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ALI FARHOOMAND
DAKSH AND IBM: BUSINESS PROCESS

OUTSOURCING IN INDIA. PART 1—THE
FORMATIVE YEARS
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DAKSH AND IBM: BUSINESS PROCESS
TRANSFORMATION IN INDIA. PART 2—THE
&
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POST-BUYOUT YEARS
Teaching Note
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Synopsis
Daksh eServices (“Daksh”) was launched in January 2000 by a group of entrepreneurs who
saw the potential in using e-mail as a medium to provide customer support for global clients.
It became an undisputed success story in the Indian business process outsourcing (“BPO”)
landscape. With a growth rate exceeding the industry average of 60%, its revenue crossed
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US$50 million in fiscal 2003–2004. According to analysts, Daksh had all the right numbers to
have a sell-out initial public offering (“IPO”). However, contrary to expectations, in July
2004, Pavan Vaish and Sanjeev Aggarwal, the co-founders of Daksh, decided to accept a
buyout offer from IBM in favour of an 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 Indian outfit by
a multinational corporation (“MNC”) on this scale. What is more, it put to rest fears about
MNCs going slow on offshoring, given the much-publicised backlash, especially in the US.
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Dr Kavita Sethi prepared this teaching note under the supervision of Prof. Ali Farhoomand as a guideline to teaching: “Daksh
and IBM: Business Process Outsourcing in India. Part One—The Formative Years” and “Daksh and IBM: Business
Transformation Outsourcing in India. Part Two—The Post Buyout Years”.
© 2007 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 07/360TN
This Teaching Note is authorized for use only by Pooja Darda, Other (University not listed) until Jun 2022. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or
617.783.7860.
DAKSH & IBM: Business Process Outsourcing in India. Part 1—The Formative Years
07/360TN DAKSH & IBM: Business Process Transformation in India. Part 2—The Post-Buyout Years
Employing over 6,000 people at its five facilities at that time, Daksh boasted an enviable
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clientele that included many Fortune 500 companies.
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The Daksh and IBM story is presented as a set of two cases, which can be used either
independently or in conjunction. Part One, besides introducing students to the BPO industry,
illustrates different aspects of entrepreneurship in a high-growth, IT, e-services, BPO venture.
Having experienced exponential growth since its inception, in 2004, Daksh had reached a
crossroads. The founders faced two options: they could either go public and compete head-on
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with global contenders as an independent service provider, or accept a buyout offer from the
IT giant IBM. Through the case, students are encouraged to evaluate both options and suggest
the best way forward.
Elaborating the post-buyout scenario, Part Two highlights various issues arising from mergers
and acquisitions (“M&A”). The case asks why the soon-to-go-public Daksh agreed to a sell-
out and, more importantly, what prompted IBM to acquire Daksh. Students are challenged to
evaluate whether or not the takeover was the right decision, and how it fit into IBM’s overall
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strategy.
Conceptual Foundation and Teaching Objectives

Used independently, Part One effectively illustrates the different stages in the lifecycle of a
high-growth entrepreneurial venture, from inception to harvest. The teaching objectives of
Part One are:
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1. To familiarise students with the global BPO industry and discuss in specific the pros and
cons associated with offshoring business processes to India.
2. To examine how high-potential, rapidly growing ventures develop innovative
organisational paradigms, and to consider the paradoxes associated with such rapid
growth.
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3. To understand the various forms of capital formation available for entrepreneurs with
particular reference to angel investors, venture capital, valuation and IPOs.
Highlighting the dynamics of the acquisition cycle, Part Two looks at the various stakeholders
involved in the M&A process and emphasises the importance of capability migration leading
to successful post-acquisition strategic fit and alignment. The teaching objectives of Part Two
are:
4. To explore business development as a strategic process in the fast-moving e-commerce
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environment.
5. To understand the types of approaches to integration, the stakeholders involved and the
issues arising from M&A integration.
6. To provide an opportunity for students to evaluate the mechanics of successful post-
acquisition strategic fit and alignment.
7. To highlight the synergistic possibilities in M&As and to address the issue of long-term
value creation.
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Suggested Student Assignments
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Part One: The Formative Years
1. Discuss the dynamics of the global BPO industry. What are its key drivers? Can India
sustain its lead as the world’s preferred offshoring destination?
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2. In terms of the lifecycle of an enterprise, describe the progression of Daksh from
inception to maturity. Evaluate the harvest options open to the founding members and
suggest the best way forward.
3. What are the common paradoxes associated with high-growth industries?
Part Two: The Post-Buyout Years
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4. What prompted Daksh to sell out to IBM instead of pursuing the much-publicised IPO?
5. What role would IBM Daksh play in IBM’s overall strategy?
6. Discuss the issues that arise from M&A integration and evaluate how IBM Daksh worked
towards achieving successful post-acquisition alignment.
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Analysis
1. Discuss the dynamics of the global BPO industry. What are its key drivers?
Can India sustain its lead as the world’s preferred offshoring destination?
With significant potential still untapped, analysts expect that the global BPO phenomenon
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will continue to expand in scope, scale and geographic coverage. As global delivery matures
[see Figure 1 for the offshoring value chain perspective], multi-location strategies are
predicted to become the norm and most offshoring destinations (including emerging locations
such as China) are anticipated to grow in size. Going beyond cost arbitrage, companies have
started to base their offshoring decisions on a larger set of factors, such as service level
maturity, scalability and sustainability, infrastructure availability, and a favourable business
environment prevalent in the offshore destination. Also, moving from a tactical to a strategic
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approach in deciding the nature and scope of their offshoring, preference is accorded to
service providers that offer solutions over multiple shores, processes and expertise. According
to a study conducted by McKinsey, further industry evolution will be influenced by the
interplay of three major forces: supply (the capacity and quality of offshore locations),
increased demand (realistic adoption of offshoring by companies) and industry conduct
(actions initiated by the large industry players).1
Broadly, the BPO industry has three well-defined layers. The bottom layer consists of
businesses that have clearly become commodities due to their high volume and services-
replicating processes developed by clients. Most of these have been successfully offshored to
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low-cost locations, either through independent third-party service providers or through self-
owned captive units (eg, American Express, which set up its own BPO operations in India).
1
National Association of Software and Service Companies, India (February 2006) “Extending India’s Leadership of the Global
IT and BPO Industries”, NASSCOM-McKinsey.
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The top layer comprises tailored technology services. Because these solutions are custom-
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designed to meet the individual needs of customers, most companies prefer to provide
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services from locations close to the IT industry’s major customers, located in America,
Europe and Japan.
Lower costs Develop strategic advantage
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Cost Higher Disaggregate Re-engineer Partnered
Client
arbitrage Value the value processes investment

