Oracle acquired Sun Microsystems after a long battle while DELL did not have much difficulty in making the Perot acquisition. While both the acquisitions seem to fit well with the long-term strategies of the two companies, i.e Oracle & DELL, depending on how they go about integrating these acquisitions will decide if they will be able to derive any value from these transactions.
Oracle is a software product company which also offers services around its products, which are essentially solutions involving its products. DELL is a computer manufacturer which has done extremely well in computer hardware including desktops, servers & storage. So, the DNA of both these companies is different. One is a whole & soul software company while the other a hardware giant.
Oracle gets a good hardware portfolio from the acquisition of Sun. Sun's strength is servers and that is what Oracle's software runs on. This would help Oracle offer complete solutions (hardware & software) which otherwise it could not. But the key here is the role of hardware. Most of the money will still come from software & services while the hardware will make the solutions complete (one-stop-shop).
DELL gets a services portfolio from the Perot acquisition. Perot's strength is in the healthcare, government & data center business verticals. Hence the services portfolio is still not complete. Key verticals like BFSI, Retail, Automotive & Telecom are missing. DELL may be trying to take the IBM route to grow to the next level, but IBM has a very strong software portfolio in addition to a very good hardware (mainframe & servers) business. But most of DELL's revenue still comes from Laptops & desktops.
In my view, if Oracle uses Sun as a supporting aid in its software & services offering, it can derive maximum value from Sun acquisition. In all likelihood this is where it is headed. In the case of DELL, it should use its servers & storage business to support its services business. This seems to be very unlikely, given its DNA. Hence DELL may not be able to derive much value from Perot acquisition in the near future unless it manages to transform itself into a services-centric company from being manufacturing-centric.
Showing posts with label Industry. Show all posts
Showing posts with label Industry. Show all posts
Monday, November 22, 2010
Sunday, October 24, 2010
Indian IT companies shying away from big-ticket acquisitions
India has produced quite a few success stories in the IT space with the likes of Infosys, Wipro, TCS, HCL, Tech Mahindra, Satyam, Patni, etc. Each of these companies, without any exception, have grown mostly through the organic route. It is not that they did not do any acquisitions. They did. But none of them were worth more than the revenue from their largest customer. Can the Indian IT companies reach the next frontier without big-ticket M&As and consolidation? When I tried to dig deeper into the reasons behind this, what I found was interesting.
Firstly, most of the Indian IT companies are either family businesses (HCL, Wipro, Patni) or cash cows of big business houses (TCS). Though Infosys is an exception, it was never considered a serious risk-taker when it came to growth. When companies have such background, we can only expect them to be very conservative when it came to M&As. Mahindra group buying Satyam cannot be considered a classical case of M&A because it was a classic case of government intervention & fire-sale at the same time.
Secondly, when you go for big-ticket acquisitions, there is always the question of control of the merged entity. Most of the Indian IT companies will not be able to handle that situation well. They are used to having most of the decision makers in India while some local folks are taken in at on-shore locations to handle the clients. Let us take the case of Infosys & Cap Gemini merger which was talked about some time ago. If that had materialized, I am not sure if the Infosys would have managed that well. It would have been an utter failure given the management structure at Infosys. I have not heard of any other Indian IT biggie even thinking of a big-ticket acquisition.
Going forward, I don't think Indian IT companies can afford to shy away from taking the M&A route to reach the next level. That is because, most of IT companies are engaged in IT services and don't have any clear USP which differentiates one from the other. None of the Indian IT companies have invested heavily into developing functional expertise which is key to win large deals. To make things worse, foreign IT companies like HP, DELL, IBM, Oracle, etc. have very strong India presence as well as other cheaper offshore locations. So, when big-ticket IT deals are up for grabs, Indian IT biggies are up against formidable competitors who can offer more complete solutions (Hardware, Software, Consultancy) than these guys can.
Now the question is what kind of acquisitions that the Indian IT biggies should go after so that they are not only successful in managing the integration and grow to the next level, without too much of disruption? The answer is not simple. They should go after companies which can get them formidable leads in specific verticals as well as key markets. For example, when DELL acquired Perot, one thing which mattered most, in my view, is Perot's leadership in Government,Healthcare and Infrastructure verticals in addition to having a strong offshore presence. Indian IT biggies have a strong offshore presence and hence they need to go for acquisitions which will get them strong advantage in specific verticals and leadership position in key markets.
