Today in Tech: Lodestone Acquisition - TCS, Infosys & Cognizant; Labor Unions in IT firms; Shibulal on strategy

NS Ramnath
Published: 23, Jul 2012

I have been with Forbes India since August 2008. I like writing about ideas, events and people at the intersection of business, society and technology. Prior, I was with Economic Times. I am based in Bangalore. Email: ns.ramnath@gmail.com

What Lodestone acquisition would mean to top IT companies Financial Express leads with a story on TCS, Infosys and Cognizant vying to acquire Lodestone Management Consultants. Lodestone is based in Zurich. It's an young firm,  founded in 2005 by a former McKinsey consultant Ronald Hafner. It has revenues of $209 million and employs about 800 people. All the companies in question have declined to comment.

It’s easy to see why they are interested in Lodestone. All the three hope to grow faster than the industry. (TCS and Cognizant are doing that, and Infosys expects to do so once its new strategy starts yielding results). Lodestone acquisition will give some boost to the revenue. It might not be that apparent if you look just at Lodestone's size. TCS’s quarterly revenue is 13 times Lodestone’s annual revenue. For Infosys and Cognizant, it's 8 times. But, if you look at incremental revenues, you will get a better picture. In the first three months of the year, incremental revenues of TCS was 62 million. It was (-35 million) for Infosys and 48 million for Cognizant. Revenue-wise, TCS is far ahead of Infosys. Infosys and Cognizant are neck to neck. Lodestone will help the winner gain some speed and widen the gap. Lodestone itself has shown good growth since its founding (see chart, from its fact sheet).

FE notes that Lodestone's margins are lower than that of potential acquirers. Yet, given Lodestone’s focus area - a concentration in consulting - that wouldn’t be of much concern to IT firms. A senior executive from the consulting division of an IT firm told me that the companies looked at his division also as a way to gain entry into a client firm, and get IT services businesses eventually. The consulting revenues might be small, but the ripple effect is significant. Lodestone prides itself as a company with ‘real consultants’, has offices beyond Europe – in US, Brazil, Australia and Asia. So this should help.

Yet, despite their experience in making acquisitions and the fact that Lodestone - with 800 people - is small and there are several areas of intersection, integration will not be easy  primarily for the cultural reasons. Retention of talent will be tough. In an earlier report, FE said it would be a $ 300 million deal. I have no idea if it’s correct information or if the valuation is reasonable ( even though 1.5 time the revenue doesn't sound off the chart). But, the fact that there are many contenders for the asset, it will be interesting to see what happens to the cost.

 

Will labor unions work in IT/ITES companies?
Economic Times quotes Mohandas Pai, till last year a key member of Infosys leadership team, on Karnataka government on bringing IT companies under the purview of the Industrial Employment (Standing Orders) Act, 1946: “This is a retrograde step. This law belongs to the 19th century and does not take into account the ground realities of a globalised world. Originally, the exemption was secured to stop harassment from the labour department and the inspector raj."

The story goes on to say: "these so-called "standing orders" must be approved by labour unions or staff representatives. This, companies fear, could be an invitation of unionisation."

Is it likely to happen?

In December 2008, when newspapers were full of stories on slowdown, cost cutting, and in some cases even, lay offs in IT/BPO firms, I met Karthik Shekar who is running an organization called Unites - Union of Information Technology Enabled Services. A former IBMer and son of an IAS officer, Shekhar was trying hard to form unions in IT/BPO sector.

He was finding it very difficult. Over 15,000 people had filled up its application forms and made some monetary contributions to its coffers since its founding. But only about 1100 were regularly paying the fee of Rs 50 a month.

He told me he tried various methods to bring more people into the fold of unions. But, reaching out to employees was difficult. Some years ago, on January 26, the republic day, he organized a flag hoisting ceremony in front of HSBC's Hyderabad facility. The aim was to attract employees and may be persuade them to join Unites. It had limited success, and all he is left with is a couple of press clippings. "The management even asked the employees to use the back gate, instead of the front," he said.

Even in cases where a BPO's parent company had a tie up UNITES' parent organisation in Europe, Shekar made little progress in convincing the management to consider local unions. "They went into technicalities of why it doesn't follow", he said.

Where management seemed a little more sympathetic – and here lies its basic problem – it couldn't gather enough employees to attain a critical size. "HCL seemed to be quite okay with Unions, but it wanted us to represent at least 40% of its employees. If I get about 10%, may be we will have some say. But that didn't happen," he said.

In smaller companies, where reaching a certain percentage of total employees should be easy, it made has some headway. But even there workers prefer to negotiate the terms and conditions of employment by themselves.

Then he came up with an idea to tap the unhappy employees across the companies. These days it organizes campaigns for workplace safety, seeks out to people who have problems with their employers – counsel them, and in some cases go to courts on their behalf.

When I met him last, there were eight cases going on in Bangalore argued by its volunteer lawyers. (Sometimes, it gets tip off from other UNI bodies representing workers in other sectors. Security workers for example, get to know what's happening in different companies, he said). Some of the serious issues are about sexual harassment.

But, there are also a number of complaints about unfair contracts. "But, often, they come after they have signed the contracts, and there is nothing much we can do about it. So, we tell them, come to us before you sign the contract," he said.

But, these initiatives did nothing to increase its membership. "They only want to come to us and crib. When it comes to signing the dotted lines, they say no," he said.

Shibulal on Infosys
The Hindu has an interview with SD Shibulal, Infosys CEO. Here’s a bit i found interesting. The question was on cash.

It is important you look at our strategy in these matters. We would like to raise the proportion of products and platforms, which is presently 6 per cent of revenues, to a third. Organically growing from 6 per cent to a third of revenues is not easy. So there are some very strategic areas where we can look at inorganic growth, which we have articulated. Products and platforms, C&SI in Europe and life sciences are some targets. We have expanded our search area much wider in the last 6-9 months and we are at it.

Read the full interview here.

 

Also of interest

  • Russian Mogul Wants to Upload Your Brains Into Immortality: Popular Science
  • Smartphone overtakes PC as primary internet device in China: Engadget
  • Lenovo CEO spreads the wealth, distributes his $3 million bonus to lower level employees: Engadget
  • Google's Sparrow acquisition: bringing 'beauty' to Gmail: Verge
  • Social media throws up new challenge to the Games: Reuters
  • AP plans to set up 6 IT hardware clusters with Rs 300-cr outlay: Business Line
  • Without content, a web presence is lifeless: Rajdeep Endow: Business Standard
  • Startup Saves Memories for Loved Ones: Iceland Review

 

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