The M&A action is hotting up at India’s top software services companies but will that be enough to get ahead of the curve in the digital-transformation game? Last week, HCL splashed out $330 million to snap up Palo Alto-based Actian Corp, which offers data analytics and a range of other services to clients worldwide. On the same day, Infosys put $75 million on the table to acquire digital creative agency WongDoody, based in Seattle.
India’s software services companies have been accused of fumbling the ball and not facing up to the techno-challenges thrown up by artificial intelligence, data analytics and the raft of other new digital technologies. Now they’re playing catch-up, spending on tech acquisitions to fast-track their digital transformation.
But the bad news is they may not be moving quickly enough in a world going digital at warp speed. To survive, Indian companies need a top-to-bottom overhaul of their cost-arbitrage culture. Another unsettling element is that the new technologies don’t need armies of software engineers who’ve been the industry’s backbone.
To be sure, some companies have been making their moves. Take a look at Wipro which has spent over $1 billion in three years to make six acquisitions. Last October, it paid $8.5 million for Cooper, adding the San Francisco design consultancy to Designit, the Danish firm it bought three years ago for $95 million. Similarly, along with WongDoody, Infosys last year paid an estimated $21 million for San Jose-based Skytree which has developed an advanced analytics machine-learning platform. Also, last year, Infosys purchased London’s Brilliant Basics, billed as a digital- and customer-experience studio.
And back in 2015, Infosys splurged $120 million to buy another California-based company, Kallidus, which offers a cloud-hosted platform for mobile websites, apps and other digital shopping experiences. Infosys’ acquisitions come even as turmoil at the top has seen it looking to unload other buys.
The acquisition pace of all the companies pales, however, when compared to Accenture which has been blasting to the top of the digital-tech business, snapping up firms at a rate of around two a month. Accenture has bought 24 companies since last April and five since January.
It announced plans last year to fork out $1.8 billion on a string of purchases after spending almost a $1 billion in the two previous years. That’s more than all the other Indian software services companies combined.
Says Ganesh Natarajan, hi-tech guru and founder of 5F World: “Accenture has a multi-billion-dollar platform business and will be the player to beat.” Already, Accenture gets 52 per cent of its revenues from new technology solutions which is far ahead of the big Indian IT players.
Buyouts, though, aren’t cash-rich companies’ only strategy. Wipro Ventures Fund has a $100-million war chest and is constantly looking out for promising start-ups. And in December, Tech Mahindra said it was scouting the world — India, Silicon Valley and the UK — for 20-30 firms that would fit its gameplan.
Incidentally, TCS, India’s largest software services player has largely eschewed the M&A route for new technology growth. At another level, HCL has gone in for a tie-up and will build solutions on an IBM platform. Similarly, Infosys has teamed up with California-based Calix to jointly invest and build on its Axos software defined access platform.
Can they catch up?
Even so, the question remains: Can Indian companies make up for lost time? Initially, many took a head-in-the-sand approach to new technologies because they were making respectable profits from legacy businesses although growth rates were slowing. Also, digital projects involve much more in-site work, meaning there’s much less to send offshore.
“They weren’t very excited about having people on-site because bottomlines will go down,” explains HfS Research senior vice-president Pareekh Jain. Indian firms were also slow-starters in new technologies because they were worried about cannibalising their legacy businesses.
Indian firms traditionally had a huge advantage because they could throw large numbers of low-cost bodies at every project. But that USP’s gone out the window because digital technology is all about automating what before needed many hands on deck. “Labour arbitrage attracts some customers but it’s not as strong a value proposition as it used to be,” notes Forrester Research vice-president and research director Ashutosh Sharma.
In fact, now many digital projects involve creating multi-disciplinary teams, getting them to crack a problem and turn out a product swiftly and also deliver constant upgrades (for instance, companies like Amazon sometimes change prices every 30 seconds). That means bigger on-site teams.
Part of the problem is conceptual with Indian firms still trying to get their heads around ‘Going Digital’. In fact, the term is so broad in scope, Nasscom has refused to come up with an updated definition. In any event, Indian firms’ strength right now lies more in automating and speeding up work processes.
At the top end, there’s digital consulting but firms have been slow to pick up business in that segment. And even as the industry struggles to come to grips with the new digital reality, the offshoring model faces a high-profile threat from US President Donald Trump’s focus on manufacturing in the US. That’s forcing companies to look at hiring more locals in the US. Infosys, for instance, is opening an innovation hub in Connecticut, which is expected to employ 1,000 people by 2022.
Then, there’s staff retraining — a massive task. Tech Mahindra, for instance, has retrained over 70 per cent of its employees “in different modules around new-age technologies driving digital projects,” says company chief executive CP Gurnani, adding that, being “future-ready is our prime responsibility.” Other companies offer mixes of in-house courses and outside training in organisations like Coursera and edX.
But the industry has strong critics who say not enough is being done and even what is being done is happening too slowly. Says Natarajan: “Training is woefully inadequate. Strong blended-learning solutions delivered on adaptive learning platforms with cognitive tools are essential. The e-learning content has to be supplemented by AI Bots, online career management and coaching.”
Other industry analysts say huge resources must be thrown into the training game, just as Infosys once did with its Mysuru centre. Meanwhile, HfS’ Jain adds even though Indian companies have gone on a world-conquering mission, they prefer to hire Indians who won’t mind being on weekend call rather than foreigners. Says Jain: “They’ll have to (learn to) be real MNCs.”
Still, the sharpest industry critic is Vivek Wadhwa, a Distinguished Fellow at Harvard Law School and also at Carnegie Mellon University’s College of Engineering, who says infotech companies remain too complacent about the future. Says Wadhwa: “I give Indian IT less than five years before it begins to implode. Unless it gets on a war-footing right now to reinvent itself, it will become toast.” That’s a bleak assessment and one which India’s companies will be working overtime to disprove.
— With assistance by Paran Balakrishnan