The Hindu Business Line : <roman2>`To survive, you need an India- or offshore-capability'</roman2>

My guess is that multinationals are not looking at an India acquisition as a route to growth, but as a route to capability. — MR FRANCISCO D'SOUZA, COO, COGNIZANT TECHNOLOGY SOLUTIONS

Mr Francisco D'Souza, Chief Operating Officer of Cognizant Technology Solutions, is not someone given to making off-the-cuff, provocative statements. Responding to a question, at the Nasscom conference, on why Tier-I Indian firms were fighting shy of making big ticket acquisitions, he asserted that `the track record of global IT service organisations in successfully managing large acquisitions has been poor.'

As players in the Indian software sector gear up for possible consolidation, Business Line decided to quiz him on this.

Excerpts from the interview

Do you think big ticket acquisitions have not delivered on their stated goals?

I think it is definitely something to think about. We have not done any sort of scientific research (on the subject of big ticket acquisitions). But we have gone back and looked at a lot of acquisitions that have happened, not just in the Indian context, but in the American context as well for several years. They are pretty hard to integrate. If you look at the track record, there are not many that have achieved their goal, in the larger context.

What are the service mergers you had in mind, when you talked about big-ticket acquisitions?

Look at EDS and AT Kearney. Look at CSC Index. Those are the big ones that come to mind. EDS has already announced that it is divesting AT Kearney. As for CSC Index, there is little left of Index within the CSC umbrella, even from a service line perspective. CSC has largely retracted back to the service lines that it had before the Index acquisition. So these are two that one can clearly point to. There are other smaller ones in this category, but data to support it may not fully available for outsiders.

Another good example to look at is the hostile takeover of CSC by Computer Associates a few years ago. It was telling, because it was the first time a hostile takeover had been attempted in the services industry. In the end, it failed, because the reality is that in a services industry, your assets walk out of the door every day.

So, if your assets do not want to make it happen, it is hard to put it through. Unlike Oracle-Peoplesoft, which is another hostile example. In this, Oracle said that what it was going after was the product and customer base, which will stick regardless of whether the people stick or not. It is a different situation there.

What went wrong in these acquisitions — purely cultural challenges relating to people or were other factors at play?

You could call it culture. But services firms have a unique set of characteristics and challenges when it comes to integration. It has to do with the fact that our primary asset walks out the door every evening. And that is what one is acquiring. Even though we are acquiring a customer base, ultimately our ability to build our customer base is tied to the people. If we cannot retain them, then the value of the firm disappears quickly. So, it is all about attracting, retaining and integrating the people into a structure that makes sense. In most services firms, one has an organisation structure into which merging another entity becomes a challenge.

In fact, I would argue that if, say, a services company is acquiring a consulting company it will be a largely complementary acquisition. As organisation structures will not overlap that much, integration should be easier in some respects. But if two firms that are largely in the same business merge, you will have far greater overlap of the organisation structure.

The integration challenges are that much greater, the closer the businesses are in terms of markets, customers and services that they are providing. Managing that on a large scale becomes a challenge.

If you look at many of the acquisitions that we have done, they are small. They will largely fall into two categories. One group of acquisitions have been largely complementary, in areas or service lines that we had not been in prior to the acquisition. So, integration was relatively easier.

They remained a self-contained group within Cognizant, preserved their identity and the team stayed together.

In the other group, where they were overlapping with our core business, we had to integrate quite quickly. It takes a lot of effort to do, as you have to almost do it on a person-by-person basis at the micro level to make the integration successful.

Do you think the compulsion is far greater on companies such as Cap Gemini or Atos Origin to make acquisitions and build their offshore presence?

If you look at the pure-play Tier-I offshore firms, there are plenty of growth opportunities. The market has consolidated and these players are contesting all the opportunities. There is plenty of demand at the high level. If you look at the multinationals that have long historical client relationships, there is pressure on them to add India capacity.

Doing it organically is probably slow and perhaps not fast enough for their appetite. For them, an acquisition makes a lot of sense. My guess is that they are not looking at an India acquisition as a route to growth, but as a route to capability. We have to separate that. Clearly, everybody has recognised that you need an India or offshore capability to be able to survive.

How is your strategic relationship with EDS working out?

What I said in the last earnings call is that we are pleased with the progress we have made. We are working with them on a couple of opportunities. But it is an ongoing process.

What was the logic of the alliance?

The logic is that EDS plays in the category of deals that we don't play in. In the case of large-scale bundled end-to-end deal, in which applications is one part, none of the Indian pure plays is in those deals. Our thinking was that by partnering with EDS in those opportunities, we would be able to participate in a segment of the market in which we have not historically operated. In the two opportunities that we are working on, EDS has large-scale relationships with clients, which span applications and infrastructure. We are coming in and becoming an applications partner. At the same time, we have no restrictions on working directly with the clients in respect of unbundled deals.

The private equity firms are getting together to make a bid for CSC and ACS (Affiliated Computer Services). Do you think that this is likely to increase the pressure on other global firms to react?

I would argue that many of the global multinational firms that have not jumped on the off-shoring model in an aggressive way and those that are public have a dilemma about how to adopt the off-shoring model. Every time you move work offshore, you cannibalise your own revenue. Some of these companies are finding it hard to manage this transition. Accenture has done and is doing it quite well. But if you look around at ACS or CSC or Cap Gemini, they have not moved substantial part of their headcount to low-cost geographies around the world. I suspect that it has to do with the pressures of being a public company. For such companies, being a part of a private equity play may alleviate the quarterly pressures of a public company for sometime.

If you look at the IT services firms like ours, at this point, the growth rates are still very healthy. The opportunity is still large and if you look at the McKinsey study, we have just begun to scratch the surface. So the compulsion to do acquisitions at this point is not tied to growth. We grew 51 per cent last year largely organically. The reality is that we see plenty of opportunities without the need to do acquisitions. My guess is that this is true for our segment across the industry. I think Oracle PeopleSoft happened in an industry, which had matured, and ERP growth was beginning to slow down. I don't think that our market is anywhere near mature.

How do you feel about your peers setting up a separate mega deal team to participate in large-scale unbundled deals?

I think it is way too early to call this a trend. I would say we have seen some (mega deals). ABN Amro is something everybody talks about. If you are at any of the top-tier company's client pipeline you would find a vast majority of orders to be of the hunting license kind. Generally speaking, in a hunting license kind of relationship, a client will go out and say that I am going to pick a set of approved offshore vendors. And now, it is up to each of the approved vendors to work with the business units to identify the actual work that is going offshore. When you go to the business units, it could be application development, testing, maintenance or infrastructure management. Many of our largest relationships are of the hunting license nature.

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