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.
