Indian IT’s dilemma: To buy or not to buy
Mint Asia takes a look at whether Indian IT companies can build new businesses without an aggressive acquisition strategy
Three years. Seventy acquisitions. $3.4 billion.
That is the amount of money that information technology (IT) giant Accenture Plc has splurged on acquisitions.
What makes those figures all the more remarkable is the fact that Accenture has spent more money on acquisitions in the past three years than the combined amount that India’s two most acquisitive IT outsourcing firms, Wipro Ltd and Infosys Ltd, have spent on buyouts and strategic investments ever since they started out.
The huge gulf in spending between Accenture and India’s two most high-profile IT firms—as well as others, including Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd—underlines how global outsourcing and consulting firms have gone all out with their bets on newer technologies and the so-called “digital” revolution, and, in the process, leapfrogged Indian IT services firms, which have largely been risk-averse in their approach towards buyouts, according to tech industry executives and analysts.
In the past three years, Accenture has significantly invested in building a strong digital agency in Accenture Interactive, and scaled up business from cyber security and cloud computing—all the three technology areas currently account for three-fourths of the company’s $18 billion digital business.
Which also means that the size of Accenture’s digital business is now almost as large as the combined revenues of Infosys and Wipro.
Till about five years ago, the narrative was vastly different.
India’s top outsourcing firms, led by TCS, were on a roll. According to data from top outsourcing advisory firms, including ISG, the likes of TCS, Infosys, HCL and US-based Cognizant Technology Solutions Corp., which has most of its employees in India, were successfully snatching major outsourcing contracts away from incumbent giants such as IBM, HP and even Accenture, to a certain extent.
So, what really changed over the past five years?
Experts tracking the sector point to a systematic overhaul of strategy from Accenture and a simultaneous slowdown in risk appetite from large Indian IT firms as being the two primary factors that have swung the tide in a decisive way over the past five years.
Accenture’s approach towards acquisitions varied widely from that of its peers in India’s more than $150 billion IT industry—the tech giant has used each of its 70 small acquisitions and treated them like research and development (R&D) investments.
Over the past three years, these 70 companies together have brought in $1.52 billion in incremental revenue—again, that’s more than the combined incremental revenue from acquisitions of Infosys and Wipro during the same period.
During that period, Accenture managed to shore up its digital revenue to $18 billion, or more than half of $34.85 billion of overall revenue at the end of August 2017, compared with $5 billion, or 17% of its total business at the end of August 2014.
Beginning September 2014 until August 2017, at least 30 companies bought by Accenture are in the areas of cyber security, cloud computing and ad firms, according to an analysis by MintAsia.
Fifty-six of the 70 companies acquired are in the areas of design, social, mobile, analytics, cloud computing, cybersecurity and Internet of Things that Accenture calls as part of “new revenue” or classified as “digital”, the fuzzy and umbrella term which each company uses uniquely.
Accenture Interactive, the marketing subsidiary that was set up in 2009, generated $4.4 billion, or one-third of the company’s $13.2 billion, in digital revenue for the year ended August 2016.
Although Accenture declined to share the latest revenue number of its Interactive business, analysts estimate Accenture Interactive to have grown similar to in 2016 (50% year-on-year growth), largely on account of 10 companies bought in calendar year 2017. This will translate into Accenture Interactive’s revenue to be at least $6 billion, or one-third of company’s $18 billion digital revenue, for the year ended August 2017.
Last year, Accenture, which follows a September-August financial year, bought a dozen companies to scale up business from cybersecurity and cloud computing.
Revenue from cloud computing totalled $6.5 billion last year as against the $2 billion at the end of August 2014, while cybersecurity’s revenue stood at $1.2 billion.
Accenture Interactive, cybersecurity and cloud business, has clearly emerged as one of the three growth engines for Accenture, which grew 6% to end fiscal 2017 with $34.85 billion in revenue.
The company’s top management claimed that its business from digital and newer technologies totalled $18 billion—a 260% jump from 2014 when digital revenue was $5 billion.
Which would mean that Accenture’s overall digital business is now roughly the size of TCS’s overall annual business.
Accenture Interactive alone has bought 20 agencies in marketing services since it was set up in September 2009. In 2017 alone, it bought 10 such companies.
So, how does Accenture manage to integrate its small acquisitions? The company declined to offer a comment for this story, but post-earnings management interaction with analysts offers insights.
“[I]n order to rotate to the New, we had to activate this evolving strategy of making more acquisitions to get to talent we couldn’t develop organic, and we had to bring from the market. Then the big question is how do you integrate and how do you manage the culture. ..[W]e developed this concept, which might be perceived as extremely simple, but is more certainly profound than it sounds like, which is at Accenture we are developing a culture of cultures,” chairman and chief executive officer (CEO) Pierre Nanterme told analysts on 28 September after the firm declared its four-quarter earnings.
While the firm was going all-out building its digital capabilities, as well as its marketing business, its other global peers, especially Indian outsourcing firms, were struggling to shed their reliance on traditional outsourcing services.
While on paper and at press conferences, top CEOs in Indian IT acknowledged the disruption from newer technologies, few firms actually ended up putting their money where their mouths were.
And that reflected in their vastly different approach—and attitude—towards acquisitions.
“The problem with India’s top IT firms has been that none of them have truly managed to perfect the art of integrating acquired companies within their organizations—even more so when you look at the recent start-up investments these firms have made. The problem with such investments is that companies like Infosys and Wipro don’t have full control over the IP of the ventures that they backed, and as a result, could not leverage them fully to their advantage,” said a Mumbai-based analyst at a multinational brokerage firm.
