Mid-sized IT companies bet on GCC advisory firms to score quick deal wins

Mint

7 hours ago

Mid-sized information technology (IT) services companies such as Mphasis Ltd and Hexaware Technologies Ltd are investing in advisory firms that help large corporations set up back-end tech hubs or global capability centres in India, in their bid to win substantial tech and engineering contracts later on.
This strategy, analysts say, enables IT services firms to get faster access to new clients and an easier entry into the country's $68 billion global capability centre market, which is expected to swell to $105 billion by 2030.
Picking up a stake in these consulting firms makes business sense for the homegrown IT outsourcers, as they can start providing tech services, and secure support and maintenance deals as soon as the big foreign companies set up their GCCs here in India, the analysts said.
On 10 July, Mphasis invested $4 million in Aokah, a US-based GCC advisory firm, for a 26% stake. During the company's post-earnings interaction with analysts on 25 July, managing director and chief executive Nitin Rakesh said the acquisition was done 'with a view that we will essentially have an opportunity… in helping shape deals as clients start thinking about GCCs and the various shapes and forms that it takes."
Similarly, Hexaware Technologies acquired SMC Squared on 17 July for $120 million. Its management attributed the move to the 'robust revenue opportunity" that SMC brought.
AI and GCC growth
'Currently what SMC does is to have (GCCs) set up. But what it does not do is transform the operations, especially with the AI opportunity. That's a capability that Hexaware will bring, and we think it will deepen the relationship with the customers for whom we set up GCCs. said Ramakarthikeyan Srikrishna, CEO of Hexaware, during the company's post-earnings call on 25 July.
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Mphasis and Hexaware ended the April-June period with $437 million and $382 million in respective revenue, up 1.6% and 2.8% from the preceding quarter.
These investments come at a time when GCCs present a complex web of challenges and opportunities. At least one chief executive of an IT firm attributed higher attrition to clients hiring away talent for their own in-house tech hubs.
'Overall, if you look across the industry, there's a slight uptick in attrition and that may be to do with the GCCs being more active, the product companies coming here and setting up their own captives and large banks, large enterprises, et cetera," said Sandeep Kalra, executive director and CEO of Persistent Systems, during the company's post-earnings call on 23 July.
Persistent ended the first quarter with $389.7 million in revenue, up 3.9% sequentially.
Strategic investments
Many IT outsourcers look at GCCs as a threat because Fortune companies are hiring engineers to handle their back-end tech work rather than giving that work to them.
Mphasis's Rakesh attributed his decision of investing in a GCC advisory firm to the non-feasibility of setting up a GCC unit internally.
'That is not a business that we think will fit well if it was within Mphasis. So, we decided to take a strategic investment approach and use that opportunity to create new client engagements, not just in the GCC advisory, but then in the follow-up execution of those deals as well," said Rakesh during the post-earnings call with analysts.
Hexaware's Srikrishna also highlighted the trust issues that clients faced in the build-operate-transfer model, under which the IT outsourcers set up the tech centres, before handing over the team after a few years. This final stage of transfer often caused tensions with the clients.
'We did ref calls with customers. What I'm seeing came out consistent. They said, 'Listen, we've tried BOT (build-operate-transfer) models with traditional outsourcing companies,' and they named some of our large competitors. They said, 'With them, we never felt like it's a model that works for us. We always felt like there is a tension that is going to be there at the point of transferring. That it won't be easy, one. Two, even before the transfer in the 3-year or 4-year operate phase, we felt like the team is not ours. We felt like the team is the outsourcing company's team," said Srikrishna during the company's analyst call.
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IT outsourcers traditionally set up and run captive tech centres for their clients initially and then transfer the ownership after some time, which is known as the BOT model.
Changing GCC demand
Small GCC advisory firms can expand fast and deliver quick results, prompting IT outsourcers to invest in them, analysts said.
'Mid-cap IT firms aren't avoiding GCCs, they're cutting to the front of the line. By investing in specialist advisory shops, they buy instant expertise, warm client access, and a faster route to lucrative downstream IT and engineering deals, without the years it takes to build that capability from scratch," said Phil Fersht, chief executive of HFS Research.
These investments also reflect the changing demand patterns in the GCC landscape.
'The moves by mid-tiers like Hexaware and Mphasis reflect a changing demand pattern for IT Services. Just like AI, GCCs are a topic that cannot be avoided when discussing the future of the market," said Thomas Reuner, principal analyst at Pierre Audoin Consultants.
'Where the wheat gets separated from the chaff is where GCCs are set up to help drive transformation by either pivoting to product engineering, especially within the manufacturing sector, or accelerating the transformation journey through data management and AI capabilities," said Reuner.
According to a Mint report on 19 April, smaller GCC advisory firms like Gloplax Solutions, Stratinfinity, and Bridgepath Innovations were sprouting up across the country. These smaller firms help global companies set up GCCs and manage hiring, regulatory compliances, infrastructure and day-to-day operations for the parent company.
Still, the trend of acquiring a GCC advisory firm is not new.
GCC growth
Last July, Accenture Plc, which is the world's largest IT services company, acquired an undisclosed minority stake in ANSR, the country's biggest GCC consulting firm, for $170 million.
These investments also come at a time when larger peers including Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, Tech Mahindra Ltd, and LTIMindtree Ltd have been setting up independent GCC units internally since the past two years.
Also Read: Infosys acquires majority stake in Australian IT firm for $150 million
Currently, India has more than 1,760 GCCs, of which 875 are based in Bengaluru alone, while Hyderabad has about 355. The rest are located in cities such as Delhi-NCR, Pune, and Chennai.
Nasscom estimates that the number of GCCs in India will surge to 2,200 by March 2030, with a market size of $105 billion. This presents an opportunity to the boutique advisory firms sprouting up to open and run these GCCs.