Fine-tuning the global sourcing model: Cognizant to acquire six companies from C1 Group in Germany

OVUM VIEW

Summary

Cognizant has announced its intention to acquire six companies from C1 Group, one of the largest privately owned system integrators in Germany. By doing so, the vendor is following the strategy of its Indian peers in looking for acquisition targets in Continental Europe. Infosys’s acquisition of Swiss consultancy Lodestone is the most recent reference point for this approach. However, Cognizant’s strategy for Germany is based on different assumptions than those of its Indian peers. The cornerstone of Cognizant’s thinking is that the global sourcing model needs to be adapted to the specific market conditions in countries such as Germany and France.

Cognizant will be able to adapt to the market conditions by leveraging C1’s regional focus and leaving the acquired companies in their current setup. They will, however, be enhanced by their access to Cognizant’s systems, offerings, and resources. The vertical focus of C1 Group – manufacturing and logistics, energy and utilities, and financial services – suggests a good alignment with Cognizant, and should help the vendor to operate the diverse acquired business units, which have strong relationships with large German corporations. Crucially, C1 Group will give Cognizant access to the SME market, which would provide another differentiator from its peer group. Cognizant’s Indian peer group will monitor the move closely due to them having achieved only modest traction in Germany and France to date.

Company cultures – not offshoring – is the inhibitor for offshore players in Continental Europe

Despite suggestions from India-based players that Germany and France – unlike the Nordics or Benelux – are not open to global sourcing, in Ovum’s view the main inhibitors are more related to business cultures and organizational issues. Global sourcing is largely an accepted reality by organizations in Germany, with all the leading suppliers adopting this model. The differences come with the front office, project management, the ability to comply with local requirements, and sensitivity in dealing with regional differences. Cognizant is trying to adapt its approach accordingly, and so intends to leave C1 Group largely in their current setup but with access to Cognizant’s platforms and resources. While this approach is sound, the obvious challenge will be managing six companies within the Cognizant eco-system. Cognizant points to the entrepreneurial spirit of these companies, and intends to preserve this by keeping them largely independent. Cognizant’s strong emphasis on localization ties in with the how the company differentiates itself from its Indian competitors by emphasizing that it is headquartered in the US with three quarters of its global work in India. This is reflected by 90.2% of the vendor’s revenues coming from North America and the UK in 3Q12, reiterating the need to expand in Continental Europe.

Cognizant’s strategy could become a blueprint, but few companies are comparable to C1 Group

Most acquisition targets that have been touted for Indian players in Germany are captives such as Lufthansa Systems or the transfer of assets as part of an outsourcing deal. In contrast to Lufthansa Systems and Lodestone, C1 Group was not up for sale, and so the expectation that the managing directors of the acquired companies will leave once the lock-in period expires is not certain. Cognizant believes that these managing directors are crucial interfaces that it will need in order to preserve the entrepreneurial spirit of C1 Group.

The approximately 500 employees that will transfer from C1 Group will more than double Cognizant’s footprint in Germany. This indicates the level of change management that will be required to make the acquisition work. In addition, Cognizant and its C1 Group acquisitions are expanding their relationship with the remaining companies in C1 Group that were not acquired. Thus Cognizant could have access to roughly 700 more employees. The main difference between Infosys’s Lodestone acquisition and Cognizant’s C1 Group acquisition is that the latter is concentrated on Germany and focused more on development and implementation rather than on high-end strategy consulting. Cognizant views this as beneficial because much of the consulting business is tied to individual relationships that cannot be ring-fenced. While no financial details were disclosed, C1 Group is likely to have been a significantly cheaper option than Lodestone. Thus in Ovum’s view, if the acquisition is successful, it could become a blueprint for the peer group by better emphasizing localization, but then again, not many companies have a similar setup to C1 Group.

Cognizant’s exposure to partnership with T-Systems will be reduced

The strategic partnership between Cognizant and T-Systems has always been a marriage of convenience. T-Systems needed access to scalable offshore resources, while Cognizant needed access to large German accounts. Over time this partnership has matured, with both sides trying to be pragmatic and accommodating in order to achieve their original goals. However, suggestions that T-Systems was looking for a second strategic offshore partner – regardless of their merit – were a reminder not to place all eggs into one basket.

In Cognizant’s view, the acquisition of C1 Group will complement rather than supplant the partnership with T-Systems. T-Systems’s more modest penetration into financial services and life sciences points to possible areas of collaboration, but following the acquisition, Cognizant will be able to reduce its exposure to T-Systems and have more clout in negotiations, which might be required as T-Systems has few key executives left that set up the original partnership.

In Ovum’s view, Cognizant’s approach of blending local with nearshore and offshore resources seems to reflect its cultural background. It combines its offshore heritage with a strong immersion in mature markets, and this appears to be a differentiator in a market where differentiation is so difficult to come by.

APPENDIX

Author

Thomas Reuner, Principal Analyst, IT Services

thomas.reuner@ovum.com

Further reading

Infosys strengthens consulting expertise through Lodestone acquisition, IT019-003102 (September 2012)

Nasscom rallies to rebrand BPO: just call me BPM, IT019-003096 (September 2012)

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