Tag: mergers & acquisitions

Empire Building: The Impact of IBM’s Acquisition of SoftLayer Technologies | Gaining Altitude in the Cloud

The cloud services space just got a lot more interesting. Announced earlier this month, IBM paid a hefty price — $2 billion — to buy Dallas, Texas-based SoftLayer Technologies, the world’s largest privately held cloud computing infrastructure provider.

IBM is now well on the way to delivering on the goal stated in its 2012 annual report: to make a key impact on cloud and reach $7 billion annually in cloud revenue by the end of 2015. Clearly IBM wants to participate in the revenue potential from the growth of cloud services. Big Blue has already spent $4.5 billion over the past five years to build its SmartCloud portfolio of cloud services, but those acquisitions were in the private cloud arena. To compete broadly in this lucrative market, IBM needed a compelling offering in the public cloud arena.

A recent report from North Bridge Venture Partners and GigaOM Research predicts the cloud market will reach $158.8 billion by 2014. And Gartner predicts the market will grow to $210 billion by 2016.

The SoftLayer acquisition accelerates IBM’s efforts to establish a footprint in the public cloud arena without having to start from scratch when AWS, Google, Rackspace and others already dominate the space. SoftLayer’s cloud infrastructure platform, and its existing 21,000 customers, gives IBM immediate scale and relevance.

Other than increased revenue, why does IBM want to have a compelling offering in the public cloud space in the first place?

They believe — correctly, I think — that significant workloads will migrate from the data center and private clouds to the public cloud. There is a set of workloads that, quite frankly, are more attractive in the public cloud than they are in a private cloud space (web hosting, application development and testing, and email, for example). It makes more sense to pay for these services on an hourly basis rather than on a monthly or yearly basis.

We believe these types of services currently comprise about 50 percent of the workloads that currently run in IBM customers’ data centers or their private cloud environments. So about half of IBM’s customer workflows are well positioned to move into the public cloud. They won’t all move at once, but we see clear indications that they are starting to move. If IBM is to provide comprehensive cloud services, it needs a smooth path for migrating those workloads. SoftLayer gives IBM the capability to create a glide path.

Thus, IBM’s acquisition of SoftLayer is both a defensive strategy and an offensive strategy. On the offense, they want to increase market share in the fast-growing public cloud space and need a compelling offering to compete with AWS, Google, Rackspace and other cloud players. On the defense, they need to create a migration path from traditional IT infrastructure space into the public cloud.

I don’t think the SoftLayer acquisition is a game-changer. Nor do I think it remakes the cloud space. But it does put IBM into a credible role.

Will this acquisition be enough to secure IBM’s position as a cloud leader? I suspect it isn’t enough, given the role that IBM likely will want to play. I think we will see further acquisitions to build up IBM’s capabilities and scale.

Photo credit: Simon Greig (xrrr)

Dell Going Private | Sherpas in Blue Shirts

Last Tuesday, Dell Inc. announced that it will go private, with Michael Dell, Silver Lake Partners, and Microsoft combining in a $24.4 billion offer that represents a 25% premium over Dell’s value prior to word of the discussions emerged. While there are some strings attached to the deal, it now seems inevitable that Dell will soon be a private company.

Out of the public spotlight, will things be different?

Will the absence of quarterly earnings pressure energize a set of business initiatives that will remake the storied PC maker? 

Companies that go private no longer face quarterly earnings imperatives, instead have the opportunity to exercise more flexibility to take decisive actions that might affect near term reported earnings, but have attractive medium and long term returns. For example, some companies that have gone private after long tenures as public entities make bold moves such as:

  • Accelerating and broadening offshoring initiatives, which had material upfront costs, but promise very attractive longer term economics. This longer term view unshackles key improvements, lubricated by fewer concerns in this case of exposure to public relations rhetoric that might move the market.
  • Launching heretofore delayed M&A activity that had short term adverse earnings implications. This includes moving forward to jettison laggard units that would have triggered write-downs of under-performing assets.

