Does It Make Sense for ER&D Vendors to also Be Present in IT Services?
Many IT services vendors operate in the ER&D Space
Does it make sense for ER&D vendors to also be a presence in IT services?
There are quite a number of IT services vendors active in ER&D: evidently, all the tier-one Indian vendors, with the probable exception of Cognizant (apart from IoT); increasingly, Accenture, and Capgemini. And then, each time, I have looked at the service portfolio of an IT service vendor, there is always some form of ER&D, be it embedded systems, PLM application services, or network engineering. This does not come as a surprise after all software is pervasive across physical products.
Altran and Alten operate in IT Services but consider them as non-core
The opposite is exact: most of the major ER&D service vendors also provide some form of IT services, Altran, for instance, has a portfolio of application services, and also of network engineering, in its French operations. And so does Alten. The two companies have a different perspective: Altran sees this IT services portfolio as a legacy of the past, while Alten considers its financial service, public sector, and business services that purchase mostly IT services as a key for balancing its client base, even if IT services are non-core.
And then, some vendors have a dual IT service and ER&D service background. Belcan, SII, Ausy, and Assystem Technologies come to mind. Belcan has a history in engineer staffing and has recently diversified into the US federal market, taking both an IT services and ER&D approach. Randstad acquired Ausy in 2016 by Randstad to increase its margin, and diversify into more complex projects. SII in the past year has expanded in the BFSI by buying a French consultancy. Assystem Technologies was an ER&D pure-play until it acquired in Q1 2018 one of the best software testing/quality assurance firms SQS in Germany.
Does this mean that vendors active in both IT and ER&D services are mainly staffing vendors?
It would be tempting to say so, but the reality is more complicated. For instance, with its 6.6% EBIT margin in H1 FY18, SII has an EBIT margin that ranges between that of staffing/interim firms and IT services/ER&D vendors. Looking at the positioning of SII, it is active in IT services, in development services, taking a new tech (Java, .NET) and agile approach, and target service center-based contracts.
The case of SQS and Assystem Technologies is a different story. Under its CEO, SQS has accelerated its transformation and developing into program management, and digital and agile/DevOps testing. The synergies between SQS and ER&D services are limited from a portfolio, but might be more significant from a geography perspective: SQS brings an international presence to Assystem Technologies the company did not have.
Bottom line: ER&D vendors would be better off sticking to their core business
Given the challenges that exist in IT services, I prefer ER&D pure-plays, rather than firms that operate in both sectors.
IT service continues to be a process and industrial industry, which increasingly has a barrier to entry regarding service portfolio management, investment in proprietary IP, and industrialization/automation. It is not clear how ER&D vendors will be able to compete with firms like Accenture and TCS, i.e., firms that are large, growing by ~10% annually, and that are highly profitable.
ER&D vendors have enough on their plate in their service portfolio transition to IoT, analytics, and overall digital offerings. With IoT bringing competition from IT services and also from cloud vendors, and telecom service providers, competition is stronger than ever. So, in short, it is okay to be a niche vendor in IT services, but the core ER&D currently requires investment. Better say focused!