Why Accenture is the benchmark Indian IT urgently needs to adopt to survive the H-1B fallout
It may come across as hubristic -- even downright foolish -- to expect any Indian IT company to try and become, almost overnight, a global giant with a presence in 175 cities across the globe, a well-burnished brand almost IBM-like in its lustre, and one of the go-to players in the new world of digital.
The above enviable description belongs to Accenture, of course, and there are several very good reasons why Indian IT needs to urgently figure out a way to emulate it.
A few days ago, Trump lowered the boom on the "specialty occupation" H-1B visa by ensuring that USCIS turf out any application that features an entry-level computer programmer. Apparently, roughly 65 percent of H-1Bs who work on projects in the US occupy this low-level position and preventing their entry into the US will raise costs significantly for Indian IT at a time when margins are already under severe pressure.
The H-1B imbroglio is just a surface-level problem that conceals beneath it a far greater rot. The old, traditional sources of gold for Indian IT -- application development and maintenance, infrastructure management, and business process management -- are in their last gasps and experiencing acute pricing pressure in what are now-severely commoditized areas.
DIGITAL AS LIFEBLOOD
What is taking over at rapid speed, however, is the world of digital, which encompasses the fast-moving domains of social, mobile, analytics, and cloud. So much so that around 90 percent of incremental spending, or new business, for Indian IT firms today hinges on the ability to problem-solve, innovate, and deliver in these areas -- that too with a speed and agility not known in the old model. Indian IT, with roughly 80 percent of its business still operating from old lines, will be dead as a dodo if it doesn't find some wings and migrate into this new world as quickly as it possibly can.
To say that this is a daunting task for Indian companies is an understatement. And yet, here is the Chicago-headquartered, Ireland-registered Accenture (formerly Andersen Consulting), a company with $32.5 billion in revenues that has around 75 percent of its 375,000 staff located in low-cost centres such as India and the Philippines with India housing 140,000 of them.
Today, India for Accenture is far from being just the source of back office work churned out by low-level drones. Instead, Rekha Menon, Accenture India's chariman and senior managing director, tells the Economic Times that a hundred of the company's top global clients are all served out of the country, especially those that require cutting-edge digital solutions in areas such as security and analytics.
The shocker is that 46 percent of Accenture's revenues still come from the old model, but that stream is growing at a trickle (some 4 percent) and is now being used mainly to service new business lines such as transformational consulting galloping along at a 32 percent clip, while the overall digital-related business grew approximately 35 percent to more than $7 billion last year. If there's any model out there that Indian IT can and should conceivably morph itself into, this is it.
GROWING IN TURBULENT TIMES
The other reason to aspire to become an Accenture is because of where and how it is growing its business. Over the last year, Indian companies have released several statements that have complained about Brexit "headwinds" and impending anti-H-1B Trump policies and their impacts on growth. Accenture, on the other hand, has remained relatively unscathed.
"When you look at the backdrop of Brexit, specifically in Europe, we have not seen any material impact to date," David Rowland, Accenture's CFO, stated in an analyst conference call. "We didn't see that in the fourth quarter and we don't see anything in the first quarter," he added.
Indeed, the company has consistently outstripped its own earnings guidances, which we all know is by-and-large a ritualistic game of manipulating investor expectations, but it nevertheless speaks of a pretty assured performance during turbulent times.
On the other hand, Indian rivals such as Infosys and TCS consistently bemoaned "adverse and uncertain" macroeconomic circumstances last year after growing at an already unimpressive rate of 9.1 percent and 7.1 percent respectively in FY '16 (March-end). While TCS registered its slowest yearly pace since 2009-10 for FY '16 (at less than half of the 15 percent pace at which it expanded in the previous year), Infosys recently disclosed that it would not be able to do much better than between 7.2 percent and 7.6 percent growth for this year, which is substantially lower than that of last year.
The kicker here is that it apparently struggled to report incremental growth in any of its markets or service lines. As for Cognizant, suffice it to say it chopped its full-year revenue growth forecast three times in 2016, finally delivering an underwhelming 8.6 percent.
SPENDING SPREE
One of the big reasons that a large company like Accenture -- three times the size of its largest Indian competitor -- has been able to sustain topline growth is because of its voracious appetite for firms whose businesses are future-facing and growing rapidly. India's Economic Times reports that Accenture shelled out $2.5 billion for 38 acquisitions in the last three years -- a mind-boggling 70 percent of that in 2016 alone, and spanning all areas digital, underscoring the urgency with which it views the world unfurling before it. Digital-related services has apparently accounted for about three-fifths of incremental revenue.
