The past months have been difficult for Indian IT firm Infosys. Its performance has been very disappointing. It has lost its most-watched IT services company status to industry leader (in terms of size) Tata Consultancy Services. It has also ceded its second position in the Indian IT industry to upstart Cognizant. For the April to June quarter, Cognizant, which overtook Wipro last year, recorded revenues of US$1.79 billion as compared to Infosys’ US$1.75 billion. Not surprisingly, employee morale has been down. And through all this, Infosys has been constantly hauled up for being shy – some would say stingy – when it comes to making acquisitions. The company’s unutilized cash pile of US$3 billion plus has not gone down well with stakeholders.
But the mood now at Infosys is upbeat. On Monday, the US$7 billion firm announced its acquisition of Lodestone, a Zurich-based management consultancy firm. Founded in 2005, Lodestone advises companies on strategy and offers business transformation solutions enabled by SAP. Infosys CEO S.D. Shibulal, who has been under fire recently, believes that this acquisition of CHF 330 million (around US$350 million) is a “game-changing move” for the company.
So what does Lodestone bring to the table? At revenues of US$200 million, clearly it is not size. Shibulal points to Lodestone’s consulting capabilities and its European presence. Of Lodestone’s 850 total employees, 750 are SAP consultants. It has a client base of 200 across industries including manufacturing, automotive and life sciences. Around 50% of the company’s revenues come from Switzerland and 23% from Germany – countries relatively less impacted by the turmoil in Europe.
“A key plank of our Infosys 3.0 strategy is to expand our consulting and systems integration business. And while continental Europe is undergoing some turmoil, from our point of view we get only 10% of our revenues from this region. We see great potential in increasing our revenues there. So this acquisition is at the intersection of two of our key strategies.… We are putting two and two together and trying to create five,” says Shibulal.
Analysts see this acquisition as a step in the right direction for Infosys. Sudin Apte, principal analyst and CEO at research firm Offshore Insights, notes: “The world is changing very dramatically from the enterprise application perspective, and vendors need to have transformational and consultative capabilities. The Lodestone acquisition will make Infosys a good candidate to win in next-generation enterprise application services. It also ensures that Infosys will now have some sizable presence to address the local fulfillment in Continental Europe. This is a very important aspect of this market.”
Apte doesn’t think the size of the deal is important. “If they were looking at an acquisition to add revenues, then this will not solve their problem. But this is not a small deal for the space they are talking about. When it comes to strategic consulting deals and transformative practices, where are you going to get bigger firms unless you want to buy an Accenture or Capgemini?”
Sundararaman Viswanathan, manager at Zinnov Management Consulting, agrees. “More than the size of the deal, this has to do with the strategy that Infosys has been talking about. More than buying revenues, it is about investing in capabilities. Infosys has taken a big bet on SAP as their enterprise strategy and this is in line with that. It also gives Infosys a very good footprint in Europe and sets them apart from their peers.”
According to Viswanathan, given Infosys’ strong internal culture, a larger deal would in fact have brought with it a whole lot of integration issues. “It would have consumed more bandwidth and taken them away from some of their core priorities.”
So is this the beginning of the end of Infosys’ problems? “The Lodestone acquisition is a positive step and in the right direction, but it will not solve all of Infosys’ problems,” says Apte. “They need to do a few more such deals. And in addition to such acquisitions, they need to galvanize their organization, build internal stability and convert their strategy further into actions.”
Meanwhile on the same day, Infosys BPO, the business processing arm of Infosys, acquired Marsh BPO, the captive BPO unit of the U.S.-based insurance brokerage firm Marsh and McLennan Companies, for an undisclosed sum. This acquisition is expected to give Infosys BPO (2012 revenues: around US$500 million) annualized revenues of US$10 million-12 million. The acquisition may be small, but the direction is promising, observers say.