Following my blog post yesterday about comments made by T-Systems CEO Reinhard Clemens, about the need for European service providers to merge to compete, outsourcing industry veteran Jean-Louis Bravard gives his reaction to the comment.
Jean-Louis is a director at consultancy Burnt-Oak Partners. He previously held a global executive role at EDS.
"I think Reinhard Clemens is absolutely right. Outsourcing is not unique in facing a world in which size matters. However there are many ways in which to grow and growth by acquisition is extremely risky. There is empirical evidence that about 50% of M&A does not produce the expected value which is about the same "success rate" as outsourcing! Imagine adding M&A unto outsourcing.
To push the point even further and looking back at the past few years we do not see much positive in acquisitions, especially when outsourcing firms decided to acquire consulting firms.
I am not that impressed by the argument on financing as when all is said and done neither IBM nor HP are banks and there is a limit to their might and risk appetite. Furthermore there are specialists [consultants] who can structure and place outsourcing debt. In other words funding internally may be an issue but it is not and has never been a show stopper.
Now let's think about this hypothetical case of a large European firm buying another one. Obviously there is a lot of synergy at the headquarters and beyond that the first level of true value will be regional. Today no European firm is probably large enough in all 27 European countries to take on all IT services to a Top50 European firm while an IBM or an HP can show presence in each country... and beyond.
Our first point is that reach is key.
Our second point is cultural. How probable is it that the integration between large local players will work. We are doubtful although we see a much higher probability of a Tier 1 from country A buying and integration a tier 2 from country B. The case of Logica in France or Atos in Holland would seem to show that such a play has merit, but highly depend on the chosen business model and especially the availability of leadership.
Our last point is the market. Right now some of the third party advisors are pushing for small and short deals and while this is probably a bad idea for clients it reduces the probability of mega-deals at European level thus reducing the attractiveness of aggressive M&A.
So in conclusion and while we believe consolidation in European outsourcing will come, we do not see it as rapid as some as there have been enough opportunities for such transactions lately. A wild card could be one or more large Indian (and later Chinese) players buying their way in to accelerate their growth and attack IBM, HP and some Tier-2's in their back garden.
Last but not least, when acquisitions are considered we do recommend defining & executing a clear communication plan to the impacted clients as well, explaining the value which will hopefully accrue to them if the acquirer does not overpay!"