For instance, in the last quarter of FY '16, Accenture announced the acquisitions of three digital service companies: MOBGEN, Tecnilogica, and Germany's (EWG) dgroup. Accenture also snapped up two security firms around the same time: Israel's Maglan and Australia's Redcore. It is not that Indian IT are not thinking this way -- Wipro made a very savvy buy of Appirio late last year; Infosys picked up Noah Consulting, Kallidus, and Panaya; Cognizant has made a few digital buys. But they are few and far between -- you can count them on your fingers. TCS, the biggest of the lot, hasn't made a single big-name purchase worth talking about.
On the other hand, sitting on vast hoards of cash reserves while facing fierce competition for both old and fading lines as well as new business (as Indian IT has been doing) seems an utterly foolish plan of action. "The difference between Accenture and the others is the money in M&A that Accenture has deployed to acquire talent and reputation. This has left Cognizant and the rest of the industry in the dust and has allowed Accenture to capture a lion's share of this high growth segment," said Everest Group CEO Peter Bendor-Samuel in an Outlook Business article.
TRANSFORMATIONAL CONSULTING
Then there's consulting which has emerged as the lynchpin to winning new business and fattening up the firm's margins. "Accenture is distinct in its ability to focus on transformation and digital, combined with an aggressive M&A program. This has allowed them to build a commanding lead in digital, which is where much of the growth is," says the Everest Group's Samuel in Outlook.
Consequently, the consulting business is bounding along at around 30 percent in FY16 and currently makes up nearly one-third of the firm's overall revenue. No one else in the Indian competitive landscape apparently comes close to this kind of success.
MASTER OF NEW DOMAINS
Another important development marks Accenture's continuing evolution. IT firms will soon have to become purveyors of more than just, well, IT. In an era where IT workers need to understand and speak the language of business and marketing and sales managers need to become more tech savvy, understanding the visual world for both has become key. Accenture has realized the need to capitalize on this key convergence and acquired Fjord, a design agency.
In fact, India chief Menon said that the company recently went toe-to-toe with L'Oreal's existing advertised agency and was actually able to wrest the account from them . The Ad Age Report 2016 ranked Accenture Interactive as the world's largest and fastest-growing digital agency network, and this is nothing short of a remarkable development and a glimpse of the future that these kinds of companies are heading into.
The ability to offer an end-to-end solution set that includes creative technology, consulting, and analytics is simply too tempting an offer for a client to not consider seriously. This is something that Cognizant has also recognized, having acquired design shop Idea Couture last year.
WORKING WITH THE NEW BREED
There's also a large swathe of new business that traditional IT players have been avoiding but which Accenture has eagerly latched onto. Once again, Accenture's strong consulting practice melded with the skill of acquired firms who play in analytics and design have allowed the company to offer solutions using a microservices architecture, the preferred way of writing code at new-economy companies such as Google and Uber.
These modular services, constructed via APIs and HTTP, run their own processes over a distributed system that can talk to each other and therefore impart a great deal of developer agility to solutions, much like the work Accenture has done at Google on Google Maps or Google Translate projects. Mint has said that by contrast, most of Indian IT still tend to cling to clients in the old world who are in turn being disrupted by ones in the new economy -- the very ones who are Accenture's clients -- causing a deadly spin cycle for Indian IT but a convenient boost for its Chicago-based rival.
Of course, even the mighty stumble and fall and Accenture's numbers for the last quarter, while "not terrible", did not exactly dazzle. Profit forecasts for the year were slightly raised, and while it saw a slight slump in new bookings, growth in North America fell by 4 percent versus double digit figures a year ago. Its revised outlook warns of bleak times ahead for the sector.
And yet, Accenture says it is on track to close another $1.5 billion in acquisitions soon, resolute in its goal of growing as quickly inorganically to assure it will continue to thrive in the wild west of tomorrow's digital landscape.
Indian firms like Cognizant and Infosys have strong brands and Wipro is making impressive strides in automation. But if they want to survive what is increasingly a turbulent landscape and a questionable future shorn of the milk and honey of the traditional business, they would do well to take a few pages from Accenture's playbook.