IT service consolidation

If there is a lesson for Indian IT companies in Xerox’s $6.4 billion bid for Affiliated Computer Services (ACS), it is this — now, is the time to buy, buy, buy.

Recession is indeed the time for investment. This is one, time-tested strategic response to market slowdown, that unfortunately not many Indian IT companies appear alert to. As Vineet Nayar, CEO, HCL Technologies’ said in a recent media interaction, “In this market, you can only grow by eating someone else’s lunch.”

The ball got rolling in September this year, when Dell acquired Perot Systems for $3.9 billion. Soon after, Xerox sealed its deal with ACS for a reported $6.4 billion.

Industry watchers see a common trend in these two mega deals. The move, in both these cases, they observe, is prompted by the two hardware companies’ desire to move more aggressively into IT service space, where profit margins are higher.



This undoubtedly queers the pitch for the likes of HP, IBM and Accenture, as well as for Indian bigwigs like TCS, Infosys, Wipro and HCL Technologies, who so far, haven’t begun taking the inorganic route to growth and survival.

Observing that the ongoing industry consolidation is putting the squeeze on mid-size IT service providers experts predict that in times to come, even pure-play BPO providers-such as Genpact, WNS and EXL-may begin to evince interest in Indian IT service providers, but for that to happen they must first be ready with all the window dressings.

One reason Dallas-based ACS was able to catch the attention of Xerox was that it would be able to provide the kind of labor arbitrage that Xerox is looking for, in a space where price is often the only differentiator. In the past one year, ACS has steadily increased its offshore headcount by 60% and simultaneously reduced domestic employment by 8%. Between the two of them, Xerox and ACS now own 14 data centers in Dallas, Bangalore, India, Monterrey and Mexico.

All said and done, last year’s economic slowdown has rejuvenated the global outsourcing model. From this point on, the struggle for market share is only going to get bloodier.

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