Work chain
Service provider
Plain Business Offer new Add strategic Business

Vanilla IT Process solutions value Transformation
Services Outsourcing Outsourcing
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Low margin / standardised High margin / customised
Figure 1: Offshoring—A Value Chain Perspective

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This leaves a large block of services sandwiched in the middle, which are also on the way to
becoming commodities as shared standards spread. This layer is feeding the demand for
outsourcing partners who not only have the ability to cut costs, but can also add value to
business processes. Realising the potential and ability of Indian firms such as Wipro and
Infosys to meet this demand, large global players in the IT industry such as Accenture and
IBM have entered the playing field. Offering end-to-end solutions to customers, they have
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added acronyms like BTO (business transformation outsourcing), IOO (integrated offshore
outsourcing) and ISO (integrated services offering) to the alphabet soup of offshoring. These
industry giants, among others, have acquired a host of smaller niche service providers across
the globe, triggering a wave of consolidation in the industry. Professing to maximise gains to
customers, global outsourcing is thus showing signs of moving to a combination of nearshore
and offshore models.
However, the meteoric growth of the industry is accompanied by an omnipresent threat that
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the demand growth in the industry may slow down. Increasingly, companies are beginning to
understand that changing business processes to accommodate large offshore workforces is a
difficult, time-consuming task and often produces lower savings than expected. Employees
need to document procedures and establish performance benchmarks before processes can be
sent offshore. In addition, it can take 12 to 24 months for performance to stabilise and the
volume of work to ramp up, which slows the payoff. Concerns about service quality and
security, in the wake of several well-publicised breaches, are also making some companies
think twice before moving processes offshore. Moreover, the union and political opposition to
offshoring gains, especially in Europe and North America, are an added cause of concern,
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although these are declining.
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The Indian BPO Industry
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Drawing from the updates of the annual attractiveness index published by A.T. Kearney for
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the past two years, in 2006, India continued to outrank all other destinations as the world’s
most preferred offshoring location.2 The major advantages that have led to India’s leadership
are:
• Abundant talent, approximating one-third of the IT and BPO talent among low-cost
countries
• Creation of urban infrastructure in the larger cities that has fostered several IT e-service
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(“ITeS”) centres across the country
• Operational excellence that delivers cost and quality leadership in offshore service
delivery centres
• A conducive business environment upheld by favourable policy interventions such as the
telecom reforms
• Continued growth in the domestic IT sector that provides enabling infrastructure and
develops a broad skill base
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• An extremely favourable time zone enabling client operations around the clock.
However, India’s offshore industries need to overcome a number of challenges if they are to
continue their heady growth and sustain their share relative to competing countries [see Table
1 for a comparative analysis of the key global offshoring locations]. First, the Indian ITeS-
BPO industry is faced with a potential shortage of skilled workers. Currently, only about 25%
of the technical graduates and 10–15% of the general college graduates meet the demands of
the industry. In addition, the attrition rate for skilled workers is very high. Even the larger
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players lose about half their front-line employees every year. As other low-cost countries
from around the world strengthen their capabilities and the competition for offshoring
contracts intensifies, India must improve the quality and skills of its workforce if it wishes to
sustain its competitive advantage. At the same time, acceding to the demands of various
labour unions, it needs to develop standardised work practices in order to remove the “IT
sweat shops” or “cyber coolies” stigma currently associated with the Indian BPO industry.
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Urban infrastructure is an equally daunting challenge. India’s offshoring industries are

