Category: Engineering Services

Cognizant’s Acquisition of Belcan – An Engineering Services Leaderboard Shake-up | Blog

Cognizant’s acquisition of Belcan for US$1.3 billion marks a significant expansion in its engineering services portfolio. This strategic move enhances Cognizant’s capabilities, positioning the company closer to the top-tier engineering service providers. Reach out to us directly to discuss this topic further.

Cognizant recently announced the acquisition of Belcan, a portfolio company of AE Industrial Partners, for a total enterprise value of US$1.3 billion. This is among the largest acquisitions in the history of Cognizant, which, interestingly, has acquired seven companies with an engineering services focus since CY2021.

This is also the biggest acquisition of recent times in engineering services – a space that has been known for rampant M&A activity and sees a marquee acquisition every few years amid tens of tuck-in acquisitions. The last large acquisition in this space was back in 2022 when Modis acquired Akka Technologies (EV of US$2.36 billion).

Based on revenue estimates for Belcan, this acquisition sits at a modest revenue multiple of ~1.55x, which is slightly lower than the other recent acquisitions in this space, such as:

  • Infosys’ acquisition of In-tech (EV: EUR450 million; 2.6x revenue)
  • Infosys’ acquisition of InSemi (EV: INR280 crores, 1.8x revenue)
  • HCLTech’s acquisition of ASAP (EV: EUR250 million; 1.6x revenue)

This seems like a bargain deal for Cognizant (especially considering that we saw valuations as high as 9.6X revenue, as recently as 2021).

So, what does Cognizant stand to gain on the back of this acquisition? Let’s discuss.

A significant elevation of its engineering services portfolio

Everest Group publishes an annual list of Top 50 Engineering Service Providers based on their engineering services revenue and growth. Cognizant was positioned at #7 in the last edition of the list, preceded by Accenture, Akkodis, Alten, Capgemini, HCLTech, and TCS.

Considering the combined engineering services portfolio of Cognizant and Belcan – the combined entity would inch closer to the top 5 providers.

A sizable play in a growing and uncrowded space

Asset-heavy verticals, particularly the automotive vertical, have been the hot favorites among service providers from a capability-building and acquisition standpoint. This has been on account of the resilience these verticals have showcased over several quarters despite the economic slowdown. While Cognizant broadly adhered with this industry trend as it picked Belcan, it took a slightly unconventional approach by focusing to tap into the aerospace and defense (A&D) vertical.

There are two key reasons for this shift in focus to A&D. Firstly, in CY 23, outsourcing in this vertical grew the fastest (9-11%) on account of enhanced defense spending and a post-pandemic recovery in aviation and aerospace. Secondly, compared to automotive, this vertical is less catered to by providers. While automotive is catered to by 90% of the providers featured in the ES Top 50 list, only 60% of the providers cater to A&D, thus making the space less crowded.

To bolster Cognizant’s asset-heavy portfolio, Belcan brings a vast pool of 6,500+ specialized engineers across not just A&D, but also automotive, industrial, and even cybersecurity. A&D remains their key focus area, where, along with expertise, Belcan also brings a well-established client base with “blue-chip” enterprises and state defense departments such as the US Department of Defense (DoD). This acquisition, along with capabilities, also fills whitespaces in the geographic footprint. For example, a strong network of offices in the United Kingdom will bolster Cognizant’s European presence, while the innovation centers in offshore locations will serve as hubs for high-quality technical solutions dedicated to A&D.

Were there other approaches that Cognizant could have considered for the desired outcome?

In recent quarters, IT service providers such as Cognizant have struggled with sluggish or stagnant top-line growth due to budget cuts, project downsizing in key verticals, and reduced focus on discretionary spending.

Juxtaposing this need with the continued growth momentum (albeit slowed down than in the past) being observed in the ER&D spending across enterprises has led to a faster growth rate in the engineering outsourcing services market viz-a-viz the traditional IT services outsourcing. In that spirit, the engineering services market seems to be the right choice to catapult growth and beat the slowdown.

While it is easy to zero down on the engineering services arena, it is difficult to follow the traditional approach and build capability organically, as has been the case in the past. This is because of the unique nature of engineering services, which is characterized by new-age design thinking (across software product engineering) and deep-domain expertise (across manufacturing and connected products engineering). In such an arena, it becomes poignant for providers to adopt the inorganic route, which enables quick muscle building and maybe relationships as well (as in the case of Cognizant – Belcan).

At the same time, this acquisition also brings in diversification from a vertical standpoint as currently, Cognizant’s top-line leans heavily towards BFSI and healthcare. While these industries are recovering, their growth isn’t as rapid as some of the asset-heavy industries.