Indian IT companies need to go after finding companies like Perot which can quickly get them to leadership positions in specific verticals. But, for such mergers to succeed, the top management of these companies should change their mindset from being offshore leaders to business enablers. I still don't see that shift happening yet. With Indian economy on a roll, Indian IT companies are enjoying phenomenal valuations. At the same time, foreign companies, because of the muted growth in their base locations, have very low valuations. This is the time to go after good acquisition targets and make it happen. Indian IT companies which capitalize on this opportunity will manage to scale to the next level. The rest will become acquisition targets of the successful ones, later.
In summary, it is high time Ratan Tata takes similar risks that he took while acquiring Corus, with TCS as well. It is high time Indian IT companies start looking seriously at the M&A route on a much bigger scale and different focus, in order to survive and thrive to reach the next frontier.
Firstly, most of the Indian IT companies are either family businesses (HCL, Wipro, Patni) or cash cows of big business houses (TCS). Though Infosys is an exception, it was never considered a serious risk-taker when it came to growth. When companies have such background, we can only expect them to be very conservative when it came to M&As. Mahindra group buying Satyam cannot be considered a classical case of M&A because it was a classic case of government intervention & fire-sale at the same time.
Secondly, when you go for big-ticket acquisitions, there is always the question of control of the merged entity. Most of the Indian IT companies will not be able to handle that situation well. They are used to having most of the decision makers in India while some local folks are taken in at on-shore locations to handle the clients. Let us take the case of Infosys & Cap Gemini merger which was talked about some time ago. If that had materialized, I am not sure if the Infosys would have managed that well. It would have been an utter failure given the management structure at Infosys. I have not heard of any other Indian IT biggie even thinking of a big-ticket acquisition.
Going forward, I don't think Indian IT companies can afford to shy away from taking the M&A route to reach the next level. That is because, most of IT companies are engaged in IT services and don't have any clear USP which differentiates one from the other. None of the Indian IT companies have invested heavily into developing functional expertise which is key to win large deals. To make things worse, foreign IT companies like HP, DELL, IBM, Oracle, etc. have very strong India presence as well as other cheaper offshore locations. So, when big-ticket IT deals are up for grabs, Indian IT biggies are up against formidable competitors who can offer more complete solutions (Hardware, Software, Consultancy) than these guys can.
Now the question is what kind of acquisitions that the Indian IT biggies should go after so that they are not only successful in managing the integration and grow to the next level, without too much of disruption? The answer is not simple. They should go after companies which can get them formidable leads in specific verticals as well as key markets. For example, when DELL acquired Perot, one thing which mattered most, in my view, is Perot's leadership in Government,Healthcare and Infrastructure verticals in addition to having a strong offshore presence. Indian IT biggies have a strong offshore presence and hence they need to go for acquisitions which will get them strong advantage in specific verticals and leadership position in key markets.
Indian IT companies need to go after finding companies like Perot which can quickly get them to leadership positions in specific verticals. But, for such mergers to succeed, the top management of these companies should change their mindset from being offshore leaders to business enablers. I still don't see that shift happening yet. With Indian economy on a roll, Indian IT companies are enjoying phenomenal valuations. At the same time, foreign companies, because of the muted growth in their base locations, have very low valuations. This is the time to go after good acquisition targets and make it happen. Indian IT companies which capitalize on this opportunity will manage to scale to the next level. The rest will become acquisition targets of the successful ones, later.
In summary, it is high time Ratan Tata takes similar risks that he took while acquiring Corus, with TCS as well. It is high time Indian IT companies start looking seriously at the M&A route on a much bigger scale and different focus, in order to survive and thrive to reach the next frontier.
Thursday, March 4, 2010
Indian IT Industry: Where do we go from here?
Indian IT industry has been the subject of discussions from Beijing to Washington D.C for different reasons. Indian IT majors have managed to build a solid foundation, on which they need to grow. But the going is getting tougher with every passing day. The global economic downturn forced them to take a step back and take stock of the situation in much greater detail. The question is, is Indian IT ready to scale the next frontier. There are no easy answers.
Firstly, as far as the IT outsourcing pie is concerned, all the low-hanging fruits have been plucked. Indian IT needs to change their mindset of getting better margins by going for a better fresher - lateral mix. It does not work that way anymore. The bigger players like IBM & HP have an edge here. They not only have thriving consulting practices which fetch them better margins but also help them go after bigger deals. Indian players have been very slow in building required domain expertise in order to have a decent consulting revenue.
