IT majors riding on niche firms to build consulting capabilities

According to Gartner, the US IT consulting market stood at $51 billion in FY22 and is expected to touch $66 billion by FY25.

IT Sector
Globally, it is a $114-billion market, which is expected to reach $146 billion by FY25.

By Ayushman Baruah

Indian IT services companies are acquiring smaller niche firms to scale up their consulting capabilities and earn a bigger share of the lucrative consulting business. Management consulting is an area most IT services players are keen to get into as it involves supporting the senior-most members of a firm, including the CEO or the board who take critical decisions.

“Management consulting firms drive the highest-level decisions. IT services firms are relevant to a relatively small portion of this execution agenda,” said Abhisek Mukherjee, cofounder and director, Auctus Advisors. “IT services firms want to build strong management consulting capabilities because the one who drives the decision-making gets to control the execution agenda…and typically has a disproportionate say on who does the execution, and how.”

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According to Gartner, the US IT consulting market stood at $51 billion in FY22 and is expected to touch $66 billion by FY25. Globally, it is a $114-billion market, which is expected to reach $146 billion by FY25. Accenture, which is considered a top global consulting firm, reported a 13% year-on-year rise in consulting revenues, which stood at $27.3 billion in FY21. That figure is more than 50% of its total revenues of $50.5 billion. Indian IT firms do not disclose their consulting numbers, but analysts estimate it to be below 10% of their total revenues.

Infosys started its consulting arm in 2004 but the division today contributes only a fraction of the group’s overall revenue, according to people familiar with the developments. Apart from the large acquisitions of Lodestone (2012) and Noah Consulting (2015), Infosys continues to acquire smaller firms to strengthen its consulting capabilities.

Most recently, in July, Infosys said it will acquire BASE life science, a leading consulting firm in the life sciences industry in Europe. “This acquisition augments Infosys’ deep life sciences expertise, and expands our footprint further in the Nordic region and across Europe, and scales our digital transformation capabilities with cloud-based industry solutions,” said Ravi Kumar S, president, Infosys.

In April, Wipro acquired US-based Convergence Acceleration Solutions (CAS) for $80 million. CAS is a consulting and programme management company specialising in driving large-scale business and technology transformation in the telecom space.

HCL Technologies established a distinct digital consulting services line under its overall digital business four years ago. “Digital consulting has been a significant contributor to our Mode 2 (projects that innovate or differentiate the business) growth over the last four years,” said Anand Birje, senior corporate vice-president, HCL Technologies.

In May, HCL acquired Switzerland-based Confinale, a digital banking and wealth management consulting specialist, to expand its footprint in the global wealth management market.

Last year, Tech Mahindra acquired Germany-based Beris Consulting, which offers advisory services in the automotive and mobility space. Tech Mahindra acquired Beris to unlock growth in the IT and applications space in the automotive sector.

Experts believe acquisitions are attractive from two inter-related perspectives. “First, they allow the acquirer to plug specific capability gaps through these bolt-on acquisitions. Secondly, they provide a compelling entry door to new clients,” said Jatin Gulati, partner, Auctus Advisors. “IT services companies, by design, are typically broad in their portfolios across offerings, industries, and geographies. Small consulting companies represent attractive opportunities to build depth of experience and credentials across either of these aspects.”

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In terms of return on investments, IT services companies typically look at these acquisitions with a two-to-three-year horizon.

“We believe this is the maximum they should. By their nature, consulting companies have short- to medium-term visibility on their business and revenue trajectory. Since these acquisitions are growth-synergies driven, the tenure within which acquirer IT services companies look to capture most of the growth synergies tends to be a 2-3 years short-medium term horizon. It is also a good enough time frame for the acquirers to integrate the consulting company, their key people, their client relationships, and also bring the ‘land-expand’ strategy into play,” added Gulati.

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