Execute a focused acquisition strategy for capability augmentation to deliver Industry 4.0 services

HFS recently released an HFS Top 10 Industry 4.0 service providers report, in which we evaluated 21 leading service providers around the globe. As a part of the evaluation, we observed that some of the leading service providers, such as Accenture and HCL, are following a smart acquisition strategy to augment their Industry 4.0 capability. Other service providers can also follow this strategy to increase their capability in this space. But the success of acquisitions depends on the integration (both hard and soft factors) between the two companies. In this PoV, we analyze the rationale behind the acquisitions in this space and provide pointers that service providers should keep in mind for Industry 4.0-focused acquisitions.

Accenture is pursuing a focused acquisition strategy to augment the capability of its Industry X.0 practice

Accenture is ranked number 1 in our HFS Top 10 Industry 4.0 Service Providers report, and we mentioned “acquisitions” as one of its Industry 4.0 services strengths. Exhibit 1 highlights some Accenture X.0 practice acquisitions that span across industries, technologies, and specific services themes, such as connected experiences.

Exhibit 1: Accenture’s acquisitions target both technology and business areas

Source: HFS Research, 2020

Industry 4.0-focused emerging small and medium-sized companies possess the required capability and solutions portfolio but have a limited geographic presence and client portfolio. The big service providers such as Accenture, on the other hand, can industrialize the solutions via means such as ownership for the full services lifecycle, integration with other solutions, or broader client bases to leverage the solutions.

The broad scope of Industry 4.0 is accelerating the need for acquisition

Industry 4.0 is a convergence of traditional industrial automation technologies, enterprise software, and emerging digital technologies, including expertise in more than 10 technologies, as explained in the HFS Industry 4.0 value chain. To manage this complexity, service providers should consider taking the acquisition route for the following reasons:

• Domain understanding. The Industry 4.0 value chain depicts integrated manufacturing encompassing R&D, design, operations, and support services. With the advent of digital technologies, some of the processes in the value chain are evolving fast, and service providers cannot develop all these capabilities in-house.
• Technology expertise. Industry 4.0 services demand capabilities in both manufacturing-specific (such as MES (Manufacturing Execution System) and PLM (Product Lifecycle Management)) and generic technology components (such as cloud, cybersecurity, and analytics). The fast-growing wave of emerging companies in the market is specializing in both the use-case and industry-specific applications of these technologies. Thus, service providers need capabilities in these best-of-breed technologies.
• Solutions portfolio. Service providers are developing point solutions (off-the-shelf solutions for targeted use-cases such as quality inspection, asset maintenance, etc.) for Industry 4.0 services across industries, demanding precision engineering capability. In many cases, service providers do not have this capability and need to acquire these solutions.
• Talent management. There is a huge Industry 4.0 talent crunch, as very few institutions offer a full-time course on digital manufacturing. So, some of the acquisitions also act as “acqui-hiring,” enabling service providers to recruit trained professionals for specific technologies or areas of manufacturing.

Culture fitment is a challenging issue for successful integration

Service providers typically follow two broad strategies for Industry 4.0 acquisitions: acquire companies based on particular needs, such as domain-focused or technology-oriented, or leverage other acquisitions for Industry 4.0 services, for example, acquiring an MES solutions provider is also helpful for Industry 4.0 services.

We have observed an increase in the number of promising small and medium companies (which typically have fewer than 500 employees) in the digital manufacturing space that are becoming potential targets for acquisitions.  These emerging companies are small in size, so they have a different culture (in terms of way of working, hierarchies, etc.) and employee engagement models (related to aspirations, future prospects, etc.) compared to the big organizations. Since the acquisition is about intangible assets, service providers must consider the cultural aspect along with the other factors.

Critical success factors for service providers for successful acquisitions in Industry 4.0

Service providers must strategize internally and execute due diligence with the targeted organization about the following points:

• Target specialized firms. Evaluate the uniqueness of the solutions of the potential target acquisition organizations; in a capability-oriented acquisition, the solution offering is one of the main differentiators.
• Pursue culture compatibility. Consider the cultural fitment and alignment for a successful post-acquisition integration; this often translates into similar roles, responsibilities, aspirations, and growth opportunities for the employees of the acquired entity in the new organization.
• Align strategic goals. Create a clear roadmap for the acquired solutions portfolio, client value proposition, funding, and other strategic elements.
• Seek new growth opportunities. Assess opportunities to up-sell and cross-sell to the existing client portfolio, and consider converting new logos by leveraging the acquired solutions portfolio.
• Don’t ignore workforce management. Managing the workforce is critical, as some of the corporate support functions will be consolidated post-acquisition. Layoffs and high attrition due to consolidation can have a negative effect on other employees and also create a bad impression on the market.

The Bottom Line: Balance between the hard and soft factors is the key to success in Industry 4.0 acquisitions

Service providers often focus too much on the solutions and services portfolio for the acquisition. But the people aspect is also very important for the future prospect of the overall to-be acquired intellectual property. Thus, service providers must evaluate the cultural aspect besides capability and financial due diligence.