What happens when cash really becomes KING? 

Private companies, particularly those owned by performance-driven private equity firms, often shift toward maximizing cash generation rather than managing quarterly and annual earnings performance. This shift in the premier objectives can reshape many elements of the business; for example:

  • Arrangements with customers may shift as T&Cs are realigned to prioritize cash over earnings
  • Inorganic growth is viewed through a different lens as the firm no longer can use equity as a currency for acquisitions
  • Strategic moves to fill capability gaps or establish footholds in new market segments are reoriented as private firms think (more than) twice about paying cash to acquire firms with high multiples and are more ready to consider divesting units that might command a high multiple

How does a big debt load change the game? 

Most large buyouts of this nature end up with a debt-heavy capital structure, pushing for cash generation to retire debt and elevate value for equity holders – all within a time horizon for the investors that will generate very attractive returns. While GAAP earnings pressure might decrease, EBITDA pressure will elevate. Thus, priorities shift to emphasize:

  • Driving cash flow up as quickly as possible to provide plenty of interest coverage and to start paying down principal
  • Taking aggressive actions to drive the enterprise value north – the objective, after all is to make the investors rich(er) – growing enterprise value and position the firm to go public again in a few years at a much higher valuation.

Will being private drive a different organization culture? 

Private companies really do act different.  The opportunity – perhaps necessity – emerges to structure different incentives as the equity part of senior leaders (and deeper in the organization) shifts from a nearly day-to-day focus to the quest for a future liquidity event.  This fundamental change in focus presents some heady organization design choices; for example:

  • The balance of compensation schemes need to change. Structuring these most basic of incentives sends powerful signals on the direction and goals of the company
  • This private company environment inevitably attracts a different talent profile that seeks a different kind of reward (more risk-taking?) and creates a distinctive opportunity for culture change

How will “new” owners shape the future? 

When companies go private, a different ownership structure – often smaller and simpler – with a clear vision of success typically takes control. In most cases this new ownership profile has fewer shareholders with much greater influence on the firm’s direction. The newly private company experiences:

  • Clarity of priorities which will define core business direction. For Dell, will this sharp focus lead to revitalization and sharper focus of the hardware business or a next generation firm driving innovation beyond traditional models?
  • Opportunities for new partnerships (what will Microsoft do?) that could modify the shape of products, services and the basis of competition going forward

Private is different than public. Dell the private company will be different than Dell the public company. Customers and competitors will see changes – perhaps at a pace that rivals the Dell of the 1980s when it was last a private entity. Buckle up!

Image credit: Dell

Infosys Acquires Lodestone: It’s Not about the Money; It’s about Sending a Message | Sherpas in Blue Shirts

With over US$4 billion in cash reserves, Infosys had a history of keeping analysts on their toes speculating on the moves it would make. However, after its botched attempt to acquire Axon (which HCL won in a competitive bid), Infosys chose to sit on its money pile for so long that some bored analysts joked that the cash would hatch into chicken!

Infosys has experienced a fair amount of criticism recently due to its below par performance compared to its peers. With good news few and far between, Infosys had to set the ball rolling in the endeavor to resurrect its image as a market leader. Let’s take a look at its acquisition of Lodestone – a Zurich-based management consultancy that advises international companies on strategy, process optimization and IT transformation – fares not only from an overall strategic perspective but also from an image management perspective.

Geography focus: Europe

With three quarters of Lodestone’s revenue coming from Switzerland and Germany, there are no prizes for guessing Infosys’ geographic focus. Alongside European logos, Infosys will acquire local leadership, language skills and reputation in a market (Continental Europe) that has been traditionally tough for Indian service providers. It is not surprising that this acquisition follows Cognizant’s purchase of Galileo earlier this year, which enables it expansion in France, and Wipro’s acquisition of a Citibank’s datacenter in Meerbusch (Germany).