dealing with bottlenecks everywhere, from power supply to traffic congestion to cafeteria
services. Cities are fast approaching a breaking point and further growth will have to be
fuelled from entirely new business districts outside the tier one and tier two cities.
A final challenge facing Indian providers is the need to continuously innovate in developing
new service lines and improving operating processes. Since wages and other costs are rising
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by 10–15% every year, India-based BPO providers will have to find ways to reduce total
costs so that they can continue to offer customers the expected 30–40% savings.
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2
National Association of Software and Service Companies, India (December 2005) “Strategic Review 2006—The IT Industry in
India” (Source data: AT Kearney, annual country attractiveness index)
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Strengths Weaknesses Opportunities Threats
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India - Vast skilled labour - Infrastructure - Move up the value - Emerging low-
pool - Bureaucracy chain cost nations
- Superior service - Expand into other - Unstable
quality markets besides the geopolitical
- Strong government United States situation
support - Rising costs
- Cost competitiveness
- Favourable time zone
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location
China - Very cost competitive - Low service - Further penetration - Increasing
- Large labour pool maturity into the Japanese salary levels
- Strong government - Lack of English market that may dilute
support proficiency - Penetration into low-cost
- Negative perception English-speaking advantage
of geopolitical risk countries
- Generally low - Non-voice BPO
country image
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Malaysia - Cost competitive - Low service - Leverage itself as - Small labour
- Excellent business maturity firms’ secondary pool
environment - BPO jobs not option to spread risk
- Strong government popular
support
Czech - Proximity to western - Low level of service - Further penetration - Other EU
Republic Europe maturity into the western nations
- Language and cultural European market
compatibility
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- Cost competitiveness
Singapore - Superior service - Not cost - High-end niche jobs - Small labour
quality competitive pool
- Excellent business - BPO jobs not - Increasing
environment popular service
- English language maturities and
proficiency capabilities of
low-cost
nations
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Philippines - Cost competitiveness - Low service - Leverage existing - Emerging low-

- Excellent English maturity relationships to cost nations
language proficiency - Unfavourable expand presence
geopolitical - Penetrate English-
situation speaking markets
- Lacks infrastructure other than the
United States
Canada - Geographical - High wage rates and - Further penetrate - Increasing
proximity to the taxes the US market using service
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United States geographical maturities and

- Excellent business proximity as a capabilities of
environment leverage low-cost
- Excellent supplier - High-end niche jobs nations
capabilities
Table 1: Comparative Analysis of the Key Global Offshoring Locations

Source: National Association of Software and Service Companies, India (December 2005)
“Strategic Review 2006—The IT Industry in India”.
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2. In terms of the lifecycle of an enterprise, describe the progression of Daksh
from inception to maturity. Evaluate the harvest options open to the founding
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members and suggest the best way forward.
Daksh can be classified as a high-growth enterprise, or a “gazelle”,3 having grown from a new
venture with revenues of US$2.33 million in its first year of operation to US$53 million four
years later. Nimble and fleet-footed entrepreneurial enterprises such as Daksh supplant
bureaucratic giants with their new leadership approaches, a passion for value creation and
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watchful eye for opportunity. These entrepreneurial ventures experience rapid to explosive
growth and are the investments of choice of the venture capital community. When the
founders of Daksh identified a market opportunity in using e-mail as a medium to provide
customer support for global clients, they quickly converted it into a business plan. With the
help of an angel investor, they approached several sources to solicit funds. After securing the
first round of funding and the first customer, the founders lost no time in giving reality to the
rhetoric. Cashing into the offshoring boom in India, Daksh notched a profit of US$100,000 on
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a turnover of US$2.33 million within the first year of operations.
Type of Firm Growth Rate Innovation Funding

