The jinxed consulting forays of Indian IT
Premium- Domestic IT majors have tried to build as well as buy their way into management consulting. Will they succeed?
Back in 2012, when Infosys Ltd snapped up Zurich-based Lodestone Management Consultants for $350 million, it was widely seen as a transformational moment. “This (acquisition) is a seminal event for Infosys," said S.D. Shibulal, the company’s then chief executive officer. Analysts hailed it as a “step towards Infosys 3.0". The company’s stock price went up. And the breakthrough moment—when Indian IT services firms moved into higher value work—seemed to be just around the corner.
Unfortunately, that moment never really arrived. The Lodestone acquisition did not transform Infosys into a management consulting behemoth, nor did it propel the Bengaluru-based IT services company into the global big leagues populated by firms such as Accenture, IBM, and Capgemini.
“Lodestone may be characterised as a failed acquisition," said Srikanth Sridhar, strategy advisor, PA Consulting, who was an early employee of Infosys Consulting. “It (Lodestone) allowed (Infosys Consulting) to onboard about 800 consultants. But by 2016, most key partners and employees (had) left the organization. In 2015-16 alone, a huge attrition wave hit the Swiss and German offices, which were the stronghold of Lodestone. It left behind a sizeable vacuum in the balance sheet."
Yet another consulting foray—US-based Noah Consulting LLC, which was acquired by Infosys for $70 million in 2015—also didn’t pan out as planned. “Noah brought onboard very targeted oil and gas-centric ERP and data management skills, which are not directly attributable to management consulting capabilities," Sridhar said.
This journey of repeat attempts to enter the lucrative world of management consulting, followed by limited success, is in fact indicative of the experience of the Indian IT services sector as a whole. Infosys has just been at it for the longest, having been among the first in the Indian IT ecosystem to deploy a dedicated management consulting arm.
The motivation behind these forays is fairly obvious: Consultants often have a say in organizational strategy, pivots and digitalization goals. Having a seat at the table at an early stage—and importantly, the ear of the client firm’s chief executive officer (CEO)—could be an invaluable asset in generating business for the IT services arm. At a time when ‘digital transformation’ is a buzzword within many organizations, the role of the consultant would perhaps only become even more important.
“Indian IT services organizations have always had the aspiration to be a strong consulting player," said Abidali Z. Neemuchwala, co-founder and director, Dallas Venture Capital, and former CEO of Wipro. “They have tried both organically building a practice and inorganically acquiring consulting companies… Results have been mixed," Neemuchwala added. Will that change any time soon?
The IT consulting industry’s global market size is pegged at $525 billion. Accenture, which is considered a top global consulting firm, reported a 13% year-on-year rise in its 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.
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Need for consulting
At the outset, it is important to understand how management consulting firms are different from typical IT services companies. Management consulting involves supporting the senior-most leaders of a firm—the CEO or the corporate board—who take important decisions on slew of subjects ranging from strategy and investments to fundraising.
These decisions set the execution agenda for the rest of the leadership, and therefore, the company. The agenda of C-suite executives (COOs and CDOs) flow from these top-level decisions. The execution of this agenda may often require a technology intervention, such as building an application, implementing an ERP platform or integrating new IT infrastructure. IT services companies get involved at this level.
“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, co-founder 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."
Globally, Accenture has successfully built a strong consulting practice mainly by virtue of its legacy existence as Andersen Consulting (the firm changed its name and identity in the early 2000s). “Its (Accenture’s) consulting arm acts as the ‘tip of the spear’ and enters clients right at the top, which sets the entire execution agenda and positions all its formidable downstream services for subsequent sales," Mukherjee said. “This superior positioning ensures that it can charge a premium not only for its consulting services, but also for its downstream services compared to Indian IT services firms," he added.
Indian IT’s struggle
Infosys Consulting Inc. was founded in 2004 under the leadership of Steven Pratt, Raj Joshi, and Ming Tsai. The company aspired to hire and train management graduates from top business schools (B-schools) and engage industry experts to develop compelling approaches that could bridge the gap between technologists and C-suite decision makers.
While the initial few years were heady days, over the years, the consulting business has remained an also-ran for Infosys. The division contributes only a fraction of the group’s overall revenue. A number of factors are responsible, according to people who are familiar with the business.
“Firstly, when you hire MBAs from top B-schools for a management consulting role, their expectations about the nature of engagement, culture and incentives are very different. Infosys as a technology services major finds it hard to meet (these expectations). As a consequence, the crème of the talent is attracted by top strategy houses such as McKinsey, BCG, Bain, AT Kearney and others," said Sridhar of PA Consulting.
