Well stone the lodes… Infosys cranks up its SAP-ness with the acquisition of Lodestone

Cindy Carpenter is Research Vice President, HfS Research (click for bio)

So the providers are upping the ante with their acquisition push of late, with Accenture augmenting its regulatory capabilities in pharma with the pick up of Octagon, and IBM making a strong move into recruiting services with Kenexa.  Infosys now pipes in by focusing on the tech consulting side with the acquisition of global SAP consulting shop Lodestone.  HfS new Research Vice President, Cindy Carpenter joined this morning’s analyst call to investigate further…

Will Infosys Be Able to Get the Lodestone Horses on the Right Track?

Infosys’s acquisition of management consultancy and SAP integrator Lodestone Holdings lines up perfectly with their long-term strategy of moving to higher value services, but this acquisition is a risky way to grow these capabilities.  Management consulting firms are usually seen as poor acquisition targets, because the assets go home every night.  If they’re not happy, they can usually find plenty of opportunities elsewhere, and the value of what you’ve bought may decline very rapidly.  This goes double when the acquiring company is in another country from the acquiree.  (We need only look at Capgemini’s struggles with consulting acquisitions in the U.S. to underscore this point.)

Infosys understands the challenge of managing consultants well.  On the analyst call discussing the transaction, Infosys Consulting CEO, Steve Pratt, commented that “good consultants are like thoroughbred race horses” – they can be temperamental, but get them excited and point them in the right direction, and they’ll do great things.  He also noted that they need a “collaborative environment” and a lot of freedom.  This is a very different culture from the culture of most Indian IT outsourcing  companies, which tend to be structured and hierarchical, with an emphasis on following methodology, process control and predictability.  So how has Infosys grown its integrated consulting and technology business?  Very carefully. From its inception in 2004 until just this past year, Infosys Consulting has been a separate company, incubated and nurtured along different rules, operating models and margins.  Infosys Consulting is now up to 30,000 employees and part of the parent company, but it still has a distinct footprint (mostly United States) and delivery model (about 30% onsite/70% offshore) compared to the legacy Infosys technology business.

The key to success in this acquisition will be bringing the same kind of understanding of different organizational cultures and models to the integration of Lodestone into the Infosys business.  Lodestone’s 750 consultants operate from 17 countries today, but India is not one of them.  The company has 200 clients, which means either that their consulting engagements are very small on average, or that they are claiming past and active clients.  Contrast this with Infosys’ 711 clients to about 150,000 employees, averaging about 210 employees per client, mostly for ongoing, multi-year engagements.

If Infosys wants to reap downstream revenues from Lodestone’s consulting engagements, it will have to teach Lodestone employees not only about Infosys’ services, but also introduce them to their global delivery model and how to work effectively with their new colleagues in India. Ronnie Hafner, Lodestone’s CEO, has no concern about his employee’s inexperience in this model, but Infosys does plan to groom Lodestone consultants to cross-sell the Infosys offerings and provide training in the Infosys methodology.  Remember that they are thoroughbred racehorses – mostly German and Swiss – and give them plenty of room to run.

Key Takeways:

On the positive side, this acquisition fits Infosys’ strategic goals beautifully:

• It continues to grow Infosys’ management consulting capabilities and ability to deliver higher services, moving from commodity software maintenance to  integrated business platforms.
• It adds onsite management consulting teams in Europe (and adds a few consultants in Asia-Pacific and Latin America).
• It adds domain knowledge and experience in the verticals of life sciences, auto and manufacturing, where Infosys has a relatively small footprint.
• It strengthens Infosys Consulting’s SAP’s practice, bringing it up to 10,000 employees and $1 billion in revenues.

Points for caution:

• Infosys will have to bring some of its best consulting and business transformation skills to its own acquisition, if it wants to reap the synergistic value for its global services strategy.
• Lodestone’s consultants are widely dispersed, increasing the challenges of integration and retention.
• Take the claim that Infosys is acquiring 200 new clients with a grain of salt.  Infosys will have an opportunity to introduce itself to these companies, but they may be past clients, too small, or uninterested in India-based services.

Recommendations for Infosys:

Acknowledge that you are bringing together three very different cultures in this acquisition: the EU management consultant culture of Lodestone, the global systems integrator culture of Infosys Consulting, and the India-based technology firm of the legacy Infosys business.  You’ve just paid about $450,000 per consultant – now is not the time to waste that recruiting cost.  Consider:

• Making it a goal to get 1/3 to 1/2 of all Lodestone clients to one of your India delivery centers in the first year, to meet their new colleagues and learn about the Infosys global delivery model and capabilities.
• Assigning a buddy from Infosys Consulting to each consultant in Lodestone, whose job it is to provide coaching about their new organization and learn about Lodestone’s capabilities
• Bringing together delivery managers from Infosys Consulting, Lodestone and Infosys India to build out new, integrated offerings by vertical.  Support new relationships among counterparts with face-to-face working sessions in different geographies.

Cindy Carpenter (pictured above) is Research Vice President at HfS.  You can access her bio accessed here.

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