High growth > 50% Breakthrough Venture capital
Medium growth >20% Substantial Venture capital
Lifestyle <20% Incremental Asset-based
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Figure 1: Types of Entrepreneurial Firms4
While high-growth ventures such as Daksh follow the typical S-shaped growth pattern
associated with entrepreneurial growth, the stages of venture development are substantially
compressed. This is because such ventures do not stay small for very long. According to
Timmons and Spinelli (2004), such ventures are typically characterised by:
• Flat organisation structures that look like interlocking circles rather than ladders. The
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layers of control and command are only one to two layers deep, thus making them
extremely adaptive and flexible.
• They are integrative around customers and critical missions.
• People lead more through influence and persuasion, which are derived from knowledge
and performance, rather than through formal rank, position or seniority.
• They value their people and share the wealth with those who help create it.
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The business model practised at Daksh [see case Part One, Figure 2] integrated all the above
tenets. Emphasising speed of delivery, the organisation structure at Daksh was extremely flat.
In addition, the founders advocated a people-centric culture, which not only focused on
employee empowerment and training but also offered them stock options. Talking about “co-
sourcing” down the line, Daksh’s emphasis was on customer satisfaction rather than customer
acquisition.
In high-growth ventures, the entrepreneur’s initial challenge is “to dance with the elephants
without being trampled to death”. Once beyond the start-up phase, the ultimate challenge is
“to develop the firm to a point where it is able to lead the elephants onto the dance floor”.5
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3
“Gazelle” is a commonly used expression for a company that exhibits a growth rate of at least 20% each year, for four
consecutive years.
4
Kotelnikov, V. “Types of Entrepreneurial Firms”,
http://www.1000ventures.com/business_guide/sustainable_growth_rapid.html (accessed December 2005).
5
Timmons, J.A. and Spinelli, S. (2004) New Venture Creation, Entrepreneurship for the 21st Century, McGraw-Hill: New York.
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For this to happen, it is imperative that the business remain extremely adaptive during the
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growth phase of its lifecycle. According to Kuratko and Hodgetts (1998), an adaptive firm is
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defined as such if it increases opportunity for its employees, initiates change and instils a
desire to be innovative. The entrepreneur’s vision and value must also be spread throughout
the organisation. Literature further emphasises (Timmons and Spinelli, 2004) that the
organisational culture and climate, as defined through the six dimensions listed below, are
critical to how well a new venture will deal with growth.
• The degree of organisational clarity in terms of being well organised, concise and
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efficient in the way that tasks, procedures and assignments are accomplished
• The degree to which management expects and puts pressure on employees for high
standards and excellent performance
• The extent to which employees feel committed to the goals and objectives of the
organisation
• The extent to which employees feel responsibility for accomplishing their goals without
being constantly monitored
• The extent to which employees feel that they are recognised for a job well done, instead
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of only being punished for mistakes or errors
• The extent to which employees feel a sense of cohesion and team spirit, and work well
together.
All these considerations were ground realities at Daksh. In fact, all employees, including the
founding members, carried the organisation’s values with them at all times. Also, the desire of
personnel to pursue opportunities was carefully nurtured through institutionalised reward
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systems, propagating an environment that allowed for failure and that emphasised the
development of both individuals and venture teams. It was therefore no surprise that the
founders of Daksh could avert the typical problems faced by entrepreneurs in transiting the
growth to maturity stages of venture development. With a credible management team, a
booming market and an impressive client list, Daksh had no dearth of prospective investors.
Two years into operation, the second round of venture funding was in place and Daksh knew
exactly where it was going. By 2004, having completed the third round of funding, Daksh had
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fast-tracked to the maturity stage of venture development. Moving up the offshoring value
chain, it offered its customers distinctive capabilities, delivering multiple processes from
multiple locations. This brought with it another set of challenges. As the client base increased,
more people were hired and facilities and infrastructure had to be expanded to meet the
accelerated growth rate. Meanwhile, the market showed signs of transition. As larger global
players entered the Indian BPO landscape, consolidation in the industry began in earnest.
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Fast Fast decision Fast to market Sustaining

thinking making speed
Figure 2: Competitive Qualities of a High-Growth Company6

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Having built a significant net worth, the next step forward for the founders of Daksh was to
formulate a harvest goal and craft a strategy to achieve it. According to the literature on
6
Kotelnikov, V. “Types of Entrepreneurial Firms”,
http://www.1000ventures.com/business_guide/sustainable_growth_rapid.html, (accessed December 2005).
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entrepreneurial firms (Kuratko and Hodgetts, 1998; Timmons and Spinelli, 2004), there are
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seven principal avenues by which an entrepreneur can harvest the value of the venture he or
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she has created. He or she can either extract capital by cashing in the “capital cow”; launch an
effective employee stock-ownership plan; engage in wealth-building options; go in for a
management buyout; form a merger, acquisition, or strategic alliance; sell the venture outright;
or make a public offering. By 2002, two of the four founding members had left Daksh,
exerting the management buyout option, leaving Pavan Vaish and Sanjeev Aggarwal to hold
fort. In April 2004, the duo had two harvest options; they could either go in for an IPO or
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accept the buyout offer from the global giant IBM.
By 2004, rumours were rife about an imminent IPO, with reinforcing statements issued by the
founders further fanning the grapevine. Going public, the ultimate goal of most entrepreneurs,
would bring with it a number of advantages such as large capital inflow, enhanced liquidity,
improved credibility, and an enhanced value and image of Daksh. In 2004, the numbers and
the environment were right for an IPO. However, having received substantial private equity
funding, the much talked-about IPO looked to be more of a brand building exercise to help
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consolidate identity than an endeavour to raise funds. It also seemed that Daksh was looking
at the IPO as an exit route for investors. On the flip side, the IPO would involve a significant
expense as well as a large amount of management’s time and effort. Also, subsequent to the
IPO, detailed disclosures of company affairs, including its customers, would have to be made
public—a deterrent in the offshoring industry where customer security and confidentiality are
matters of high priority.
The other available option was a sell-out to IBM, with the important issue being the
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harvesting price. In entrepreneurial enterprises such as Daksh, calculation of the actual value
of the firm is more of an art than a science. Estimations, assumptions and projections are all a
part of the process. There are at least a dozen different ways of determining the value of a
private company. However, in practice, a lot of judgement calls are made in every valuation
exercise. While the price/earnings (“P/E”) ratio is a common method for valuing publicly held
corporations, ventures like Daksh do not have prices in the open market for their stock and
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thus must rely on the use of a multiple derived by comparing the firm to similar public
corporations. This multiple is usually an estimate based on a number of factors, such as the
operating industry environment, the goodwill the firm carries, the emotional bias of the
founders, the goals of the buyer and the seller and, most importantly in the case of a buyout,
the reasons for the acquisition. If using the multiple-of-earnings method, the net earnings are
capitalised by using an estimated capitalisation rate. Alternatively, using the fundamental
method, the multiple is an indicator of the present value of the firm in terms of the estimated
future earnings.
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In 2004, with reported revenues of US$53 million and profits of US$10.6 million, Daksh was
in the pink of health. According to Avendus, an investment bank focusing on IT services and
BPOs, most mid-sized companies would get valued at 1.5 times the forward revenues. 7
Assuming a forward multiple of 1.5 and projected revenues of US$75 million for 2005, the
market value associated with Daksh could realistically be estimated at just over US$100
million [see Table 2]. This indicated that, in a short period of four years, the founders had
created significant value for investors and themselves.8
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7
The Hindustan Times (12 April 2004) “Daksh to Don IBM Colours”.
8
Timmons, J.A. and Spinelli, S. (2004) New Venture Creation, Entrepreneurship for the 21st Century, McGraw-Hill: New York.
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2004 2005*
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Revenues (US$ million) 53.00 75.00
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Profit (US$ million) 10.6 15.00
Valuation (US$ million) at a 79.5 112.5
forward multiple of 1.5
* Estimated
Table 2: Valuation of Daksh eServices at a Forward Multiple of 1.5
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Prologue (To be Used after Case One as a Transition to Case Two)
The final value determination of any privately owned company is the actual price agreed on
by the buyer and seller, taking into account all the variables as judged by both parties. In the
case of Daksh, the owners sold to IBM at an agreed price of US$170 million, which was a
forward multiple of 2.26 times the revenue and 11.3 times the profit after tax [see Table 3].
According to industry analysts, the Daksh deal was an aberration, as it was driven by IBM’s
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urgency to scale up in India and also because of its market credibility and leadership.
2004 2005*
Revenues (US$ million) 53.00 75.00
Profit (US$ million) 10.6 15.00
Revenue multiple (at US$170 3.0 2.26
million)
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P/E multiple 16.0 11.3
* Estimated
Table 3: The Actual Valuation at US$170 Million
3. What are the common paradoxes associated with high-growth industries?