Secondly, the Indian IT majors never focused seriously on the domestic market. Most of the big-ticket domestic deals have been bagged by IBM before these guys even started taking notice. This clearly shows that our IT majors never focused on corporate strategy. Even if they had strategy teams, they lacked focus. Just having a couple of MBAs will not do wonders unless there is clear direction from the top.
One aspect that most of our IT majors including global biggies have ignored so far is near-sourcing. Instead of outsourcing to India, companies in the US can move their jobs to low cost locations in the US itself. Some of them could be cheaper than the tier-2 cities in India in terms of the overall cost (people + overheads). With project release cycles getting shorter, the near-shoring model would work out better. Jobs will stay in the US and Obama will also be happy.
In summary, unless the Indian IT majors pull up their socks and build up the necessary domain expertise and come up with appropriate strategies to scale up, they will sink without any trace.
Firstly, as far as the IT outsourcing pie is concerned, all the low-hanging fruits have been plucked. Indian IT needs to change their mindset of getting better margins by going for a better fresher - lateral mix. It does not work that way anymore. The bigger players like IBM & HP have an edge here. They not only have thriving consulting practices which fetch them better margins but also help them go after bigger deals. Indian players have been very slow in building required domain expertise in order to have a decent consulting revenue.
Secondly, the Indian IT majors never focused seriously on the domestic market. Most of the big-ticket domestic deals have been bagged by IBM before these guys even started taking notice. This clearly shows that our IT majors never focused on corporate strategy. Even if they had strategy teams, they lacked focus. Just having a couple of MBAs will not do wonders unless there is clear direction from the top.
One aspect that most of our IT majors including global biggies have ignored so far is near-sourcing. Instead of outsourcing to India, companies in the US can move their jobs to low cost locations in the US itself. Some of them could be cheaper than the tier-2 cities in India in terms of the overall cost (people + overheads). With project release cycles getting shorter, the near-shoring model would work out better. Jobs will stay in the US and Obama will also be happy.
In summary, unless the Indian IT majors pull up their socks and build up the necessary domain expertise and come up with appropriate strategies to scale up, they will sink without any trace.
Friday, February 12, 2010
Toyota's problems: An outsider's perspective
Toyota, one of the most respected companies in the world is in a mess, which, to some extent, is its own creation. The problem that Toyota is in, is a deadly combination of Japanese corporate culture and outsourcing. A lot has been talked about the former while not many have tried to look at the latter. In my view, a good assessment of the issues related to outsourcing has a lot of lessons for other auto-makers across the world. I will try to focus my discussion on outsourcing while touching upon the effect of the Japanese culture.
Firstly, Japanese have a very strict corporate hierarchy with a fierce sense of loyalty which is greatly appreciated. In most of the Japanese companies operating in India, all the key positions are held by Japanese. Most of the people who operate on the field being Indians, they have better insight into what customers want, what problems they are facing with the products, etc. With the hierarchy that the Japanese are used to, bad news will seldom reach the top till the last minute and by the it is too late anyway.
Secondly, most of the car-makers work with a lot of component suppliers, which is a good strategy. But they also push their suppliers to cut-costs every time their contracts come up for renewal. I firmly believe that it is this strategy that could have cost Toyota very badly. We all know that beyond a point, you can't cut costs even if you bring in efficiencies. Japanese take a very long time to develop a trust relationship with a new partner / supplier. But once the trust is established, it is very difficult to break that relationship. These kind of relationships could potentially lead to a blind trust and this mixed with the typical outsourcing strategies of car-makers, makes it a deadly combination leading to the mess that Toyota is in now.
Finally, when a Japanese company is operating in US, which is their biggest market, they are bound to be watched. Whatever be their reputation, they should have been more careful while handling customer complaints. When they claim to produce the most reliable cars, if they don't care to address serious customer complaints, it is a PR disaster waiting to happen. Of-course, the current situation is much worse than a mere PR disaster.
To conclude, bad outsourcing strategy, closed nature of Japanese corporate culture and bad customer handling, in my view, are the primary reasons for the mess that Toyota has got itself in.
Firstly, Japanese have a very strict corporate hierarchy with a fierce sense of loyalty which is greatly appreciated. In most of the Japanese companies operating in India, all the key positions are held by Japanese. Most of the people who operate on the field being Indians, they have better insight into what customers want, what problems they are facing with the products, etc. With the hierarchy that the Japanese are used to, bad news will seldom reach the top till the last minute and by the it is too late anyway.
