The recent news that MindTree Consulting is planning to acquire 32% stake in AztecSoft indicates that the Outsourced Product Development (OPD) market is finally entering the consolidation phase.
Consolidation – A Matter of Time
While the consolidation in Indian IT industry has been predicted for a long time now, this still is a significant development in OPD space. This consolidation will be driven not just for the economies of scale but mainly for the purpose of acquiring new skills/differentiation. I personally believe that the consolidation of IT Services market is still some time away. It will only be starting once these IT firms acquire complementary skills such as OPD. Once this market is rationalized, the caravan will move into the next level of IT Services consolidation.
Good for MindTree & Aztecsoft
The press release on Aztecsoft web site sums it up perfectly. Its easy to see that this is a very strategic move for both the companies. MindTree comes with a great reputation in IT Services & R&D Services. AztecSoft has good set of customers and is a known brand in OPD & Independent Testing Services. While Product Engineering is not new to MindTree, acquisition of Aztecsoft will give them the DNA of a pure-play OPD company – not to mention its customers. This alliance also gives power to MindTree to compete with the upper-tier IT Services companies which are slowly looking downwards at the OPD market.
What This Deal Means to Other Smaller Indian OPD companies
The OPD market is heavily fragmented and saturated. This acquisition definitely throws up a challenge to other small-medium OPD companies. These OPD players have been planning and trying to move on from one-time engineering deals to bigger and partnership-level deals. They will now have to compete with a company the scale of MindTree. With MindTree’s muscle, Aztecsoft will now reach the pole position in this competition and also be able to go after bigger software companies which as a smaller company it would not have been able to pursue.
The OPD companies such as Symphony Services, Persistent Systems, Aditi Technolgies, Sierra Atlantic etc, not only have to ramp up on the current partnerships but also have sharpen their focus in specific and emerging engineering areas. One potential gap in MindTree’s offering seems to be the apparent lack of delivery capability from some emerging geographies. This is an area that these companies need to aggressively build and sell while developing other geographies as well.
It will be a difficult and interesting battle ahead of them over the next few quarters. I expect more consolidation in the near future.