When a venture surges in growth, a number of factors begin to present multiple challenges.
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Entrepreneurs constantly struggle to organise factors such as cultural elements, staffing and
development of personnel, and appraisal and awards. To build an adaptive, flexible
organisation which can respond to the demands of high growth, a number of contradictory
forces need to be addressed. Consider the following:
Strategic Emphasis vs Cost Innovation

Rapidly growing firms strive simultaneously to control costs, enhance product quality and
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improve product offerings to maintain competitive parity. However, cutting costs conflicts
with the kinds of autonomous processes most likely to encourage the pursuit of quality and
innovation. In the case of Daksh, the founder members themselves served as role models,
drawing salaries at 50% of the market rates. Daksh also implemented, wherever possible,
other cost control measures that did not interfere with operational excellence.
Strategy vs Autonomy
Innovative firms are fostered through company cultures that support risk taking, autonomy
and employee participation in decision making. However, meeting deadlines and dealing with
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front-line services, as in the case of Daksh, also requires the implementation of strategies
whose success depends on the design of formal systems that inhibit risk taking and autonomy.
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Bureaucratisation vs Decentralisation
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Increased hiring stimulates bureaucracy. Firms formalise procedures as staffing doubles and
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trebles. Employee participation and involvement, as well as the personal touch of the
entrepreneur, decline. Tied to growth, however, is an increased diversity in product offerings
and services that brings with it the recognition that the firm’s existing human resources may
lack the necessary skills to manage the broadening portfolio.
4. What prompted Daksh to sell out to IBM rather than pursue the much-
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publicised IPO?
Although they were handsomely rewarded for their entrepreneurial skills in an uncharted area
of business, the founders of Daksh must have wanted to see what their shares would have
fetched on the stock market. This would be a natural instinct for any entrepreneur. The
founders would not have sold so easily something that they cherished and nurtured from day
one. From the Daksh standpoint, the imperatives to re-think strategy seemed to be triggered
by some other lever. All indicators pointed towards Daksh’s future relationship with one of its
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customers. Sprint, a significant Daksh client contributing nearly one-third of its revenues, was
to be managed by IBM under the terms of a new contract between IBM and Sprint. Going
forward independently may have led to the loss of the Sprint contract and a consequent loss of
revenue—a potential disaster in an IPO year. In addition, teaming up with a global leader
could open up new client opportunities, reduce dependency on a few large customers and
offer growth opportunities to its 6,000 employees. According to Daksh, the key trends in the
Indian BPO industry at the point of sell-out were as follows:
• Customers looking for end-to-end solutions were also looking to outsource critical work.
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• Industry growth was largely happening either in captives or with the large industry
players.
• Early-stage BPOs that were not in niche markets would have to consolidate or perish,
creating a very challenging environment for venture capital-funded companies to go
public.
• Customers were looking for deep pockets and balance sheets, while employees were
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looking for global brands and career growth.