To learn more about the engineering services landscape, reach out to Ankur Jain, [email protected], Mayank Maria, [email protected], and Nishant Udupa, [email protected].

The Bumpy Road Ahead for US Automakers: Everything You Need to Know About the UAW Strike Disrupting the Industry | Blog

The ongoing strike by the United Auto Workers (UAW), the biggest union in the US automotive industry, has ramifications on auto production, costs, and supply chains. In this blog, we explore the impact of the UAW strike against GM, Ford, and Stellantis and look at who stands to win and lose.   

What the UAW is demanding

Union leaders representing the striking workers are negotiating for the following: 

  • Higher wages and other benefitsThe UAW has been asking for a 40% pay hike, reduced weekly work hours, revised pension schemes, improved healthcare benefits, and greater job security. The closure of factories to transition towards electric vehicles (EVs) is yet another factor driving the union’s demand for more protection for their workers
  • Reintroduction of cost-of-living adjustments (COLA) to help workers’ pay keep pace with inflation: During the 2008 financial crisis, autoworkers made concessions to automakers, including giving up COLA, which has not been reinstated. Over the past two decades, the average hourly wage for workers in the motor vehicle and parts manufacturing industry has declined by more than 20% when accounting for inflation
  • Equal benefits for all employees: The industry currently operates under a two-tier wage system, where new employees and temporary workers receive lower pay and benefits than their more experienced counterparts for performing the same tasks

After unsuccessful negotiations on these issues, UAW President Shawn Fain declared a rolling strike on Sept. 15, simultaneously targeting all three automakers. Since then, the consequences of these events have hit the entire US automotive industry. Let’s explore this further. 

Impact on production

Despite only three factories/plants being affected by the strike initially (GM’s assembly plant in Wentzville, Missouri; Ford’s site in Wayne, Michigan; and Stellantis’ site in Toledo, Ohio), the impact on production was stark when 13,000 workers walked off the job. Vehicle production by these automakers fell by 4,000 to 6,000 vehicles within a week of the UAW strike.

The three Original Equipment Manufacturers (OEMs) argue that the proposed UAW contract would hinder their competitiveness in transitioning to EVs. If the UAW strike continues for more than four weeks, it could delay EV development plans and extend production schedules to 2024. This would further set back Ford, GM, and Stellantis, who already trail Tesla, Rivian, and Lucid Motors in the EV market.

Impact on costs 

The UAW proposal is unlikely to be accepted in full by any of the three automakers, considering they already pay higher wages (US$65 per hour) compared to competitors such as Tesla (US$45 per hour) and Toyota (US$55 per hour), which do not use union workers. Any further wage increases would likely cause GM, Ford, and Stellantis to pass on some costs to their customers, providing an advantage to other automakers who can price their vehicles lower.

The three auto OEMs contend that they must shift towards manufacturing EVs to comply with government regulations and maintain competitiveness in the automotive industry. However, this transition will require significant reinvestment of their profits, which will not be possible if they comply with the UAW’s demands unless the firms choose to incur more debt. 

Impact on supply chains

The UAW expanded its strike last week to 38 GM and Stellantis parts distribution centers as negotiations with these two manufacturers failed to make significant progress. The strategic move by the union to hit parts centers rather than production facilities will impact supply chains, making it harder for the companies to source new parts to repair and service vehicles that have already been sold. Production delays and strikes on parts centers will also cascade the impact onto Tier-1 suppliers, further increasing pressure on the three OEMs to reach an agreement with the UAW.

While the UAW’s demands may well be in good faith and result in improved working conditions for their members, the road ahead for the three impacted automakers seems nothing but bumpy. The true winner in this entire saga may well turn out to be Tesla, as it is poised to expand and enhance its market share in the EV segment.

Everest Group’s Engineering Research & Development (ER&D) services analysts will continue to follow the developments and provide updates. Please reach out to Nishant Udupa or Gokul K to discuss the UAW strike or other automotive industry topics.

Everest Group Unveils 2023 Top 50 Engineering Services Providers List | Blog

The Everest Group Engineering Services Top 50 is a valuable resource for enterprise decision-making and provider benchmarking. Discover traits shared by the leaders, the industry outlook and hottest market segments, and other compelling insights from our research in this blog.

The highly anticipated fifth annual edition of the Everest Group Engineering Services Top 50 reveals a myriad of shifts in service provider rankings and the debut of some newcomers, making this year’s report especially intriguing.

But before we dive into the report details, let’s understand the value of the Engineering Services Top 50 list.

