Capgemini Gobbling Up IGATE: Optimizing The Old Outsourcing Model Or Embracing The New

Introduction

It’s increasingly possible that 2015 will be the year when we see some significant consolidation in the outsourcing industry as prices reach rock-bottom, margins are squeezed to impossible levels and old-world service providers struggle to de-link headcount from revenue growth.

At HfS Research, we (almost always) shy away from commenting on the IT/BPO industry rumor mill, especially when it comes to M&A activity, however, the rampant rumors surrounding a successful Capgemini acquisition of IGATE raise some serious questions around whether these service provider mega-mergers make sense in today’s services economy.

So we gathered together our global team of analysts and asked them all to weigh in on what they each thought could be the key assets that Capgemini would acquire in such a large transaction and what they wouldn’t be getting as well.

It’s impossible to fully evaluate the attractiveness of such a combination from outside without access to the financials and synergy considerations but on purely strategic considerations, we are ambivalent on this deal.  It would give Capgemini a significant beneficial boost in many capabilities but the integration challenges and the cultural alignment required to make it successful at a time when the “As-a-Service Economy” is changing overall market dynamics means this runs the risk of being a significant distraction grounded in the current market.

But let’s see what the team came up with to form this point of view.

What Capgemini might want from IGATE

North American Clients

IGATE derives over 70% of its revenues from North America with anchor clients such as General Electric and RBC and particular strength in financial services and manufacturing.  By contrast, Capgemini gets around 20% of its revenues from North America with the stated intention to grow that very significantly and rapidly across the services portfolio.

Indian Delivery Presence

Capgemini has worked hard over the last few years to build its presence in India starting from the acquisition of Kanbay back in 2006.   Today it has 55,000+ FTEs in India as compared to 30,000+ at IGATE.  The IGATE delivery footprint may be especially interesting to Capgemini who have been trying to grow their presence in Tier II cities in order to reduce labor costs and IGATE may be an accelerant to this effort.

Analytics

IGATE through its BI/ETL/EDW work has penetrated into some really large accounts in industries like quick service restaurants and is now moving up to higher value analytics work for these same clients.   This would bolster Capgemini’s already strong BI and analytics practice, particularly with US client, and add ~2500 analytics FTEs which is always a plus.

Vertical Business Process Outsourcing

Capgemini has been a horizontally oriented BPO service provider with a comparatively small vertical capability.  IGATE brings depth in financial services vertical BPO especially insurance where they have been making investments for the last several years as a TPA and a provider of transactional services.  IGATE would also bring vertical BPO (with analytics) in other verticals such as healthcare and life sciences, which would also compliment Capgemini.

Governance, Risk and Compliance services

This was one of the key ‘emerging services' areas for Capgemini in the last couple of years, and HfS believes it wanted to build particular depth in domain-specific regulatory compliance services for financial services.  IGATE’s client footprint in financial services may be an accelerant for these efforts. 

Engineering Services

IGATE can complement the Capgemini's Engineering services practice which is oriented significantly towards aerospace and utilities clients.  By contrast, IGATE engineering services serves medical devices and mining clients including several marquee clients.   However this is still a small offering out of the grand total and so it is unlikely to be a significant source of strategic benefit immediately.

What Capgemini might not get

Automation and Cognitive

Capgemini is making strides bringing Process Automation into especially its BPO operations but so too are their competitors especially in Cognitive where the Capgemini vision isn’t clear today.  We like what they are doing  in process automation but IGATE isn’t going to be a force multiplier to this capability and in fact the integration may distract the team from making advances in this critical investment area today.

The Bottom Line: A solid buy to shore up the old model but not an exhilarating embrace of the As-a-Service Economy

Most of the leading service providers today are looking at niche buys that specifically add software IP or a vertical capability, such as Cognizant/Trizetto, or Infosys/Panaya  However, in Capgemini’s case, there are still some significant holes in its portfolio to fill out, most notably a more powerful presence in India, a stronger portfolio of US enterprise clients, and a deeper foothold in financial services.  iGATE brings these to the table. 

Net-net, we applaud the boldness of this move, and hope, for Capgemini’s sake, the French mothership can integrate the two firms effectively.  However, we also hope Capgemini can quickly focus on some specific niches that have real As-a-Service elements so them, such as strong analytics depth in discrete functions, and further industry vertical strengthening.  In addition, we are still awaiting the firm to pack its punch in automation and cognitive, where it is beginning to talk a big game, but needs to demonstrate some real investment plans.