Imagine you are building a house. Your architect drafts a plan that you like. She then recommends a mason. It is likely that you will hire the mason. You may even offer a turnkey project to your architect, including masonry. Now imagine the reverse: your mason recommends an architect. It is less likely that you will engage the architect. It is even less likely that you will offer a turnkey project, including the architecture, to the mason.
The architect’s fees are typically 2-3% of the project cost, while masonry may be as high as 50%. Yet, the architect exercises a disproportionate influence on the downstream work.
This is how positioning impacts influence in the services value chain. Management consulting firms, such as McKinsey and Bain, exercise significant influence at the top of the value chain. IT services firms, such as Tata Consultancy Services or L&T Infotech, get larger implementation projects, but their influence is limited. Management consulting firms typically drive decisions, while IT firms are the executors of these decisions.
Given this context, should Indian IT firms climb up the value chain by building consulting capabilities? Our view is yes, for three reasons: First, to capture the premium that consulting-led firms command. Accenture uses its consulting capabilities as the “tip of the spear” to enter clients at the top. This enables it to influence downstream decisions and accords it a premium position. With most clients, Accenture commands higher billing rates than its India-bred competitors.
Second, as the international face of the Indian economy with a large global client base, IT services firms must lead India’s transformation from cost-leadership to thought-leadership. Not driving this change will consign us to a perpetual low-cost positioning and impact our soft power in the global economy.
Most importantly, the distinction between business and technology is blurring. Today, for most clients, business and digital strategies are integrated and not having business consulting skills will impact the ability of Indian IT firms to remain relevant.
Global management consulting firms have already recognized this integration of business and technology and are building deep skills in digital, artificial intelligence (AI)/machine learning (ML), and advanced analytics.
QuantumBlack is part of McKinsey Digital and provides data-driven analytical solutions and advisory. BCG Gamma uses data analytics and AI/ML to develop predictive models for healthcare, banking, financial services and insurance, telecom and retail clients. Bain’s Vector toolkit compiles offerings across digital and analytics advisory services. In addition, these firms have venture arms that identify and invest in high-potential startups in similar complementary spaces.
Premium Positioning
If Indian IT firms allow this “downstream” expansion of global management consulting firms, they will cede the premium positioning to them in the coming digital decades, much like they ceded it to the likes of Accenture in the 2000s.
Our analysis points to three strategies Indian IT firms can adopt to address this challenge: First, compete, and be seen to compete, directly with the digital ventures of management consulting firms. They must directly challenge the likes of QuantumBlack and BCG Gamma. It is easier for Indian IT firms to compete in the digital space than traditional management consulting.
Second, build aggressive venture arms to pursue and acquire companies that may enable this evolution up the value chain. While a few Indian IT firms have such venture arms, these must be re-focused to targets that drive this premium re-positioning. In fact, Indian IT firms should compete directly with global management consulting firms for such acquisitions.
Third, Indian IT firms should establish consulting-led beachheads in emerging economies, where the consulting and IT landscapes are incipient. McKinsey and Accenture entered India as soon as it liberalized, at a time few companies could afford their services. The early entry and investments have enabled them to establish dominant positions over their India-bred competitors. Similarly, there is an opportunity for Indian IT firms to establish themselves as consulting-led companies in select emerging markets in Asia and Africa. Once these markets mature, the Indian IT firms will be at pole position to benefit from the growth.
Indian IT firms need to act right now to address the challenge from global consulting firms, else India’s low-cost positioning will perpetuate, impacting its position in the global economy.
Abhisek Mukherjee is co-founder and director, Auctus Advisors.
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