• The scale to become a global player, with multiple shores, processes and areas of
expertise, was the requirement of the time.
• Customers were moving from a tactical to strategic approach in deciding the nature and
scope of their offshoring.
• The India advantage would rapidly commoditise, forcing vendors to differentiate based
on proprietary capabilities.
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Strategic Organisational Change

Organisations, specifically in the fast-moving world of e-business, need to transform
continuously in order to grow, to develop competitive advantages or merely to survive.
Figure 3 shows the dynamic organisational tension framework as suggested by Farhoomand
(2005). This illustrates that in order for organisations to successfully implement change, they
need to balance a dynamic tension among five major organisational dimensions (strategy,
structure, people, technology and processes) and five major external forces (customers,
suppliers, partners, competitors and regulators). Classifying organisations as complex systems,
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this framework views change as “an adaptive response to some tension within the business
ecosystem. When some part of the system changes, a tension between this and other parts of
the system is created, which is resolved by the adaptive change of the other parts”. 9 The
9
Farhoomand, A. (2005) Managing (e) Business Transformation, A Global Perspective, Palgrave Macmillan: New York.
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number of stakeholders and the complexities involved in satisfying multiple and often
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conflicting goals makes it difficult to implement any organisational transformation. In the
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case of Daksh, the organisation reached a point where radical change was the order of the day.
Evaluating its core strengths in light of the changing operating environment as well as the
changing perspective of customer preference towards larger well-known organisations, the
founders decided to harvest the value created and sold out to the global giant IBM. This step
in turn necessitated a number of changes within the organisation for establishing a strategic fit
with the overall IBM culture and strategy.
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Suppliers
Customers Regulators
Technology
Strategy
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Structure People
Process
Partners Competitors
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Figure 3: The Dynamic Organisational Tension Framework
Source: Farhoomand, A. (2005) Managing (e) Business Transformation, A Global Perspective,
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Palgrave Macmillan: New York.
5. What role would IBM Daksh play in IBM’s overall strategy?

Over the years, IBM had been shifting focus to providing end-to-end services to its clients.
Divestment of its PC business, acquisition of PwC and its concerted efforts in pushing its on
demand strategy spoke of its commitment to high-margin management consulting and
technology services industries. From IBM’s standpoint, the need was to offer end-to-end
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services, including efficient back and front office operations, to clients on a global scale.
Moreover, this had to be done quickly, since competition was catching up. With no major
businesses in the customer contact space, IBM looked to add this missing piece to its service
portfolio. The trigger seemed to be IBM’s multi-billion-dollar, five-year deal 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
swiftly to acquire the scale and the skills required to manage the Sprint contract.
Two factors swung in favour of Daksh. First was IBM’s first-hand knowledge of the internal
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functioning of Daksh, having been the implementation partner for its enterprise resource
planning (“ERP”) project. Second, Sprint was already a Daksh client with the latter handling
some of the processes that IBM would handle under the new contract. Acquiring Daksh gave
IBM a running, profitable business with over 6,000 experienced personnel. This ramped up its
position in India to compete not only with the Indian biggies Wipro and Infosys, but also to
leapfrog competition from rivals Accenture and EDS. All this was achieved without any
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effort in terms of setting up, hiring or training. Through the deal, IBM gained impressive
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scale and a significant time-to-market advantage; it became the largest multinational vendor
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in the ITeS landscape in India overnight.
IBM’s Vision for the Future and the Capabilities Required to Fulfil the Vision
IBM’s global services division, IGS, globally delivers services that enable clients to outsource
and transform their business processes on demand. Its portfolio builds on its business process
competency skills, expertise, assets and delivery across the three primary models: business
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transformation outsourcing, business process outsourcing, and the still-in-development
managed business processing services (“BPS”).
Client Clients
Needs
Managed Business Process Services
Business
Model BTO
yo BPO BPS
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F&A
AoD
CRM
Business
Process HR
Competency
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SCM / Procurement
Industry Specific
Asset Management
Execution
Resource Management
Enablement
Foundation Delivery
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Strategy, Finance, Business Controls
Figure 4: The IGS Strategy

Source: Internal IBM Daksh presentations.
According to IBM, BTO delivers improved business results through continuous strategic
change and the operation and transformation of clients’ business processes, applications and
infrastructure, measured against business outcomes. Although BTO is considered a huge
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growth engine, not every IBM client defines transformation the same way. For many, BPO,
which reduces a client’s costs and investment in business processes while improving
efficiency and customer satisfaction, is a more appropriate solution. Keeping this in mind,
IBM has expanded into this marketplace with the acquisition of IBM Daksh.
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617.783.7860.
Looking forward, BPS will offer a set of more standard, highly automated, asset-based
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offerings that will not only focus on the mid-market and small- and medium-sized businesses,
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but will also be the components for BPO and BTO deals. According to company sources,
growth in the market for BPS is expected to outpace large-enterprise growth in both the
traditional IT services and process outsourcing marketplaces. In addition, IBM is also
developing its Applications on Demand capability through the expertise acquired from its
acquisition of Corio, a leader in the applications service provider industry.
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IBM’s delivery model is based on the tenet that teams located in the clients’ home countries
bring the critical knowledge and experience of the markets where its clients operate. This,
combined with its delivery expertise, business insights and innovation leadership, make the
IBM value proposition unbeatable. IBM has close to 70 service delivery centres across the
US, Canada and Europe, delivering services to its clients in these markets by using its
BTO/BPO teams from more than 35 centres located in rapidly growing locations like eastern
Europe, Brazil, China and India, as well as traditional centres like the US, UK and Australia.
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Food for Discussion
If CIOs buy BPS the same way they bought ERP and customer relationship management
(“CRM”) packages—over 19th-hole cocktails with consultants—the consequences could
make the bloated expectations and cost overruns of the ERP and CRM era look like best
practices by comparison. At least the ERP and CRM software could be unwrapped and put on
servers. BPS exists only in theory. And while CIOs over the years have had the experience of
managing plenty of technology projects, implementing theories may be a first on their to-do
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list. The cautionary adoption by the industry is visible in IGS’s performance figures.
6. Discuss the issues that arise from M&A integration and evaluate how IBM
Daksh worked towards achieving successful post-acquisition alignment.
The acquisition cycle as shown in Figure 5 should ideally lead to both economic
opportunities as well professional synergies. However, the large number of unsuccessful
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M&As across corporate history have proven that successful post-merger integration is a fine-
honed skill involving the alignment of a number of stakeholders [see Figure 6].
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617.783.7860.
Figure 5: The Acquisition Cycle
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Source: Madhavan, R. (2002) “Post-Merger Integration: A Program Management View”, PMI
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Institute, University of Pittsburgh.
Partners Employees
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Communities Customers
M&A
Integration
Competitors Suppliers
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Investors Governments
Figure 6: Stakeholders in M&A Integration

