The consolidation noise in the Indian IT industry is scaring away prospective employees from joining mid-tier firms and is making first time outsourcing clients to India nervous. Questions about possible acquisitions are coming up in every client meeting and mid-tier firms are working out protection clauses for their customers, industry watchers said.
Analysts from Everest Research noted that market speculation about acquisitions has added to the challenges of mid-tier firms, already affected by aggressive service provider portfolio rationalisation from customers in the post-recession era. The most immediate disruption to the customer in case of a merger can happen in the form of employees. There is a risk of attrition in the delivery teams, which impacts customers directly.
Executives from mid-tier companies told FE that some very senior people from top tier IT services companies roped in to drive their businesses have now refused to join because of the uncertainty.
Besides Patni, several tier-2 vendors including Sonata Software are caught in the middle of promoter stake sale speculations.
?It has become a discussion point with clients because they want to evaluate from their overall risk perspective. The small and medium enterprises offshoring to India for the first time are concerned,? N Venkatraman, head of strategic finance and risk management at Sonata Software said.
RV Ramanan, president of global delivery at mid-tier firm Hexaware Technologies said that q uestions have been raised by many of the firm?s customers ? some of them in the context of protection in case the company gets acquired. ?Is there a fear? Yes. Questions are being asked. We have given ample explanations. However, it has never stopped them from outsourcing,? he said.
The firm, he added, is willing to work out protection clauses. ?Every large deal will have an exit clause. It may also have a policy in terms of risk mitigation ? how would we transfer knowledge in case the client wants to take the work back? We do give that elaborate process,? Ramanan noted.
Vice president of Global Sourcing at Everest Group Amneet Singh said a major concern was the relevance of the client in the new scheme of things. There could be a void in the relationship with the vendor if the go-to-market strategy changes after the acquisition.
Dr TR Madan Mohan, managing partner of consulting firm Browne & Mohan agreed. Customers, he noted, are worried relationships can get unsettled. ?For a small firm, a $5 million account is a huge one and usually, a very senior person engages with the client. In case the company is acquired by a much larger player, many enterprises believe their relationship will not hold that importance,? he said.
Sudin Apte, founder-CEO of advisory firm Offshore Insights said that s ome Patni accounts who are used to getting royal treatment may no longer be treated the same way once the firm is acquired.
?In the case of PE buyouts, there are also possible conflicts of interest if the owner of a vendor is also the owner of their competition,? he said, predicting client attrition for Patni if the promoter sale attempts go through.
Analysts are also expecting top management attrition in Patni in case i-Gate acquires majority stake. The combined entity, for instance, would not require two CEOs, multiple heads of quality, sales, HR, and business lines.