Financial markets are trading on speculations of Infosys (Nasdaq:INFY) buying out Cap Gemini, the French IT giant. Both the stocks have seen upward movements in the bourses, driven by probable positive synergies of such a merger.

If the Infosys-Cap Gemini deal goes through, it will be the first deal of its kind for an Indian IT company. As per the FY07 data, Cap Gemini is triple the size of Infosys in terms of revenue. The strategy of Indian companies till now has been to acquire mid and small sized specialist IT service providers in the US or Europe, to gain specific domain expertise while gaining geographical presence and customers. But the Cap Gemini deal could protrude Indian companies into the big-league-consulting space. To remain competitive, Indian companies have to acquire end-to-end consulting capabilities.

Rationale Behind Building Consulting Practice
It is important for the Indian companies to acquire business advisory credibility because global players have been able to replicate their low cost delivery model, thereby eroding their cost advantage.

Consulting business commands higher margins than the commoditized IT services and is an oligopolistic market dominated by the global IT giants. But as Indian vendors become increasingly accepted for IT outsourcing services, companies are beginning to look towards these vendors for consulting expertise as well. The global perception on Indian vendors is changing. This can be gauged by the fact that Indian players are now being invited to participate for the IT outsourcing bids of multinational companies and many small and mid-sized chunks of the mega deals go in favor of the Indian companies.

Consulting Acquisition
The urgency for the Indian companies to globalize is far more now than ever before. And an effective way to have a global presence is to acquire competitive regional players. It is interesting to note that most of the acquisition targets of Indian IT companies in the last few years have been niche-consulting companies, consistent with their strategy of adding consulting capabilities to their service offerings to compete with the global players. Indian vendors are trying to move up the value chain by building their consulting business capabilities abroad. For example, Wipro’s consulting practice draws its strength from the acquisition of cMango, Mpower, NerveWire and American Management Systems over the last couple of years, adding prestigious financial services and utility clients in North America and Europe. While Wipro has been very aggressive in the acquisition front, Infosys is cautiously looking for strategic acquisition. During FY06, Satyam acquired two consulting providers, London-based Citisoft and Singapore-based Knowledge Dynamics that offer management consulting and data warehousing/business intelligence consulting services respectively.

Even the second rung Indian vendors including Patni, KPIT and HCL are not far behind in buying out niche consulting companies abroad. Last two years saw a flurry of such consulting buyouts. For example, KPIT acquired a French IT consulting company Pivolis and Patni acquired California based Cymbal Corporation, an IT consulting services provider to the telecommunications vertical.

Consulting Capabilities
Consulting is a full-fledged business category in itself and can be broadly categorized within the IT framework into business, process and technical consulting. While Indian vendors may claim to be present in all the IT consulting areas, a survey by Forrester, last year brought to light good consulting capabilities of Indian vendors in the technical consulting space only. The survey found only Infosys well positioned to offer business or management consulting services. It is but natural then that the Indian service providers are trying to build such capabilities whether in an organic or inorganic way.

Consulting as a business segment still occupies a small portion of revenues for the Indian vendors. For example, for Wipro that has a 2,000 man consulting team, it accounts for about 6.5 per cent of its group revenues. Similarly for Infosys, it hovers around the 5 per cent mark. Wipro says it wants to take it to 15 per cent in the next three to four years.

What We Can Expect
While an Infosys-Cap Gemini or similar deals look improbable for now due to various strategic, integration, scale and culture related issues, we can expect more acquisitions by the Indian service providers in the niche consulting space in the US and Europe in the $200 - $500 million range. However, more than the size companies are looking at strategic fits, acquisitions that can add value in terms of capabilities and markets. Having said that, Indian IT companies, at least the top tier, are looking to buy companies employing 50-300 professionals.

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