Secondly, most of the car-makers work with a lot of component suppliers, which is a good strategy. But they also push their suppliers to cut-costs every time their contracts come up for renewal. I firmly believe that it is this strategy that could have cost Toyota very badly. We all know that beyond a point, you can't cut costs even if you bring in efficiencies. Japanese take a very long time to develop a trust relationship with a new partner / supplier. But once the trust is established, it is very difficult to break that relationship. These kind of relationships could potentially lead to a blind trust and this mixed with the typical outsourcing strategies of car-makers, makes it a deadly combination leading to the mess that Toyota is in now.
Finally, when a Japanese company is operating in US, which is their biggest market, they are bound to be watched. Whatever be their reputation, they should have been more careful while handling customer complaints. When they claim to produce the most reliable cars, if they don't care to address serious customer complaints, it is a PR disaster waiting to happen. Of-course, the current situation is much worse than a mere PR disaster.
To conclude, bad outsourcing strategy, closed nature of Japanese corporate culture and bad customer handling, in my view, are the primary reasons for the mess that Toyota has got itself in.
Wednesday, December 30, 2009
Why India is not known for engineering excellence?
I have always wondered why it is always the German and the Japanese companies who take the honors when it comes to engineering excellence. When I explored the reasons, what I found was not very surprising. Let me delve into a couple of major reasons why we may not see engineering excellence in India in this generation.
Firstly, soon after India got independence, the political leaders of India wanted to build institutions of excellence and government took up the responsibility of building it all. The license raj ensured that the private enterprises got to build what government wanted them to build and not what market wanted. In effect, we followed the Russian model (before it broke). As a result, there was no incentive for anyone to build the best products with best workmanship. Hence till 1991, we all had to live with sub-standard products unless we had some friend abroad who brought us a Bose music system.
Secondly, even after the introduction of reforms in 1991, private enterprises went about signing joint-ventures with companies abroad which had excelled in building great products (read engineering excellence), but their engineers / workers were of the pre-reform mindset. For these engineers just making products which are usable was good enough. Hence we have Tata cars which have lot of innovation, but not great finish. Even when complete technology was brought from abroad, our engineers built products of inferior quality. I have a Sony music system in my house manufactured in India and having used a similar system in US (which was made in Japan), I can make out the difference in quality.
So far, I have seen only one exception in India and that is Hidesign, which makes leather products like purses, etc. This is the only company that I know of, in India which focuses on engineering excellence and delivers products known for world-class workmanship.
Overall, I have a strong feeling that till the current generation retires, we may not see engineering excellence in India and even that is doubtful. Building products like Mercedes Benz or a Bose music system which are known for engineering excellence is still not in our DNA. I guess it will take one whole generation post-1991 for us to at-least have a product from India known for engineering excellence. So far I have not seen any, but I am hopeful.
Firstly, soon after India got independence, the political leaders of India wanted to build institutions of excellence and government took up the responsibility of building it all. The license raj ensured that the private enterprises got to build what government wanted them to build and not what market wanted. In effect, we followed the Russian model (before it broke). As a result, there was no incentive for anyone to build the best products with best workmanship. Hence till 1991, we all had to live with sub-standard products unless we had some friend abroad who brought us a Bose music system.
Secondly, even after the introduction of reforms in 1991, private enterprises went about signing joint-ventures with companies abroad which had excelled in building great products (read engineering excellence), but their engineers / workers were of the pre-reform mindset. For these engineers just making products which are usable was good enough. Hence we have Tata cars which have lot of innovation, but not great finish. Even when complete technology was brought from abroad, our engineers built products of inferior quality. I have a Sony music system in my house manufactured in India and having used a similar system in US (which was made in Japan), I can make out the difference in quality.
So far, I have seen only one exception in India and that is Hidesign, which makes leather products like purses, etc. This is the only company that I know of, in India which focuses on engineering excellence and delivers products known for world-class workmanship.
Overall, I have a strong feeling that till the current generation retires, we may not see engineering excellence in India and even that is doubtful. Building products like Mercedes Benz or a Bose music system which are known for engineering excellence is still not in our DNA. I guess it will take one whole generation post-1991 for us to at-least have a product from India known for engineering excellence. So far I have not seen any, but I am hopeful.
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