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Wednesday, December 08, 2021

IT’s Big Deal

Capgemini buyout is a portent. The industry needs to evolve beyond the outsourcing services business model.

By: Express News Service |
Updated: April 29, 2015 12:00:07 am
Capgemini, Capgemini IT service, iGATE, Capgemini buys iGATE, Indian IT firms eventually have to move beyond their current, largely commoditised, outsourcing services business, where margins are likely to only shrink further.

French management consulting major Capgemini’s $ 4.04 billion acquisition of India’s software services company, IGate, is significant, among other things, for its timing. Indian IT firms have posted disappointing March quarter results, with the revenues of the big four — TCS, Infosys, Wipro and HCL Technologies — either flat or falling on a sequential basis. Capgemini’s buyout, even if it comes at over three times IGate’s annual revenue of $ 1.2 billion, could mark the start of a consolidation process where midsized domestic players, faced with faltering growth and pressure on margins, choose to be taken over. Unlike, say, pharma or FMCG, the IT industry has witnessed few large acquisitions, barring IGate’s own purchase of Patni Computer Systems in 2011 and Tech Mahindra’s of Satyam Computer Services under the extraordinary circumstances of an accounting scandal involving the latter’s original promoter.

The coming times could, however, see buyouts becoming more common. The main reason is the change happening within the industry. The core business of Indian firms until now has centred on designing and building software applications or managing the IT systems for large multinational clients in North America and Europe. To the extent these global concerns have found it cheaper to outsource or offshore such routine application development and maintenance operations, Indian IT companies, with their large pool of relatively low-cost engineering workers, have made hay. This business model is, however, now coming under threat from the growing automation of recurring manual IT tasks. As software robots increasingly perform application management and back-office delivery services, the traditional mode of billing based on the number of engineers deployed on a customer’s project would stand undermined. Admittedly, the domestic IT industry has in recent times focused on improving productivity and better utilisation of engineering manpower — for instance, by reducing “bench” staff not assigned to active billable projects.

Indian IT firms eventually have to move beyond their current, largely commoditised, outsourcing services business, where margins are likely to only shrink further. That would mean building capabilities in product development and consulting — proactively identifying the problems of customers and proffering solutions, rather than the latter deciding both the problem and technology solution for delivery by the IT vendor. This transition to becoming complete IT services and consulting companies with competencies in data analytics and cloud computing — which is what the likes of IBM, Accenture and Capgemini are — isn’t going to happen overnight. That, however, is where the future is.

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