Is Target’s India IT Arm a Target for Indian Outsourcers?

Earlier in the week, there were media reports that Indian outsourcing firms Tata Consultancy Services (TCS) and Wipro Ltd. have been chatting with Target to buy the retailer’s captive outsourcing unit in Bangalore. Following the report, Target emphatically denied any such discussions and affirmed its commitment to the team. There are 2,100 employees in Bangalore who reportedly work on software development and maintenance.

In fact, Target reiterated its commitment to the unit and released a statement firmly denying any such reports.

“Our captive center in Bangalore continues to be an important part of our long-term strategy and is highly integrated with our work and team in Minneapolis,” Gregg Steinhafel, Target’s chairman, president and CEO said in a prepared statement. “We remain firmly committed to this Target team and are proud of the work they do. Recent rumors about a sale are ridiculous speculation.”

It’s true I know my way around a Target store, but I have no insight as to whether the rumors to sell its India IT operations are true or not. But surely the idea has passed through the minds of the Target chiefs at one time or another, no?

Let’s examine a few reasons why the retailer should consider a sale.

A penny saved is a penny earned. The retailer said this week that its net retail sales in October were up 2.8 percent from the same period a year ago, but comparable-store sales fell .1 percent. And the economy being what it is, Target (like other retailers) has faced bleak selling conditions that show only small signs of abating. Analysts continue to caution that the market is iffy at best. Instead of operating, at its expense, the India operation, Target could simply outsource, paying only the contract fees and not worrying about the overhead.

Sometimes sticking to what you do best is the best way to stay at the top of your game. If you are best at selling mass merchandise to the masses for good prices, should you invest so much time and energy in something that’s not cradled smack in the middle of that core competency? Something like developing and maintaining software?

That was one of the reasons behind Citgroup’s decision late last year to sell its India-based captive provider of IT services and solutions to Wipro for about $127 million and its India-based captive business process outsourcing arm to TCS for $505 million. At the time, Citi CEO Dan Callahan said in prepared statements that the transactions were part of the financial company’s efforts “to improve our operating leverage while we focus on our core banking competencies.” Citigroup now outsources—presumably with discounted rates for bundling so many services in multi-year contracts—to Wipro and TCS.

Of course, there are reasons to keep the business.

No one knows your business like you. Certainly that’s why Target and others started their own captive technology centers in India. They were able to tap India’s talent pool and pay India’s wages, making the deals particularly enticing. And at the time, Indian service providers were still ramping up their expertise.

It’s about strategy, stupid. As Steinhafel stated, Target’s operations in Bangalore are part of the retailer’s long-term strategy. Investing in and keeping close to the corporate bosom strategic IT services can give companies the sharp edge they need to compete in markets where profits are razor thin and getting thinner. Sometimes, short-term saving results in long-term losses.

There’s no easy answer, I suppose. And who knows which way Target will go. If I had Steinhafel’s ear, I’d suggest holding on a little longer and giving the Indian team a chance to innovate. What say you? Should Target divest its Indian IT operations, or hold fast?