AND IBM: BUSINESS PROCESS

extend our leadership position in the business transformation services

systems supported by an equally responsive IT infrastructure is what IBM labelled an “on

IGS: IBM’s “Jewel in the Crown＂

executing technology-driven services support.

IBM’s Acquisition of Daksh

Changing Industry Dynamics: From BPO to BTO

www.businessworldindia.com/aug3004/news09.asp (accessed 1 March 2006).

Figure 1: Four Likely Outsourcing Models16

The Missing Link

- Pavan Vaish, CEO, IBM Daksh17

IBM Daksh: Post-Acquisition Integration

- Pavan Vaish, CEO, IBM Daksh26

EXHIBIT 1: IBM’S PORTFOLIO ACTIONS: ACQUIRING HIGH VALUE

Business Value Business Performance Services Firms

Component Traditional Enterprise IT Industry

EXHIBIT 2: CONSOLIDATED STATEMENT OF EARNINGS, IBM (2002–2006)

Provision for income taxes 2,190 2,829 3,172 4,232 3,9

Cumulative effect of change in - - - (36) -

IGS Revenues by Segment (2006) (Figures in US$ million)

Business transformation outsourcing 1,836 4%

Source: IBM Annual Reports, http://www.ibm.com (accessed 6 February 2006).

EXHIBIT 3: IBM—PICKING UP SPEED IN INDIA

IBM Global Services US$47.4 billion US$0.96 billion 2.02%

IBM Global Services 200,000 32,000 16.00%

Brazil China India Russia

EXHIBIT 4: PERFORMANCE COMPARISON—IBM AND KEY COMPETITORS

Revenue Growth (%)

Revenues Revenue Growth (%)

Source: Individual company annual reports.

EXHIBIT 5: KEY DIFFERENTIATORS BETWEEN BPO AND BTO AS DEFINED BY

BTO Continuous strategic change

Source: Internal company presentations.

EXHIBIT 6: VALUES AT IBM DAKSH

Trust and personal responsibility - Display initiative and self leadership

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