Our verdict: A good move. Infosys was not gaining traction with its strategy of organic growth in Europe. Has it done enough to position itself in Europe? No. It will have to thread together a string of pearls (products, business consulting, systems integration, etc.) through acquisitions to even convey the message that it has truly arrived in Europe. Lodestone is not going to be the silver bullet for all of Infosys’ ailments in the region.

Competency focus: SAP consulting

With a post-acquisition turnover of more than US$1 billion in SAP programs, Infosys positions itself among the top players in this area. SAP is one of the fastest growing programs within Infosys, and this move should help cross-pollinate market access and expertise between Infosys and Lodestone. However, Infosys has demonstrated visible sluggishness in its ability to manage growth with increasing size due to its single-minded focus on margins. Will it fail this challenge too?

Our verdict: Not likely, because SAP consulting is indeed a high-margin business, which makes this acquisition very much in line with Infosys’ stated strategy.

Financials of the acquisition

This is an area in which even the strongest Infosys bashers must give it credit. Looking at the revenue multiples paid by service providers for some of their recent acquisitions:

    • HP-Autonomy: 11x
    • HCL-Axon: 2.2x
    • Wipro-Infocrossing: 2.6x
    • TCS-Citi BPO: 1.9x
    • Infosys-Lodestone: 1.6x

Our verdict: Cautious, but a good deal. However, it remains to be seen how many successful acquisitions Infosys can make with this scrupulous strategy. I believe Infosys will need to acquire multiple companies to bolster its high-margin strategy; and that will require it to go shopping with an eye on its competitors who have shown themselves to be much more aggressive.

Infosys famously walked out of the Axon deal (and lost out to HCL) by refusing to negotiate its price ceiling. And its intense focus on the premium pricing of its services has led to further entrenchment of this “non-negotiable” image among its clients, as it has chosen to walk away from projects rather than budge on pricing. Burdened by this image, Infosys can pick only one from the following two options:

  1. Be apologetic about what it has done, and go back to the negotiation tables with competitive pricing for clients and open purse strings for acquisition targets
  2. Show aggression and speed in acquiring high-margin capabilities, and push ahead with its stated strategy, i.e., to increase its revenue share from value-added, high-margin services

The latter is what its leadership says it is doing. And I think that strategy is spot on. That is why I believe the highlight of this acquisition is not the money Infosys spent on it, but rather more about the message it is trying to send – Infosys is still in the game.

The news on the grapevine is that Infosys already has a lineup of targeted acquisitions in various stages of maturity. It will be interesting to see Infosys’ next move as it attempts to push ahead in what has been a challenging period.

Almost Thumbs Up for Towers Watson’s Acquisition of Extend Health | Sherpas in Blue Shirts

Following Towers Watson’s acquisition of Aliquant in early 2011, its May 13, 2012 announcement of its agreement to acquire Extend Health, Inc., which operates one of the largest private Medicare exchange in the United States, is clear confirmation of its belief in the potential growth of the entire U.S. health and welfare (H&W) market.

And there are a number of factors that make Extend Health’s offerings an attractive solution for Towers Watson to have in its arsenal:

  • Multiple surveys indicate that quite a few organizations are planning to re-evaluate their employer-sponsored plan strategy for the retiree population in the coming years
  • There is an increasing realization that retiree exchanges are not only more economical for employers but also provide better individual options to participants
  • This is still a fairly new model, pioneered by Extend Health in 2006 (and there’s inherent value in being first to market)
  • With hundreds of thousands of baby boomers reaching retirement age in the not-too-distant future, there is significant headroom for growth

It also likely paves Towers Watson’s path into the active employee exchange market, which providers playing in the retiree market see as a natural next step extension of their offerings. For example, both Aon Hewitt and Mercer recently announced active employee exchange solutions. But several words of caution here: 1) the rate of active employee exchange adoption must be closely watched as it is fairly nascent today; 2) while all the Tier 1 providers now have “exchanges” in their offerings arsenals, they are, in a way, disruptive to the traditional benefits administration business model; and 3) it’s unclear how this will dovetail with the state exchanges that will come into play in 2014 if things remain track on with healthcare reform.