The broader reluctance of Indian IT firms to go all-out and acquire companies is possibly one reason why homegrown technology firms continue to struggle to shore up revenue from digital technologies—even as globally, firms across industries are cutting their spending on legacy outsourcing work such as software development and maintenance.
Some like TCS have followed an approach of building everything from scratch—in sharp contrast to the strategy adopted by Accenture.
“All of us (Indian IT firms), including TCS, are not even looking at this opportunity in using analytics and mobility platforms to get revenue from marketing teams. This is something which Accenture got into early through Accenture Interactive, and is now the dominant player in the space. Why are we (TCS) not buying companies? I guess it is just not in the DNA of the company as we are too risk averse,” said a senior executive at TCS, on the condition of anonymity.
Another Infosys executive also largely conceded that Indian IT firms still have a long way to go before they can replicate the success of Accenture.
“So far, our acquisition track record over the past few years has been mixed—but while they have not reflected in our numbers, we still have managed to offer our clients the best of all the technologies from our ecosystem of partners. I don’t think we’ve lagged any of our peers on that front,” said an Infosys executive, who requested anonymity.
Breaking down the numbers
Over the past five years, Wipro has spent $605 million in buying cloud services firm Appirio Inc.; Designit, a Denmark-based design firm, and picking up a 16% stake in Harte Hanks a US-based digital marketing services firm.
Additionally, parent Wipro, through Wipro Ventures, its $100-million corporate venture arm, has made investments of undisclosed size to pick up minority stakes in three cybersecurity-focused start-ups.
HCL Technologies has spent $1.72 billion over the past three years, including $1.1 billion to acquire a bunch of intellectual properties from heavyweights such as IBM and DXC Technology Co.
Although HCL Tech claims these investments will allow the company to future-proof its business, many analysts call it risky investments in legacy technologies, with HCL Tech looking to merely shore up revenue as much of the business is tied to dated technologies it has invested in.
Rishad Premji, chief strategy officer and board member at Wipro, indicated that the company had integrated all its recent acquisitions successfully and has not shied away from taking calculated risks.
“There is no ‘standard’ approach to integration. Our post-merger integration strategy depends on various factors, including the relative size of the acquired business and the corresponding business at Wipro, brand permission with customers, the culture of the acquired company and the critical talent retention strategy, among others. Sometimes we retain the acquired company’s way of working, but invariably, we tightly align the sales and marketing activities of both organizations,” said Premji.
Premji also indicated that Wipro’s venture arm had actually ended up giving the company a strategic advantage against other peers.
“We continue to look for acquisition targets, which can drive accelerated growth for Wipro, and invest in areas that are of strategic importance. Wipro Ventures provides us an additional opportunity to invest in new-age companies and build an ecosystem of partners, which is vital when we take a complete suite of offerings to the customer. Both complement each other,” said Premji.
At TCS, new CEO Rajesh Gopinathan denied that the company’s acquisition strategy had been “insular”, but appeared to concede that the Indian outsourcing market leader needs to shed its risk-averse tag.
“I don’t know if insular would be the right word, but definitely we believe in building talent and technologies in-house,” chief executive officer Rajesh Gopinathan said in an interview late last year.
Over the past three years, TCS’s acquisition track record has not been much to boast about. TCS last invested $50 million in stitching together a joint venture partnership with Mitsubishi Corp. in Japan in 2014.
“I agree it is a risk,” added Gopinathan, when asked if the company runs the risk of slow growth as building both technology and talent takes time. “We are betting on our people that this culture is the more robust and resilient culture that will allow us to go over multiple cycles of technology. Otherwise, I am merely a financial investment engine.”
The best of the rest
While the likes of TCS, Infosys, Wipro and HCL Tech have struggled to extract the maximum value from mergers and buyouts, US-based Cognizant has had a relatively larger degree of success on that front.
In fact, Cognizant’s merger and acquisition (M&A) strategy has to a lesser extent mirrored that of Accenture, according to analysts tracking the sector.
Taking a leaf out of Accenture’s playbook, Wipro earlier this month created the role of global cultural officer, naming Chris Barbin, formerly with Appirio, to the post.
“He will now head ‘Culture Works’, an initiative to help better define, prioritize and enhance the culture and ways of working within Wipro to enhance agility, productivity and team-centric thinking across the organization. In this new role, Chris will report to Saurabh Govil, president and chief human resources officer, Wipro,” said a spokeswoman for Wipro.
Experts tracking the sector said that Indian IT firms will have to overhaul their existing M&A strategies if they are serious about their intention of building out meaningful new businesses from emerging technologies.
“At the heart of it, Accenture Interactive is a design-agency-meets-technology-services firm. This is the original Sapient Razorfish model,” said Ray Wang, founder of Constellation Research, a technology research and advisory firm. “Accenture has had a more mature approach to M&A. They have a constant stream of acquisitions as buyer preferences have changed and skill sets have changed. The result—they bought demand and supply through acquisitions.”
And while Wipro’s incremental revenues from acquisitions is still yet to impress in a meaningful way, Wang feels Wipro has shown more appetite for risk than other Indian IT peers.
“Wipro has done a better job of M&A than most IT services firms to date. (Wipro) has been more deliberate, whereas Accenture has been very aggressive, although the net results are the same. Wipro has got new service mixes and capabilities, along with new clients. One aspect is the emphasis of taking company cultural considerations into play... Wipro’s purchase of Designit and Appirio with TopCoder have had an impact with clients who are seeking to get to the creative side of innovation and designing new solutions. Cognizant was early to use this approach.”
In contrast, Wang added that Infosys “has slowed down M&As and venture activities”—a case in point being the lack of big acquisitions in recent years and the recent exits from at least three start-up investments that the company has made over the past four years.
Infosys declined to comment for this story.