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Infosys First Acquisition Under New CEO: In Support of "Renew the Core" Part of Strategy

Infosys is to acquire Panaya, a vendor of automation technology for enterprise software management, for $200m in cash. Panaya is a privately held company backed by hi-tech VC firms including Benchmark Capital, HPV and Battery. The transaction is expected to close before March 31.

Founded in 2005, and formerly known as ChangeSoft Technologies, Panaya is based in Ra’anana, Israel and has ~150 employees. Its flagship CloudQuality suite automates tasks in making changes to enterprise software (currently SAP, Oracle and Salesforce). Sold in a SaaS mode, CloudQuality offers automation for change impact simulation, code remediation, collaborative test management, and test execution and application lifecycle management. Clients that have used CloudQuality describe much faster projects with significantly fewer code corrections and less manual unit testing. In addition, test scripts aim to self-adapt to maintain their currency.

This is Infosys’ second largest acquisition since its September 2012 purchase of Lodestone Consulting (for $219m and earn outs of up to $112m - in this case, Infosys is paying 6x revenue for Panaya, with no earn outs) And of course it is the first since the arrival of its new CEO and that has his mark on it. So it is significant.

Infosys has been looking for various ways to reduce the cost to serve in its BITS service lines for some time, in fact several years before the arrival of Dr. Sikka. What we see here is the company making a significant investment in this pursuit. This move is not unexpected. Since the announcement of his appointment, Sikka has talked about innovation, artificial intelligence and automation, and implied that some of this would come from inorganic growth.

Being part of Infosys means additional resources to deploy to accelerate the pace of product development of CloudQuality (with tight QA before releases), so Infosys can apply the tool to more software application areas beyond SAP/Oracle development and maintenance activity.

Sikka declared today that using Panaya will free Infosys from "the drudgery of many repetitive tasks” and “help amplify the potential of our people”. Certainly, using the tool will make employees more productive. But “amplifying potential” is about doing different things, not just being more productive – and this requires up-skilling. And here Infosys is placing bets in Design Thinking, inter alia: Sikka and COO Pravin Rao have articulated on numerous occasions their awareness of the importance of re- and up-skilling the labor force.

Automation of repetitive tasks is not replacing the benefits of labor arbitrage from offshoring (as some commentators have said) but it is certainly enhancing some of the benefits and replacing some of the elements of labor arbitrage. Some firms are developing their own IP (the path taken by TCS and Cognizant to date, for example), others are forming partnerships with a range of automation tool vendors (the path taken by Accenture and Genpact, for example).  Infosys is the first SI to have made the decision to buy and build. Applying CloudQuality tools will make some of its employees more productive - and presumably the ensuing savings will be shared with clients. So, at least in the short to mid-term, this will benefit margins in services such as enterprise solutions and application maintenance and then service lines such as testing services. But in itself, deploying the tool across parts of the portfolio does not lead to revenue growth: that will depend on the success of client facing teams to bring in additional business. And ultimately, automation is about commoditization.

Panaya currently derives ~12% (or ~$4m) of its revenues from SIs/resellers. Somewhat surprisingly, Infosys does not intend to stop this: if it intends to position CloudQuality as a differentiator, why let anyone else use the tool, be it a competitor or a client? And will other major SIs wish to use a tool developed by one of their major competitors? Probably not.

This acquisition supports Infosys’ execution of the “Renew the Core” part of its strategy (to enhance the competitiveness and productivity of current service lines). Infosys recently increased the size of its VC fund from $100m to $500m. Will the next acquisition support the “New” part of its strategy – perhaps around Digital?

Sikka seems reluctant to invest in acquisitions that would expand Infosys' presence in a target region (as TCS did with Alti in France, for example) or a vertical (as Accenture is doing with Agilex, for example). These enhance client-facing capabilities - and they are conventional routes to expansion for a services company. And Infosys is a services, not a software, company.

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See here (Renew the core business, innovate into new businesses) and here (Infosys: 100 Days In) for other recent blogs on Infosys' strategy.

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