How, Why, What is the impact, and Who is Next?
Global Mega Service Providers (Service Providers >$10 Billion Revenue) are investing and building their capabilities in engineering or larger EIIR (Engineering, IoT, Industry 4.0, and R&D) services.
These mega providers are building engineering capability via acquisitions. Some examples:
- Accenture: Industry X.0 with 10+ acquisitions in the last few years.
- Capgemini: Intelligent Industry with Altran acquisition
- DXC: Luxoft acquisition
- Deloitte: Hashedin acquisition
There are two main reasons
- Potential Market Size & Growth: The market size and current growth rate make engineering an attractive segment to be in. The global R&D spend is in the order of $1.5 Trillion, and outsourced R&D spend is about 5% of it only. Also, the current market for engineering services is growing faster than other service lines, such as IT and BPO. As growth in IT and BPO is slowing down, Mega Providers are looking for the next engine for growth, and engineering ticks all boxes.
- Missing Link in Digital: Engineering is also a missing link in enterprise transformation for both digital and physical industries. For the digital segment, it is digital or software product engineering, which is the backbone of all software platform development and digital plumbing. For the physical segment, it is Industry 4.0, which is driving transformation in manufacturing and asset-intensive industries. Not present in these sectors means inability to provide total solution and to give opening in your key customers to other competitors.
What is the impact?
The engineering service market is dominated by three categories of service providers mainly:
- European Service Providers (Likes of Alten, EDAG, AVL, Akka, EPAM),
- Indian Broad-based Service Providers (Likes of HCL, Wipro, Infosys, TCS, Cognizant, Tech M)
- Indian Pureplay Service Providers (Likes of LTTS, Cyient, QuEST, GlobalLogic, Persistent)
Now the fourth category of Global MNCs or Mega Providers is entering and growing its footprints. It will impact in four ways
- Market expansion. There is a huge gap between the current (5% of spend) market and the potential market. Mega providers will help in expanding the market, especially with their key customers.
- Larger deals will be more frequent. Deal sizes are small in engineering, but Mega Providers will not be happy with small deals, and they will push the envelope for large deals, which will help all in the market
- The scale will become a necessity. For competing with Mega Providers, the scale will be helpful. Earlier, engineering service was a niche market, and service providers could survive and even thrive by being a small niche player. Now scale will be required for investment in R&D, patents, solutions, emerging technology, marketing, geography reach. Many service providers have intensified their M&A activities, and if grapevines to be believed, there are many acquisitions in the pipeline.
- PE activity acceleration. One corollary of the growing market segment is the interest of Private Equity players. There were 10+ PE transactions in the last couple of years in the engineering service space. The next 3-4 years will be the consolidation phase, and PE will be active in making money in this engineering consolidation wave. Realistic valuation expectation in pandemic for some engineering service providers will also help.
Who is next?
In our research of top 100 service providers, we found that there are 20 service providers with revenues greater than 10 billion dollars. (Research Link). Out of these, some of the Global Mega Providers have already made a move in engineering, and they may intensify further while others may join the engineering party too.
Prediction: Mega providers will invest further in engineering. My bet is on IBM, CGI, PwC, EY, KPMG, Fujitsu, NTT DATA, NEC, and Atos to make some big moves in engineering.
The engineering market is too big to leave to engineering service providers only!