What is clear is that Towers Watson really liked what it saw in Extend Health, as what began as an announced partnership in August 2011 became an acquisition less than a year later. And one can understand why: the projected run rate for 2012 and the expected growth rate for 2013 is expected to be 30 percent or more.

There is, however, one aspect of this deal that I don’t like. The US$435 million price paid represents a >7X multiple on current revenues. This kind of multiple is typically available for a pure software company, as opposed to a services-bundled technology offering. However, it seems Towers Watson didn’t want to be a late market entrant, as exchanges represent an increasing barrier of entry for new providers as the existing ones scale up their capabilities and client bases. What do you think? Did it made the right bet?

M&A in the Health Insurance Industry: Is the Party Over or Yet to Get Started? | Sherpas in Blue Shirts

Before the economic crisis began in 2008, some ambitious forecasts predicted that by now due to industry consolidation less than 50 large health plans would comprise the entire market. Economies of scale were so attractive in the health insurance industry that even such an aggressive consolidation scenario didn’t sound unrealistic. Obviously, it didn’t happen.

number of payersHC payer MA

The question is, why? Was there some type of intervention that disrupted the natural evolution path of the health insurance industry and prevented the “presumably inevitable” consolidation, just as human intervention kept the Leaning Tower of Pisa from toppling? Before we address that question, let’s briefly talk about the fundamental premises for consolidation.

There are multiple benefits to being a big player in the U.S. health insurance industry. First, you gain access to the most lucrative client segment in this industry, the Fortune 1000 companies, as it procures health coverage for its employees in a single national chunk, rather than location by location. The Fortune 1000 target category is also the most attractive client segment because of the fixed cost associated with each sales pursuit, which can be spread across a much higher number of beneficiaries, as opposed to closing a deal with a “Mom & Pop” shop. Obviously, to be able to serve such mega clients on the national level, medium-sized firms were expected to close the gaps in their geographic footprint, and selectively acquire niche/state level players.

Second, locking down a large number of beneficiaries allows health insurance companies to exert pricing pressure on providers of medical services, while simultaneously withstanding pricing pressures from more consolidated adjacent healthcare verticals such as pharma and medical device manufacturers. Essentially, large insurance firms are discouraging their customers from consuming out-of-network services, while demanding from in-network providers extremely favorable pricing, frequently in the form of low-priced, fixed monthly payments independent of the actual volume of patients (“capitated contracts”).

Third, due to the very high level of regulation on the federal, state and local levels, as well as quite complicated value chain processes, for every industry player there is an almost mandatory cost category associated with various compliance measures, proactive legal support, and lobbying. Obviously, the bigger you are the more you can afford to spend in this direction (or the less this expense item contributes to your overall cost structure percentage-wise). This is especially true for those firms that deal with Medicare and Medicaid programs, where reimbursement requirements are changing almost on a monthly basis, and staying compliant requires an enormous effort.

With these strong driving forces, why did the expected consolidation trend de-accelerate? Several credible sources point to the recent financial crisis as a primary inhibitor, but I personally don’t think it played any major role in this situation.

I think we should mainly look at President Obama’s healthcare reform. It impacted the operating model of the industry in many ways – the medical loss ratio (MLR) requirement, preexisting conditions, individual buyers, and new coverage limits, to name just a few. Basically, healthcare reform brought so many changes to the fundamental operating principles of the industry that adapting to them requires a significant change management effort. Moreover, as reform impacts not only health insurance but also the entire healthcare industry, some secondary implications from the adjacent verticals are yet to fully cascade throughout the value chain. Just judging from the level of involvement of and extensive guidance from the National Association of Insurance Commissioners (NAIC) in interpreting various Patient Protection and Affordable Care Act (PPACA) provisions, it is quite clear that it will take some time for the industry to adapt to the newly imposed rules of the game. All in all, the healthcare ecosystem is not yet fully balanced, and in a time of ambiguity, it is difficult to make aggressive acquisition bets.

