We've been talking a lot about consolidation in the outsourcing industry and when/how/if it will happen. We can debate for hours the strategic benefits of service providers of adding niche competences, industry specialization, process acumen and global scale, and whether they should merge, acquire captives, or grow organically through client acquisition to achieve this. However, the financial crisis is creating a compelling event to accelerate M&A between service providers.
The amount of consolidation we're seeing in the financial sector, which is likely to have knock-on effects into other industries, will drive new client needs for global sourcing models. Many clients are worried about making large initial capital investments in outsourcing engagements – especially ones which have complex transition and transformational needs, hence those service providers which can help streamline these costs over the course of a contract will be successful. Complexity, disruption and increased globalization drive change, and outsourcing is one vehicle that can help many companies reach a global support infrastructure quickly. Hence, those service providers with the global scale, competency and financial resources to deliver this quickly will be the winners in this market.
While this industry has ramped-up beyond the wildest expectations over the last 5 years,
the healthy demand for outsourced services has held back a lot of M&A between larger providers, for the simple fact that there has been enough business to go round to enable many service providers to remain independent. The recent haggling over Axon Global by both HCL and Infosys is a signal of the increased stakes for dominance and scale in this market, as the top tier look for larger acquisitions to scale-up even quicker, and valuations drop to more realistic levels.