For India’s IT Services companies, the competitive landscape changed in June of this year when Wipro announced iStructure.
iStructure is the platform Wipro will use to deliver services from the cloud on a global basis to its enterprise-class clients. With iStructure, Wipro – just like Oracle, Microsoft, Amazon, Verizon, IBM and others before it – is wrapping solutions around services and infrastructure and releasing it back to customers on a monthly by-seat basis.
iStructure is the key initiative in Wipro’s ongoing move up the value chain.
Hosting in the Cloud
India’s IT Services giants have been talking about ways to create more value for some time. In a March 2012 survey conducted by Wipro competitor Tata Consultancy Services, U.S. respondents reported that nearly 20 per cent of applications are now hosted in the cloud. That number is 39 per cent in Latin America, 28 per cent in Asia Pacific and 12 per cent in Europe.
Having now reached an inflection point in adoption by large customers, the cloud offers the most compelling opportunity.
Wipro’s announcement also marks a significant evolutionary milestone in the maturation of the IT Services industry in India. The major players have all surpassed $1 billion in annual revenue through organic growth and tuck-in acquisitions, and now must look elsewhere for new revenue.
So IT Services companies in India have reached a point where growth and enterprise value now depends as much on what they do – the business they’re in, the markets they serve, where they are in value chain – as on how big they are. And clearly the value is in the cloud.
Wipro has followed this enterprise value path. It started out as a distributor, then became a VAR, then a service provider. But services are hard to scale. That’s where the cloud comes in to play. The cloud offers a way to scale services to companies of any size and anywhere.
Our proprietary MW IT Index for the U.S. shows that for the first quarter of 2012, SaaS companies are experiencing unparalleled growth in valuations. We expect this growth to continue for the next 12-24 months at least.
That’s why Wipro is betting its cloud future on platforms like iStructure. It’s also why Wipro Chairman Azim Premji announced in May that the company will seek more than $1 billion in acquisitions over the next 18 months. Most of them will be overseas cloud players with transaction sizes in the $50 million to $300 million range.
Smaller Indian IT Services Companies Have a Window of Opportunity
What does this means for India’s smaller IT Services companies – those with annual revenue of $500 million or less?
With Wipro and the other Indian IT Services giants looking to the cloud and outside India for growth, smaller Indian IT Services must be careful not to get stuck in a “no man’s land” – too small to compete effectively on their own and potentially too big to be an attractive acquisition candidate.
The good news is that right now the smaller Indian companies are in a unique place to optimize their value by being acquired by international firms seeking to strengthen their positions in India. With the market moving quickly, a potential buyer for an India-based company can be on any continent or in almost any sector of IT Services.
But to take advantage of this opportunity, they will need unique services, strong customer relationships or preferably both. That’s because companies positioned correctly are worth more to the buyer than they are to even themselves.
So for smaller IT Services companies in India, the time is now to take stock by doing the follow:
- Understand the value of your customer relationships;
- Know that if you have been providing outsourced services to an industry sector around the globe, your customer relationships might be worth more than your IP; and
- Conversely, understand that if you are providing customer analytics, your technology may be worth more than your customer relationships.
For smaller Indian IT Services companies, Wipro’s move to the cloud is creating a situation where 1+1 just might equal 3 – or even more in the current market.
(Gaurav Sharma is the Senior Vice-President and Managing Director of the India Practice Group of martinwolf M&A Advisors)