It’s time to buy onshore Technology outsourcing firms in the U.S.A. and Europe
Indian outsourcing IT firms should consider overseas buys, not only to offset the impact of rising rupee, wage inflation and skills shortage, but also aimed to strengthening their marketing muscles onsite and add large number of clients.
India’s outsourcing firms have already mined big IT buyers like General Motors, GE, Bank of America, Deutsche Bank, Nissan, Qantas, Wal-Mart, Tesco, GlaxoSmithKline, and Pfizer. Also they are expanding their share of the wallet in these large firms. They need to compete with other outsourcing IT firms to get a larger share of the wallet. Competing on price is getting even harder.
On the cost front, India’s outsourcing firms are pressured by rising rupee, wage inflation and increase in cost of operation in India.
It is time to target business outsourced at IT service providers at onshore and the high-end services like complex ADM, consulting.
How to target business outsourced at onshore IT service providers?
Inorganic growth decisions among India’s outsourcing firms are traditionally based on the geographic footprint expansion and to enhance their technical and domain capabilities. Now it is time to take this decision based on the portfolio of clients in potential target Company.
India’s outsourcing IT firms should consider the US-based small and medium-size outsourcing firms, which don’t have a strong offshore presence but with strong mix of large and SME clients.
Good Acquisition Targets
It is high time to look for acquisition not only for global footprint expansion, domain capabilities, and filling the gap in the portfolio of offerings, but it is also time to look at acquisition target companies as a ways to add strong portfolio of clients and cross sell their service offerings.
The ideal choice would be US-based and Europe-based outsourcing firms – refers to the firms in US and Europe, who doesn’t have or limited low-cost country footprint. They are good targets to go ahead.
Competing with less differentiated service offerings on price is getting even harder among India’s outsourcing IT firms. With these acquisitions, India’s outsourcing IT firms can save the time, cost and effort in building relationship with the pool of clients with acquisition targets. These clients are good sources to cross sell the other IT offerings like infrastructure outsourcing, consulting, and package implementation.
India’s outsourcing IT firms, which are very open minded in acquiring companies (like Wipro), can look to add target firms with a good set of clients. In the evaluation of target companies, the portfolio of clients at the target company needs to be given relative higher weightage from now.
Real-time Examples
- In July 2007, Patni acquired Bridgewater, New Jersey based life sciences consulting firm, Taratec. This acquisition added 18 out of top 20 pharmaceutical firms in Patni’s client pool and delivery capabilities in Birdgewater, NJ and San Juan, Puerto Rico.
- Wipro acquired Portugal-based retail IT solution provider, Enabler in June 2006. This acquisition added delivery capabilities in Europe and a strong pool of European retailers in Wipro’s client pool, which includes Tesco, Nisa Today’s, Sabeco, Ahold, Arnotts, MarktKauf, Sonae, Despar, Renner, Monsoon, B&Q, Debenhams, Miquel, Fabio Lucci and Cortefiel. There is a tremendous potential to cross sell the Wipro’s portfolio of service offerings at these clients.
- In September 2006, Cognizant acquired Aimnet, Boston-based Aimnet solutions Inc., managed infrastructure and professional services firm. In acquiring Aimnet, Cognizant gained expertise in IT infrastructure services (IT IS) practice. Not to discount that Aimnet has 80 direct and indirect customers and partners, where Cognizant can cross sell its portfolio of IT services.
- In November 2006, TCS acquired TCS Management (formerly called Total Communication Solutions), a privately-owned consulting company in Australia. In acquiring TCS management, TCS added strong pool of Australian clients like ANZ Bank, Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) together with investment banks Macquarie and Goldman Sachs JBWere.
Success Story
One good success example is in 2002, Wipro acquired American Management Systems and brought in over 100 domain consultants to its energy and utilities practice. AMS had 50 client relationships across Europe and US. The client base includes investor owned utilities, public power utilities, regional transmission companies and independent system operators. All these became Wipro clients.
With this acquisition, Wipro penetrated not very open to offshoring energy and utilities market better than its competitors, Wipro generated revenue about $274 million in FY07.
Traditionally, acquisition decisions are based on the gap in the portfolio of service offerings, the potential opportunity in the market, and direction/vision the company want to move ahead. The market has reached a stage it’s the aggressive price war, which is going to help in source business.
India’s outsourcing firms enjoying over 20% of margins, can’t take this battle long. This battle will have a big impact in their returns. Now, they need two more levers to move ahead – moving up the value chain, some part of this demands onshore presence and as large clients are mined, its time they need a pool of SME clients. All these reasons have pushed India’s outsourcing firms to consider the portfolio of clients at the target companies going to get a top priority in their acquisition strategy.
Apart from increase in client portfolio enhancement, the objective of acquisition should be also to enhance domain expertise. Also one needs to pay close attention to the budget for acquisition, valuation of the targeted company and Internal Rate of Return. It is crucial to walk together before run. Always two persons walking with tied toes is a difficult proposition. Ultimately it all boils down to below simple parameters:
1. Comfort feel…..ease of doing business
2. Fortfolio of clients
3. IRR
4. Preparedness of Senior and Middle Management of Indian companies
5. Start with partnership / alliance first before pumping money
I agree Wipro bought out only the Utilities practice of AMS, but we can’t discount the amount of revenue that Wipro’s Energy & utilities practice is generating today, where its peers are lacking.
Yes, Top India’s outsourcing firms (TCS, Infosys, Wipro) operate on a margin of 20%. Not sure about the outsourcing firm’s in philippines and China.
Is the article base on facts? and really India’s out sourcing firm have 20% margins? what about the Philippines and China?
http://www.secinfo.com/dsvRq.33mt.6.htm
Wipro did not “acquire” American Management Systems. They bought out one practice area -global utilities practice at a “fire sale” price of $26mil.
Please don’t play so loosely with the facts when you are touting success stories.