Acquiring call centres in the US and shifting their operations to Pakistan

Nov 11 - 17, 2002

The Resource Group (TRG) proposed to raise Rs 600 million through private placement and Initial Public Offering. The TRG concept is centered around labour arbitrage between the US and Pakistan. It consist of the acquisition of mature US telephone answering services and small call centers and significantly improving the profitability of its portfolio of acquired companies by shifting their service delivery to its low cost, offshore facilities in Pakistan.

Currently, TRG revenues drive from its controlling stake in its first acquisition the Alert Communications Corporation, an outsourced call center corporation with three facilities in the Log Angles area. For the twelve months ending September 2002, Alert generated revenues of US$ 8.8 million. Alert maintains an average workforce of 170 full time employee-equivalent, of which 40 or 25 per cent have already been located to Lahore. TRG expects that the share of Pakistan-based employees is expected to rise to 66 per cent of its full time employees by March 2003.

To date, TRG has grown consolidated revenues solely through the acquisition of existing US business, and intends to continue to grow through this acquisition strategy. TRG's policy of acquisition is essentially marketing process designed to provide captive business to its Pakistan facility. This strategy is in contrast to the more common approach among offshore providers of attempting to grow revenues through a strategy of direct marketing to potential end-users of business process services.

For its acquisition, TRG is focused on those call center companies that have a large number of small customers. In the US, such companies are traditionally referred to as small call centers (SCC) or telephone answering services (TAS) SCC and TAS company customers are characterized by low buyer power and high switching costs as a proportion of spend. Accordingly, it is TRG, rather than customers of TRG's portfolio companies, that is in a position to capture the majority of economic value created by the labour offshoring process.

Acquisition valuation in the US SCC and TAS sectors allow for significantly above-market returns in the pursuit of such a strategy. TRG only undertakes acquisitions in which a US dollar denominated internal rate of return subsequent to offshore migration in excess of 40 per cent is clearly demonstrable. TRG makes partial acquisitions reflecting equity interest of 50 to 60 per cent in its target companies, with existing owners and management retaining the balance. This aligns the incentives of existing portfolio company management teams with TRG and encourages them to maintain US sales, marketing and front office efforts. TRG maintains full management control over its acquisitions.

TRG's sponsors consist of the management team that established and grew Align Technology's global offshore operations, as well as prominent individual investors in the US and Europe. In their previous capacities, TRG's sponsors operated offshore facilities employing over 1,000 people in multiple offshore locations in Lahore, Costa Rica, Dubai and Mexico. TRG's sponsors were the largest IT industry operators in Pakistan, employing over 700 people in graphic design, software engineering and call center operations. The International call center established by the TRG team was the first and the largest such operation in Pakistan, and has won significant international commendations as a model offshore facility.

Alongwith the GoP, Zia Chishti, co-founder of Align, hopes to develop a new growth model in his native country, building novel economic ties with the US and finally putting Pakistan on the map of the globalizing service economy. Over the past decade and a half, falling international-telecommunications costs and low overseas wages have persuaded a growing number of Western companies to source customer-interaction services to remote offices across the globe. According to McKinsey and Company, the US-based consuling firm, the world market for remote services will grow to US$ 142 billion by year 2008, a 15-fold increase within 10 years.

TRG is certainly looking to the future with cautious optimism. While the politics of the subcontinent leaves many observers worried, TRG hopes it has struck a model that will both allow Pakistanis to share the rewards of the global economy and have the US investors smiling all the way to the bank.