However, the above represents just short-term implications of healthcare reform. Its long-term consequences are quite the opposite. The PPACA made an already regulated industry even more regulated. With so many operating constraints and requirements, it is inevitable that small players that are teetering on the edge of solvency will either get out of the business or be acquired by the bigger firms. Moreover, our government recently introduced another strong incentive for operating on a mega-large scale, when being “too big to fail” serves as indemnification for taking a little extra risk under expectations of getting bailed out if something goes wrong.

All this makes me believe the consolidation trend will reaccelerate, and that within the next couple of years, we will see a number of intriguing M&A announcements. However, the potential M&A activity may not stay limited to horizontal consolidation with mergers of like companies, but also to vertical integration. In this respect, Kaiser’s model (payer/provider) seems to be quite a controversial example for replication because of the multiple pros and cons associated with such a business paradigm. But I’ll save that subject for a separate blog.

Capgemini Acquires VWA: 2011 Truly is FAO’s Year for Acquisitions!!! | Sherpas in Blue Shirts

In my blog earlier this year on Serco’s decision to purchase Intelenet, I posed the question if 2011 would be FAO’s year for significant acquisitions. After all, it was the fourth major deal of the year, following on the heels of iGATE-Patni, Genpact-Headstrong, and EXL-OPI. With Capgemini’s just-announced acquisition of Vengroff, Williams & Associates, Inc.’s order to cash (O2C) business, which operates under the name VWA, we certainly have our answer.

The increased competitive intensity (and thus the need for differentiation) in the global FAO market is in some ways reflected through the heightened M&A activity we’ve seen this year. However, unlike some of the other acquisitions that were driven by scale consolidation, Capgemini-VWA can be seen as driven by several other themes that are also relevant in today’s global FAO market:

  • Acquisition of niche players by established leaders to augment their capability – This deal will enable Capgemini to strengthen its leadership position in the FAO market through enhanced O2C offerings. Everest Group’s analysis suggests that O2C is the single largest segment in the global FAO market, accounting for nearly 35 percent of the market. O2C BPO services can help clients reduce revenue leakage, accelerate the cash-flow cycle, and limit bad debt expense – outcomes that clients are increasingly demanding in the current economic scenario. The acquisition not only brings marquee clients such as Yamaha, Chiquita, Cisco, News Corp, Walt Disney, Oracle, Cincinnati Bell, and Mattel into Capgemini’s portfolio, but also may enable it to expand the outsourced relationship with some of these companies. Additionally, VWA possesses strong process capabilities in credit analytics, cash application, and collections, supported by leading dispute and deductions toolsets
  • Building onshore O2C presence – For reasons such as increased reservation against offshoring jobs in the U.S., or O2C clients’ preference for onshore delivery of outsourced collections services for their high-value accounts, many FAO service providers have invested in expanding their onshore presence. With this acquisition, Capgemini gains onshore O2C capabilities as over 300 experts, mainly based in the U.S. (with the rest in six locations across Europe) will join its existing BPO organization
  • Enhancing platform-based solutions – With increasing market maturity, the FAO value proposition has evolved beyond cost arbitrage and is now driven by best-in-class process expertise and technology-led solutions. A key asset that comes with this acquisition is VWA’s Webcollect O2CPro platform, which combines collections risk management, predictive account scoring, and portfolio management, and provides multi-lingual and multi-currency support. Capgemini BPO has already integrated Webcollect O2CPro software into its F&A offering through the ongoing partnership it has had with VWA for over a year. With this move, Capgemini has extended its software and services platform-based BPO strategy that was developed through its 2010 acquisition of the IBX platform

With its strong capabilities in O2C, VWA has long been an attractive acquisition target. Kudos to Capgemini for not only seizing the opportunity but also for enhancing multiple aspects of its O2C value proposition in the process.

