Wipro going the Accenture way

Bengaluru: Wipro's acquisition of UK-based consulting firm Capco is a bold bet to rev up its consulting revenues and the Bengaluru-headquartered IT firm seems to be following the growth strategy of Accenture, which draws the maximum revenue from consulting segment among global IT services players.

Experts opine that the success of this strategy, however, hinges on its execution. If implemented properly, Wipro will be the first domestic IT company to have an aggressive strategy in the consulting space. "This acquisition is a bold bet by Wipro and is futuristic in many ways. The company becomes the first Indian firm to have an aggressive strategy in consulting space. Typically, consulting deals are small in value, but these engagements lead to larger projects later. So, Capco acquisition is likely to support Wipro's growth prospects in the future," said Pareekh Jain, a technology outsourcing advisor & founder of Pareekh Consulting.

Last week, Wipro said it would acquire London-based global management and technology consultancy Capco for $1.5 billion in its bid to strengthen its presence in the Banking, Financial Services & Insurance (BFSI) vertical. This acquisition, which is the largest ever for the Ajim Premji-promoted firm, will give Wipro access to 30 new large BFSI clients. Capco will also add around $700 million of annual revenue to Wipro's top line. Industry watchers said that revenue contribution from consulting space has traditionally been low for Indian IT services providers. It usually hovers around 7-8 per cent for most of these players. In comparison, global IT firms such as Accenture and Capgemini have a large consulting practice. Accenture drew around 54 per cent of its revenues from consulting space for the fiscal year 2020 ended August 2020.

Analysts said though larger consulting revenue will add to Wipro's top line in coming years, its operating margin may be impacted.

"Usually, the net margin in consulting deals is less as compared to multi-year IT outsourcing deals because of the short-tenure of consulting engagements. So, it has to be seen how Wipro protects its margin or will follow the Accenture model on this aspect," said Jain.

Operating margins of Indian service providers are traditionally being higher than their global counterparts.

While the growth prospects for Wipro post this acquisition remain high, some analysts also raised red flags.

"Capco's revenue stagnancy is of concern as it can be a further drag on the already low growth of Wipro. Given Capco's onsite or consulting heavy nature, the acquisition should weigh on IT services' margins," Sudheer Guntupalli & Hardik Sangani, both analysts at ICICI Securities wrote in a research note. They also raised concerns over possible integration issues and future impairment charges becoming drags on the company's growth trajectory going ahead.

While the stock market didn't immediately cheer the new move of Wipro, some analysts said the acquisition can push the Bengaluru-headquartered firm out of its slow growth trajectory.

"Market was equally sceptical last time when HCL Technologies bought some IPs from IBM. But we can now say that the move has not failed. So, Wipro should get enough time to be judged about its latest acquisition," said a Mumbai-based analyst.