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An overview of IT Consulting (Part II) - Views on News from Equitymaster
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An overview of IT Consulting (Part II)
Sep 12, 2007

In our last article, we focused on Infosys Consulting. In this article, we shall delve upon Satyamís consulting division. The global market size of IT consulting is around US$ 50 bn. IT consulting as a separate business is relatively new to Indian IT companies. So one could find that most of the Tier I IT companies have a very limited history in this arena. This is perhaps one of the major lacunae in the business models of Indian IT companies. At this juncture, they not only need to compete with global MNCís to ensure that they also get a big share in the large IT outsourcing deals happening around the world but also focus extensively on consulting aspect to replicate the models of global MNCís. This, we believe is necessary since the nature of business of Indian IT companies is such that global players could find it relatively easy to replicate business model of Indian IT companies and Indian companies could face challenges in replicating business models of global MNCís. However, we will now focus on Satyam Consulting division (Citisoft Plc). In line with its Indian peers, Satyam was also focused on the application development and maintenance (ADM) services till FY05. Its major shift came in FY06 when it acquired Citisoft Plc in May 2005 to focus on business and systems consulting in UK and USA. Satyam acquired 75% of the shareholding in Citisoft for an initial cash consideration of Rs. 622.5 m. Prior to acquiring Citisoft, Satyam started providing consulting services in FY04 but revenues from consulting was very little (less than 0.5%) and was clubbed with Enterprise Business Solution revenues.

In the first year of acquisition in FY06, Citisoft recorded revenues of US$ 13.2 m and net loss of US$ 0.4 m. In FY07, Satyam made an additional investment of Rs 275 m to acquire the remaining 25% stake in Citisoft. In FY07, Citisoft recorded revenues of US$ 11 m (decline of 17% YoY) and net loss of US$ 0.3 m.

Whatís in store?
Satyam is one company, which has managed to move up the value chain very fast. This is evident from the growing contribution of high-end services to the total revenues, which now almost stands at 50:50 ratio. The company has bagged many large deals over the last 12 months. As regards volume growth and growth in billing rates, Satyam could easily outperform its peers as it has always worked at a good discount of 15% to 17% in billing rates to its peer Infosys. So in a way, Satyam is better placed to hike its rates. As regards the consulting segment of Satyam, it is still in a growing stage and it could easily take another 4 to 5 years for the company to bring its consulting revenues in line with that of Infosys Consulting revenues of 3.6%. Currently, the consulting revenue stands little over 1% of Satyamís consolidated revenues. Another key challenge for Satyam Consulting will be to find and retain quality experience professionals over a longer period of time and create an intellectual property to grow and compete faster.

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