Did ADP Do the Right Thing with its Acquisition of The RightThing? | Sherpas in Blue Shirts

Oh, yes it did. In fact, it scored big in three important areas with its October 10 acquisition of The RightThing, a privately held company and a major player in the fast growing Recruitment Process Outsourcing (RPO) market.

  • Secured a leading spot within the RPO provider community – ADP already had an RPO technology solution in its Virtual Edge Application Tracking System (ATS). With the addition of The RightThing’s business process services, which well complements ATS, ADP will have a comprehensive, rounded out technology plus services RPO solution. It will also be able to offer a fully bundled, holistic RPO offering that includes its existing talent management products.
  • Ability to tap new mid-market opportunities – Both companies are already strongholds in the mid-market (ADP in HRO, and The RightThing in RPO); ADP will now be able to cross-sell RPO services to its own HRO clients, and offer HRO services to The RightThing clients.
  • Good culture and service model philosophy fit – Operationally, ADP and The RightThing both utilize a highly centralized and standardized delivery model to drive economies of scale and offer an efficient solution to clients, so no significant alternation in delivery model philosophy will be required.

Of course, while this is a very strong match-up of capabilities and opportunities, acquisitions always have their challenges. First, both ADP and The RightThing have their own recruitment technology solutions (VirtualEdge and RecruitPoint, respectively), and ADP will need to select one and transition clients from the other. Second, ADP will need to quickly and carefully integrate the two companies to ensure retention of top talent, as well as ultimate acquisition success. Third, successfully capitalizing on cross-sell opportunities within the two companies’ client bases will depend on its ability to clearly demonstrate a solid value proposition backed by integrated service delivery and technology. Fourth, and probably most importantly, will be ADP’s ability to adapt and succeed with its first real foray in a non-platform-based play. The RightThing has several clients that utilize their own technology solutions, and ADP’s strategy to serve these non-platform RPO clients, as well its approach for new clients, will be closely watched. Only time will tell how successful it will be in this major move.

For more details on the acquisition, including its impact on the RPO and MPHRO industries, please read Everest Group’s Breaking Viewpoint on the topic.

EXL’s Acquisition of The Hartford’s Trumbull Gives it a More Complete Portfolio of Offerings in the U.S. Insurance BPO Market | Sherpas in Blue Shirts

EXL Service announced on October 4, 2011, that it had acquired Trumbull Services, a specialized provider of Insurance BPO services in the Property & Casualty (P&C) segment in the United States. This acquisition is not large in terms of the additional headcount obtained (Trumbull is a less than 200 employee company) or the deal amount (not announced, but likely to be in the range of US$50 million). However, it is strategically significant, as it gives EXL Service a greater foothold and a ready-made technology platform to offer in the U.S. P&C Insurance BPO space in general, and the insurance subrogation BPO business in particular.

Even without the acquisition, EXL has been the dominant third-party BPO provider in the U.S. P&C market (excluding TPAs), with the highest scale in terms of FTE count. However, offerings in the Insurance BPO space are no longer just about scale – the increasing role of technology is becoming an important consideration. With this in mind, EXL had been looking for a suitable acquisition in the Insurance BPO space in the United States/Europe for a while now.

Going a bit deeper into the strategic value of the Trumbull acquisition, the addition gives EXL deeper expertise in the P&C Insurance BPO space with the important ability to offer subrogation BPO to insurers. (Subrogation is a process under which the insurer can pursue action against the party causing loss to the insured, in order to recover at least a portion of the claimed amount paid out to the insured. This also involves proportionately repaying the deductible paid by the insured to the insurer.). By offering this capability to insurers, EXL gives them a chance to lower premiums, lower deductibles, and, therefore, increase market share. In the U.S. P&C Insurance market, which saw consistently falling premiums and declining investment yields in 2008-10, this is an enticing offering.

