IT companies acquire smaller firms to deliver digital-led projects

Indian IT services companies are increasingly acquiring specialized firms to scale up their capabilities to deliver digital-led projects. Building digital capabilities in-house can be long process and delivery even more complex, so acquisitions help provide instant access to capabilities, newer geographies, and ready talent. 

Industry experts believe, historically, Indian IT companies have been organized to deliver large projects at low costs but digital projects have opposite characteristics. These are smaller, complex projects which require highly-paid experts. While margins as a percentage of revenue may be higher, digital projects are typically much smaller, yielding much lower absolute margins. 

Given this inherent dichotomy, any attempt to build these pockets of digital capabilities in-house leads to two challenges, explains Abhisek Mukherjee, cofounder and director of management consulting firm Auctus Advisors. “One, given the smaller size of the projects, revenue leaders do not focus on these adequately. Two, and more importantly, the expensive talent leads to culture clashes with the larger organization.”  

“The smart work-around is to acquire digital-native firms and run them relatively independently. These firms can then deliver the smaller, but highly profitable and influential, digital projects and the larger organization can step in downstream. After multiple false starts to build these capabilities in-house, the larger players all seem to have honed in on this acquisition-led strategy,” Mukherjee added.  

This year, Infosys Ltd acquired two companies to augment its design and experience capabilities – Germany-based digital marketing agency oddity and Australia-based Carter Digital. As part of Infosys’ digital experience and design offering, both these companies will become part of WONGDOODY, a company Infosys acquired in 2018, and join its network of studios across Seattle, Los Angeles, New York, Providence, Houston, and London, and design hubs in five cities in India.  

Infosys Consulting’s acquisition of Singaporean telecom major Singtel’s delivery centre in Malaysia last year was an example of acquiring for geographic expansion as it helped broaden its presence in South East Asia for international clients.  

In April this year, Wipro said it will acquire Rizing Intermediate Holdings, Inc., a global SAP consulting firm, for $540 million, to bolster its SAP cloud practice and help clients transform their businesses into intelligent enterprises. As one of the leading strategic partners in the world for SAP, Rizing is expected to become a critical extension of Wipro’s SAP cloud practice and Wipro FullStride cloud services. Wipro said the combined offering will help expand its leadership in oil and gas, utilities, manufacturing, and consumer industries.  

Rizing is the latest in a series of acquisitions by Wipro, underscoring the firm’s ambitious growth agenda under chief executive Thierry Delaporte. The recent acquisition of LeanSwift Solutions, a US-based system integrator of Infor Products, is also aimed at complementing its cloud capabilities especially in the manufacturing and distribution sectors.  

In the same month, Wipro acquired Convergence Acceleration Solutions (CAS Group) for a total consideration of $80 million to expand its consulting capabilities for communications service providers. In a bid to strengthen its play in the cyber security space, Wipro also acquired Texas-based Edgile for $230 million in December last year.