Source: Adapted from Madhavan, R. (2002) “Post-Merger Integration: A Program Management
op
View”, PMI Institute, University of Pittsburgh.
According to Kalmbach (2001), M&As can be sorted into three types: skill deals, or those
acquisitions undertaken primarily to gain new technologies or know-how; cross-border deals,
which are acquisitions made outside of a company’s geographic borders and generally made
to give greater global scope or scale; and cross-industry deals, or those acquisitions made
tC
outside a company’s industry, often undertaken to redefine the business. Depending on where
the merging company’s capabilities reside—in resources, processes or values, four types of
integration approaches are most likely to be adopted [see Figure 7].
Issues arising from M&A integration which include human resource integration, operation
management integration, IT integration, sales force integration and process integration
amongst others are more likely to be tackled successfully when the approach to post-merger
integration is tailored to the type of acquisition. According to Burgelman and McKinney
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(2006), four critical processes capture the strategic dynamics of an acquisition integration
process [see Figure 8], especially when the acquired company becomes fully integrated with
the acquiring one (absorption integration).
In the case of Daksh while the need for strategic independence was high, it was a fully owned
subsidiary of IBM. In addition, the IBM Daksh deal fell into a zone that required the
acquisition of new processes as well as a successful integration across geographic borders.
For this integration to be successful it was imperative that key people be retained after the
merger had occurred. At the time of the merger and shortly afterwards, a large number of
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senior staff left, perhaps because they were in high demand elsewhere or assessed the merger
for its impact on their own status and prospects. Subsequent to the merger, a lot of top
management’s time and effort was spent into arriving at a set of organisation values that key
employees could identify with, done in the hope of increasing the chances of them staying
with the organisation. This, coupled with a proactive wooing of former staff by the founder-
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617.783.7860.
turned-CEO Vaish, resulted in staff that had left at the time of the merger rejoining IBM
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Daksh.
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High
Need for Organisational Autonomy

Preservation Symbiosis
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Holding Absorption
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Low
Low High
Need for strategic independence

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Figure 7: Types of Integration Approaches
Source: Adapted from Haspeslagh, P.C. and Jemison, D.B. (1991) Managing Acquisitions,
Creating Value through Corporate Renewal, The Free Press: New York.
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Formulating the Creating the Executing Executing

integration logic integration operational strategic
and performance plan integration integration
goals
Short-term Long-term
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performance performance
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617.783.7860.
Figure 8: Four Critical Processes that Capture the Strategic Dynamics of an Acquisition
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Integration Process
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Source: Burgelman, R.A. and McKinney, W. (2006) “Managing the Strategic Dynamics of
Acquisition Integration: Lessons from HP and Compaq”, California Management Review, 48 (3).
Also, cross-border deals present cultural challenges and require that leaders spend extra effort
on strategy formulation. Thus, the emphasis is on strategy and leadership. Normally, such
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M&As have a full-time and experienced integration director and team, use a corporate
integration methodology to consolidate financial reporting (a crucial element of remote
leadership and control), and thereafter spell out a few core principles to steer the integration.
The key to such deals is to stay flexible and modify the integration approach over time.
Choosing best practices from both companies, the challenge is to select between relevant and
irrelevant, combining business pieces and practices in unconventional ways to deliver a new
value proposition. In the case of IBM Daksh, IBM acknowledged the leadership of Pavan
Vaish entrusted implementation of the integration process to his team.
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According to Vaish, the post-acquisition integration at IBM Daksh has gone without any
major hiccups. He attributes the success of the integration to the flexible approach adopted by
IBM, post-acquisition. Acknowledging that Daksh was a high-growth engine, IBM has not
followed its customary integration model in Daksh’s case. As pointed out in the case, instead
of enforcing the “all glue” approach, where all its systems would be migrated across all
functions, IBM has gone in for a “light touch integration”. Thus, at the time of acquisition,
integration was initiated for only those services considered absolutely necessary. The first
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emphasis was on executing operational excellence. In doing so, operational business units
were completely insulated from the integration process. This ensured that performance
metrics were not affected by the takeover. Gradually moving towards strategic execution and
aligning the long-term performance goals, other processes were subsequently integrated.
According to IBM Daksh, two years after the integration, 80% of the processes had been
aligned to the “IBM way”.
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The Daksh deal was followed by a series of smaller acquisitions to add both capabilities and
market reach, especially in the BPO segment. Prominent among these were: Equitant, a global
provider of outsourcing services focusing on back-office financial processes; Healthlink, an
IT firm that focused on customers in the health care industry; and Viacore, a provider of
business process integration services. Expanding its service portfolio, IBM has also acquired
Atlanta-based Internet Security Systems, making IBM a stronger player in the security
software and services industry. It seems that IBM has honed its skills to successfully combat
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short-term issues arising from post-M&A integration. However, the jury is still out on
whether its M&A strategy will deliver the envisaged results.
Synthesis
The story of Daksh, one of India’s leading BPO companies that was bought out by IBM in
April 2004 at an estimated amount of US$170 million, had all the elements of the great Indian
IT dream: entrepreneurship, innovation, venture capital, wealth creation and a quick exit, with
an angel investor thrown in for good measure. Presented in two parts, the cases used
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independently or together, provide a rich platform to explore all aspects of a high-growth