The acquisition also bolsters EXL’s capabilities on the technology front. In May 2010, it acquired PDMA, the maker of LifePRO, a policy administration system in the Life Insurance BPO market deployed with 40+ insurers around the world. With the Trumbull acquisition, it also gets SubroSourcePro, a platform solution to maximize recoveries from claims. This bolsters EXL’s technology offerings, giving it greater ability to offer insurers flexible scalability and a transactional, pay-per-use pricing model that allows them to convert some of their fixed costs into variable costs.

With the acquisition, EXL also strengthens its onshore presence in the U.S. market. This is an important capability to have in an economic environment where regulatory requirements and customer preferences are mandating onshore presence for some processes. However, although EXL now has greater onshore presence in United States, it still lacks significant presence in the Western European and Latin American markets. Given that demand for Insurance BPO is rising in these locations, EXL will probably go for another acquisition in these regions in the near future, to ensure that when insurers go BPO shopping they can clearly see the store (vendor) with the most wares (capabilities).

Finally, EXL also gets a marquee client in The Hartford Financial Services with this acquisition. Trumbull had been a captive of The Hartford, and EXL has committed to honor existing service agreements. It will also tap into Trumbull’s existing client base, which includes a number of insurers with which EXL did not have any existing relationships.

However, EXL will face some challenges as it integrates Trumbull with its existing business. One is smoothing through cultural and operational style differences, as EXL is a global BPO major while Trumbull was a small captive held by a financial services major. Integration of Trumbull’s operational capabilities with EXL’s offerings will be another hurdle as EXL goes to market with a combined offering. Finally, there will be some drag on EXL’s margins, as Trumbull has an exclusive onshore presence while EXL’s own resources are largely offshore.

The bottom line is that  the Trumbull acquisition has given EXL not just a stronger foothold in the P&C Insurance BPO space, but it has also strategically deepened EXL’s portfolio of offerings, enhancing its potential in the U.S. Insurance BPO market.

As Infosys Considers Purchasing Thomson Reuters’ Healthcare Business, it’s Time for a Thought Experiment | Sherpas in Blue Shirts

The Business Standard a couple of weeks ago reported that Infosys is close to acquiring Thomson Reuters’ healthcare division in a US$700-750 million transaction. To be clear, I have no concrete evidence that Infosys will make this acquisition or is in fact seriously considering it. However, the industry rumors and news articles pose a fascinating and interesting puzzle.

On the surface, this potential acquisition seems strange and somewhat out of character for Infosys, which has until now eschewed growth through acquisition, preferring instead to grow rapidly through organic methods. An organization that has held resolutely firm to its talent excellence model and avoided distractions in related fields now seems to be preparing to break with past practices and enter the software and analytics space, in which it has little experience. A rich puzzle indeed – what factors could explain this change in approach?

As we begin this thought experiment, let us first consider why Infosys may be considering this bold move. Infosys is facing the unpleasant specter of a maturing industry in its core service offerings. Industry growth rates are slowing, the terms of competition are shifting, and other firms such as TCS and Cognizant are threatening to displace it as the industry leader.

Infosys, which led the way in pioneering the high quality labor arbitrage services space, finds itself – as does the rest of the industry – coming to grips with the limits of the model. The great fear is that clients will start pressuring price and, in so doing, bring down the impressive margins Infosys and other players have been able to post over the last ten years. In addition to pricing and margin issues, the industry faces growing pressure from its client base to increase the value of its offerings beyond labor arbitrage.

Infosys may feel the Thomson Reuters acquisition creates a mechanism to address these issues in two important ways. First, it may provide a way for it to best Cognizant and TCS by moving further into the attractive, highly growth-oriented healthcare vertical. Perhaps it believes that Thomson Reuters’ substantial healthcare customer and revenue base, and its IP, will immediately make it an even more important industry player, and provide an effective base into which is can cross sell its traditional services.

Second, it may see the acquisition as a way to gain a working book of business and instant learning’s in the services industry’s holy grail…the non-linear business. For those of you who are not familiar with the term, “non-linear business” refers to services businesses that are not priced and measured by labor but instead by a product or outcome. It is thought that a move to this type of business model can reignite growth and protect providers from price and margin pressure. Thomson Reuters’ book of business looks to be chock-full of non-linear software and analytics offerings that may provide the basis for Infosys’ acceleration into these types of business models. The cream on the cake may be Infosys’ belief that it can take substantial cost out of Thomson Reuters’ business model by applying its formidable ability to move much of the production work to its proven talent factories in low cost India.

