For a while now, Remote Infrastructure Management Outsourcing (RIMO) assets have been the “flavour of the season” from an acquisition perspective, yet we see very little transactions on this front. Why? This article aims to understand and answer this question.
RIMO is a rapidly growing service offering and is comparable to size of addressable market for offshore ADM and BPO opportunities. Depending on whom you ask, the total addressable market for RIMO is anywhere from $80 billion to $120 billion.
Today, for traditional, large global outsourcers, less than 5 percent of revenue from infrastructure outsourcing is derived from services delivered from an offshore location back into North America or Western Europe. The current offshore based RIMO market is estimated to be around US $6 – 7 billion, which constitutes a fraction of the total opportunity. NASSCOM recently published a report proclaiming that up to three-quarters of all infrastructure management roles could be off shored, creating a $26 billion to $28 billion revenue opportunity by 2013, of which Indian companies could capture about half.
Delivery of RIMO from an offshore destination is seeing significant growth on account of a) evolution of technology and b) changes in buyer behaviors in terms of preference to leverage offshore cost structures to cut-down infrastructure costs which is indicated by the high degree of offshore element in the proposals hitting the market today
The acceleration in adoption of RIM will propel suppliers to adopt different growth strategies to rapidly gain market share. a) Global IT services providers like Accenture and IBM could focus on ramp up their offshore delivery capabilities and b) Indian based large and mid-tier companies like Wipro, HCL, Infosys etc would leverage M&A to build capabilities and gain customer base.
The underlying factor that will drive some of these choices/strategies would be that global IT service providers like Accenture, IBM and HP/EDS have learnt a tough lesson in application maintenance and development. They are unlikely to repeat the same mistake in infrastructure management. They are fast setting up significant offshore capabilities to support client needs. On the other hand, pure-play Indian based players are looking to acquire on-site presence to build the end-to-end delivery capability and customers to plug the gaps in short time, both the categories of companies, more so the Indian players have opted to explore the inorganic route. While there is significant demand, the transaction activity in the RIMO (Including IMS) sector has been fairly limited over the last 18 months. Barring few deals like Wipro – Infocrossing, HCL’s acquisition of a data center in US, Allied Digital Services’ acquisition of En Pointe Global Services we have not seen many transactions.
Considering that most India based companies had aggressively announced intentions to acquire RIM capabilities the actual number of transactions has been lot lower than projected/ expected. Here’s our summary of the key reasons for lack of transactions –
Hypothesis 1 – The ‘cultural’ impediments
Most offshore firms have shown an allergy to capital investments. Their investments are in human capital – recruiting, training etc. But you cannot effectively compete for infrastructure services against hardware and network centric vendors who culturally are used to big Capex as part of their DNA.
The Indian method for RIMO is very different to the traditional Infrastructure outsourcing approach. They focus on asset-light deals and they do not take over assets such as the infrastructure itself so easily from clients. They are keen to replicate the tried and tested ADM model for infrastructure outsourcing (IO)/ RIMO operations. The ideal target is a company that provides on-site remote management services with a high offshorability element.
The reality is that RIM as a delivery model is still evolving. The top 5-7 players dominate over majority of the market and the balance supplier base is fragmented and at different stages of evolution of their delivery model i.e. transforming from traditional IO to (onsite) remote management) to (offshore) RIM which means that the capability is not as sophisticated (read asset light) and the extent of offshorability is perhaps lower than what Indian companies would like.
Hypothesis 2 – “Big is still better”
One of deal preference is to acquire a company with a Fortune 1000 client base. Reality is that most of the large companies have either captive set-ups or prefer to outsource to big global players. The larger players in the market have significant revenues and are $ billion plus acquisitions. The ticket size is perhaps well beyond the size range of the Indian companies. The mid and smaller infrastructure management suppliers, which fall within the acquisition range of an Indian IT supplier, tend to service the SMB customer segment which has its own complexities
I feel it will take a fundamental rethink and investment strategy for offshore firms to make a big dent in IT infrastructure services/ RIMO market place. The Indian companies will have to adapt to the market requirements and build a strong onshore delivery capability. The allergy towards capital investment should be cured. Asset-light deals are limited and difficult to find.
Indian companies could also focus on bite-sized acquisitions. They should look to make multiple and small strategic investments and then grow around them.
The market valuations for IMS/ RIMO companies have slowly declined in the last 18-24 months thus making them fairly attractive targets. Some of the recent deals in this space by large global players were also concluded at 0.7x of revenues.
In summary, the market potential is huge and the inorganic path is important if Indian companies want to seize this opportunity. They need to change the approach – the traditional model may not work. Consolidation in the sector is imminent and one should expect significant deal activity over the next 12 -24 months.
(Ashish Taneja and Shivani Nagpaul are part of BMR Advisors, M&A- IT/BPO practice. The views are personal)
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