entrepreneurial venture. The apparent success of the post-merger integration throws open for
discussion different aspects of the dynamics of acquisition integration. The case set also
provides international readers with an insight into the global offshoring industry, specifically
in the context of the world’s leading offshoring destination, India.
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617.783.7860.
References
t
os
Burgelman, R.A. and McKinney, W. (2006) “Managing the Strategic Dynamics of
Acquisition Integration: Lessons from HP and Compaq”, California Management Review, 48
(3).
Farhoomand, A. (2005) Managing (e) Business Transformation, A Global Perspective,

Palgrave Macmillan: New York.
rP
Gilmore, T. and Kazanjian, R. (1989) “Clarifying Decision Making in High Growth Ventures:
The Use of Responsibility Charting”, Journal of Business Venturing, January.
Global Insight (March 2004) “The Comprehensive Impact of Offshore IT Software and
Services Outsourcing on the US Economy and the IT Industry”, Information Technology
Association of America.
yo
Haspeslagh, P.C., and Jemison, D.B. (1991) Managing Acquisitions, Creating Value through
Corporate Renewal, The Free Press: New York.
Kalmbach, C.F. (2001) “What’s the Deal? A Tailored Approach to Post-Merger Integration”,
http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Alphabet/WhatsIntegr
ation.htm (accessed December 2005).
Kuratko, D. and Hodgetts, R. (1998) Entrepreneurship—A Contemporary Approach, 5th

op
Edition, Dryden Press: Fort Worth.
Madhavan, R. (2002) “Post-Merger Integration: A Program Management View”, PMI

Institute, The University of Pittsburgh.
Moreno, A. and Casillas, J. (2003) “High-Growth Enterprises (Gazelles): A Conceptual

tC
Framework”,
http://www.sses.com/public/events/euram/complete_tracks/strategies_change_innovation/mor
eno_casillas.pdf (accessed September 2005).
Timmons, J.A. and Spinelli, S. (2004) New Venture Creation, Entrepreneurship for the 21st
Century, McGraw-Hill: New York.
No
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617.783.7860.

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HKU756

DAKSH AND IBM: BUSINESS PROCESS

Conceptual Foundation and Teaching Objectives

3. What are the common paradoxes associated with high-growth industries?

Part Two: The Post-Buyout Years

5. What role would IBM Daksh play in IBM’s overall strategy?

Lower costs Develop strategic advantage

arbitrage Value the value processes investment

Plain Business Offer new Add strategic Business

Figure 1: Offshoring—A Value Chain Perspective

although these are declining.

The Indian BPO Industry

Urban infrastructure is an equally daunting challenge. India’s offshoring industries are

Philippines - Cost competitiveness - Low service - Leverage existing - Emerging low-

United States geographical maturities and

Table 1: Comparative Analysis of the Key Global Offshoring Locations

Type of Firm Growth Rate Innovation Funding

Fast Fast decision Fast to market Sustaining

Figure 2: Competitive Qualities of a High-Growth Company6

Table 2: Valuation of Daksh eServices at a Forward Multiple of 1.5

Table 3: The Actual Valuation at US$170 Million

3. What are the common paradoxes associated with high-growth industries?

Strategic Emphasis vs Cost Innovation

looking for global brands and career growth.

Strategic Organisational Change

Palgrave Macmillan: New York.

5. What role would IBM Daksh play in IBM’s overall strategy?

Strategy, Finance, Business Controls

Figure 4: The IGS Strategy

Figure 5: The Acquisition Cycle

Figure 6: Stakeholders in M&A Integration

Need for Organisational Autonomy

Need for strategic independence

Formulating the Creating the Executing Executing

independently or together, provide a rich platform to explore all aspects of a high-growth

Farhoomand, A. (2005) Managing (e) Business Transformation, A Global Perspective,

Kuratko, D. and Hodgetts, R. (1998) Entrepreneurship—A Contemporary Approach, 5th

Madhavan, R. (2002) “Post-Merger Integration: A Program Management View”, PMI

Moreno, A. and Casillas, J. (2003) “High-Growth Enterprises (Gazelles): A Conceptual

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