Now let us explore some of the challenges Infosys will face if it chooses to consummate the transaction. It will quickly find vast dissimilarities between the healthcare business and its traditional service lines. In a talent factory or consulting service line, operational excellence is driven by building a highly leveraged talent pyramid, with focused investments on productivity tools and a large recruiting engine that can continuously supply a steady stream of cheap new talent. On the other hand, software and related businesses leverage highly specialized talent teams, and they rigorously attempt to keep as stable as possible.

The investment philosophies and strategies between the two types of models are also very different; service providers think in terms of investments in sales and account teams with quick pay offs, while software-related firms make larger bets in IP which are monetized over years and sometimes decades. There are marked disparities between their channels to market and sales mechanisms, with service providers minimizing marketing dollars in favor of high-powered problem solving teams and software firms investing lavishly in marketing product positioning and utilizing aggressive order taking sales forces. Finally, the stakeholder groups that purchase and utilize the respective services and products are different and often unrelated, making cross selling between services and products a challenging and frequently unrewarding experience.

As we reflect on the implication of this thought experiment, it is clear that Infosys and the overall services industry face high stakes and business changing choices. They must make bold moves to mitigate the effects of the maturing services industry, but doing so may lead them into spaces in which they have little experience and whose synergies they hope to exploit prove challenging to capture.

With such a conundrum, and it will be interesting to see what Infosys does with Thomson Reuters’ healthcare business and how other providers address similar pressures as they look to evolve their business models and client relationships.

Changes are Afoot in the Canadian Infrastructure Outsourcing Marketplace | Sherpas in Blue Shirts

HP’s 2008 acquisition of EDS reduced an already small number of large infrastructure outsourcing (IO) service providers with a significant footprint in Canada. While for a time that meant buyers in Canada who were uncomfortable entering into agreements with IO providers with lesser presence in Canada had a smaller pool to choose from, the landscape is quickly changing.

First, the HP-EDS acquisition was quickly followed in 2009 by that of ACS by Xerox and Perot by Dell. Both Xerox and Dell have capabilities and resources on the ground in Canada they can utilize to increase ACS’ and Perot’s presence in the country’s IO space. Additionally, Canada appears to have caught the attention of offshore providers over the last few years, with many of the Tier 1 Indian providers making headway and developing Canadian practices with strong delivery capabilities. Also increasing competition in the IO space are providers that are leveraging emerging technologies to replace traditional IO deals.

What does this mean to the service provider community? The big Tier 1 multinational firms with strong footholds in Canada need to beware. Competition is coming from expected places, such as from major players that in the past have not focused their attention on Canada, as well as less expected up-and-comers that are gaining ground in using cloud offerings, for example in development and  testing environments. The Indian players, continuing their push into the Canadian marketplace, must become better focused in order to effectively compete with the large multinationals that already have a strong track record, strong relationships, and a greater presence.

What does this mean to the buyers of IO services? Many more options. Take, for example, midrange services. They can use a large Tier 1 ITO provider and go the soup to nuts solution route. They can split the physical aspects of the data centre and servers from the services and leverage an offshore provider for remote infrastructure management outsourcing. They can use a cloud solution offered by anyone from a large Tier 1 provider to a niche vendor. As the market has matured and IO services buyers have gained experience, the risk around leveraging a new set of providers and emerging technologies has decreased, which equates to additional option advantages for Canadian buyers.

This increasingly competitive environment challenges service providers to clearly articulate the value that their solution, their proposal, and their company bring to their clients. But buyers aren’t off the hook. They must ensure that their sourcing process allows for the consideration of providers with very different capabilities and value propositions than those to which they have become accustomed.

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