Unraveling the Top 50 Engineering Services Providers list

The list ranks the top 50 engineering services providers based on revenue and growth in 2022 compared to the prior year. Additionally, the report delves into the various vertical and horizontal segments where these engineering services providers operate.

Engineering Services Top 50 is a valuable tool for both enterprises seeking an overview of the provider landscape and for engineering services providers looking to compare themselves against peers.

Now, let’s explore three key highlights from this year’s list of top engineering services providers.

  1. Resilience amid economic challenges

One striking observation from this year’s report is the engineering services market’s resilience in the face of economic challenges. Despite the onset of an economic slowdown in the last half of 2022, the market managed to maintain growth rates of around 11-11.5%. This reaffirms the attractiveness of the engineering services sector as a stable and lucrative industry to be a part of.

Moreover, it was heartening to witness a recovery in some core Engineering Research and Development (ER&D) verticals. Providers heavily involved in automotive, aerospace, industrial products, and manufacturing experienced significant growth. This marked a departure from previous years, where providers with a primary focus on software product engineering held the growth spotlight.

  1. Absence of major Mergers and Acquisitions (M&As)

Unlike previous years, 2022 stood out for its unusual absence of major M&As within the top 50 list. In past years, witnessing at least one entity from the list being acquired by another had become a noticeable trend. However, no large deals grabbed the headlines. Instead, the year was marked by numerous smaller, strategic acquisitions across the industry.

  1. Dominance of broad-based providers

The report also highlights the continued influence of broad-based service providers in the engineering services market that maintain a presence across multiple verticals, giving them flexibility and resilience. The focus on digital engineering, coupled with substantial investments in acquisitions to enhance their capabilities, has allowed these providers to effectively scale in this highly competitive market.

Please contact Nishant Udupa and Nandita Pandey for questions about the list or specific providers and assistance navigating the dynamic world of engineering services.

Everest Group’s PEAK Matrix® Awards Recognize the Top Engineering Service Providers for 2023 | Blog

Engineering service providers who demonstrated critical capabilities to enterprises over the past year are now being recognized for their leadership with the 2023 PEAK Matrix Service Provider of the Year™ awards in engineering services (ES). Read on to find out who’s providing the top engineering services based on Everest Group research.   

Activity in the Engineering R&D (ER&D) sector remained largely resilient during 2022, with service providers witnessing significant growth across themes such as platformization, digital engineering, and Industry 4.0. Amid this landscape, a few engineering service providers distinguished themselves by showcasing significant capabilities and market impact across all these leading investment themes.

We have identified the top 15 ES service providers and five leading ES challengers for the 2023 PEAK Matrix Service Provider of the Year awards in engineering services.

See the Top Engineering Service Providers

State of the ER&D industry

ER&D spending and outsourcing remained resilient in 2022, though there was some growth deacceleration as compared with 2021 on account of uncertainty around the Ukraine-Russia conflict, talent shortages and rising wage inflation, and bleak global economic forecast.

Enterprises remained committed to enhancing their products, services, and processes on the back of digital technologies. Service providers, by means of their scaled talent availability, domain know-how, and IP investments, supported these enterprises in realizing faster time-to-market and cost efficiencies for their engineering initiatives.

Methodology

The PEAK Matrix Provider of the Year awards helps enterprises identify leading service providers who have demonstrated strong capabilities and market success across multiple engineering domains.

This year’s results are based on assessments from five PEAK Matrix® reports published by Everest Group in the calendar year of 2022 that looked at the following key themes influencing ER&D over that period:

  • Industry 4.0 services
  • Software products engineering
  • Digital products engineering
  • Digital twins
  • Connected medical devices

The Engineering Services PEAK Matrix Provider of the Year awards were determined by consolidating tiered scores for Leader, Major Contender, Aspirant, and Star Performer positions across each of the individual evaluations mentioned above. The two award categories are:

  • ES Top 15: Engineering service providers with the highest consolidated scores based on the evaluation
  • ES Top 5 Challengers: The next five top engineering services providers who are credible partners for enterprises and are positioning themselves as rivals to leading players

To learn more about the 2023 engineering service providers of the year, reach out to analysts Ankur Jain, [email protected], Mayank Maria, [email protected], or Akshat Vaid, [email protected].

See the Top Engineering Service Providers

Changing Dynamics In The IT And Engineering Services Market | Blog

Looking at the market for IT and engineering services right now reveals that companies are in a spending dilemma. They face high demand for these services, yet they look to cut back on spending because they are concerned about a possible recession. The strategies large companies are already putting in place to address this dilemma are changing the marketplace dynamics. Here is an overview of what your company needs to understand about these strategies.

Read more in my blog on Forbes

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