“Also, delivering thought leadership and being recognized as a leader in the space has been a constant roadblock," Sridhar added.
With building an in-house consulting unit proving to be difficult, many Indian IT services companies have relied on acquisitions to swiftly build consulting capabilities.
Apart from the acquisitions of Lodestone and Noah Consulting, Infosys acquired US-based ad agency WongDoody and Fluido, a Salesforce consulting partner in the Nordics region, in 2018. In December 2018, Infosys also hired former Cognizant executive Mark Livingston to head its consulting business. Infosys declined to respond to questions or offer comment for this story.
Apart from Infosys, other firms like Tata Consultancy Services Ltd (TCS) Ltd, Wipro Ltd, and HCL Technologies Ltd have also ventured down the path of acquisitions. In 2018, TCS acquired BridgePoint Group LLC, a US management consulting firm which caters to the financial services industry.
In the same year, Wipro acquired Sydney-based design consulting firm Syfte. Wipro said during the acquisition that strategic design is a critical part of digital transformation for clients in Australia and Syfte’s skills will help Wipro support its clients’ digital agenda.
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.
HCL has also taken the inorganic route to grow its consulting business by acquiring consulting firms such as StrongBridge Envision and Symplicit/DWS.
Despite these frenetic moves by all the IT majors, many industry watchers believe that the acquisitions are yet to bear fruit. “A lot of these companies have taken the acquisitions route, but I am yet to see a success of scale," said Sridhar of PA Consulting. “Nobody has managed to scale this (consulting) into a separate entity, which creates a formidable half a billion to a billion-dollar business. That said, there still remains a solid opportunity to evolve an India-led management consulting powerhouse by knitting the fabric of management sciences, data and insights and advisory capabilities."
Mukherjee of Auctus Advisors highlights three reasons to explain why Indian IT companies have not been able to scale up their consulting verticals. First, it’s the positioning. “Imagine you are building a house. If your architect recommends a mason, you will most likely hire that mason. If your mason recommends an architect, you are unlikely to hire that architect. In this analogy, the top consulting firms act like the architects and the Indian IT services firms are the masons," Mukherjee said.
The second reason is India’s image as a source of cheap talent, which does non-core work. When decisions that are critical to a company’s fortunes are taken at the board/CEO levels, credentials such as competence in non-core work and being cheap are disqualifiers.
The third factor hindering success is the internal culture of Indian IT services firms, which is geared towards delivering large-scale projects at low costs. “Management consulting is about delivering smaller, high-impact projects that require expensive talent. This leads to an inevitable culture clash. While management consulting capabilities lead to significantly higher downstream business in the long term, short-term pressures and culture clashes have impeded Indian firms in this space," Mukherjee added.
The road ahead
If India is not to lose out on its current advantages in technology know-how for the next few decades, it must be able to sell on the premise of value add and not just cost. It must be able to compete for outsourcing contracts with the likes of Accenture, which is currently billing at a premium over the Indian services companies as the former is viewed as a management consulting firm with technology expertise.
Industry experts believe there are three possible options that confront Indian IT firms. “One, they can continue trying to build consulting arms in-house. Second, they can acquire consulting capabilities and run those as separate firms (externally) and try to collaborate on downstream work (internally). The third option is to collaborate with other emerging Indian management consulting firms, just like McKinsey and IBM did in the last century," Mukherjee said.
While Accenture may be ahead in the game for now, a section of analysts is optimistic and believe that Indian IT services companies would eventually catch up. “Most of the digital contracts of today are consulting-led. The traditional, linear RFP-based approach is irrelevant in the current era," said D.D. Mishra, senior director analyst, Gartner. “In the last five years or so, Indian IT companies have acquired consulting companies and rolled up their sleeves. Their deal momentum and pipeline are indicative of the fact that they are able to convince customers and win a lot of digital deals. This wouldn’t be possible without strong consulting capabilities," Mishra added.
The IT industry’s apex body Nasscom also concurs with the view that the ongoing change in technology buying behaviour could actually be an opportunity for Indian IT companies. “Our view is that consulting as it existed is undergoing dramatic transformation and pure-play consulting companies are now building their own technology practice. This offers a unique opportunity for Indian tech companies to grow from here," said Sangeeta Gupta, chief strategy officer, Nasscom. “Given how technology buying itself has changed, consulting is no more disaggregated from technology so it offers a more level-playing field for Indian IT companies."
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