Is lack of M&A strategy turning out to be the Achilles heel of Indian IT?

In last five years (2015 to 2019), the Indian IT/ITES index has underperformed the US IT/ITES index, which is a trend reversal if you look at the decade prior.

If you take into account the currency impact, then Indian IT industry’s underperformance in dollar terms has been even more stark. Incidentally, what happens to the Indian index is a function of what happens to TCS and Infosys (76 per cent of the index). For the US, it is what happens to Accenture (75 per cent of the index).

The primary reason for this trend reversal has been the way these three companies have gone about using M&A as a tool to have the cutting edge of emerging technologies and deliver faster growth. Indian companies have always believed in organic growth engines, whereas US companies have been aggressively pursuing acquisitions. They believe for faster evolution in the digital space, far newer service offerings and capabilities need to be brought on the table and acquisition is the best way to achieve that.

The other difference is that Indian companies are very top driven on M&A and, therefore, heavily focused on acquisitions that move the needle.

In last five years, Accenture has closed ~130 M&A transactions with a cumulative transaction value of over $5 billion. To put that in perspective, the total amount that Accenture spent on acquisitions is 5 times more than what the two IT biggies, Infosys and TCS, put together have spent on such buys.

Infosys has completed 13 deals valued at $640 million, and TCS has completed 4 transactions valued at $510 million. The acquisitions done by Accenture are by no means a small feat, as it required a well-oiled M&A system to drive so many acquisitions and ensure smooth integration to deliver value.

The majority of the deals that Accenture has done over the years were to ramp up its digital services division and to boost its core consulting business. Accenture’s aggressive acquisition model is driven by clients’ demand for services and solutions that helped them run their businesses better.

In fact, within the digital space, newer technologies like data analytics and cloud computing, where Accenture has made acquisitions, have been drivers of expansion for the longer term.

Accenture has a significant digital presence, i.e., approximately 65 per cent of overall revenues vs. close to half of that for Indian peers. It has been growing at a decent CAGR. The size of acquisition matters, and Accenture has set the tone. Most of its acquisitions are smaller in size, with less than 250 staff. Most notably, Accenture doesn’t believe in large acquisitions due to high failure rates. The company makes acquisitions of very focused companies with specific and differentiated capabilities.

Globally, Accenture is known for its expertise in new technologies like data analytics, cloud computing, consulting, and digital practices. These can help clients leverage innovations for business growth.

An analysis of all the 130 acquisitions done by Accenture shows that around 70% of them were in the areas of design, analytics, cloud computing, social, mobile, cybersecurity and Internet of Things, which will represent significant revenue streams of the future. The market is moving towards domain and industry-specific automation. Accenture is helping its clients transform from legacy processes to digital transformation, and these acquisitions are helping the company. The path laid out by Accenture is an envious one for others in the industry to emulate.

Indian IT consultancy firms like TCS and Infosys have together spent around $1.1 billion on acquisitions, but they have shied away a lot from the type of deals that Accenture has executed. With that approach and having made bold moves early, Accenture has been leading the way on how to look at inorganic growth while constantly trying to adapt to the ever-changing technology landscape and the market has also been synching up on that.