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Decoding the growth avenue offered by Customer of Customers play for engineering service providers

We are in the midst of earnings season of Indian IT & Engineering Services companies and the results gone by portray likelihood of another challenging phase along the way. However due credit to the Indian IT landscape which has repeatedly emerged victorious whenever it has encountered any roadblock and the ongoing scenario too looks for the interim period with the progressive players already working proactively to tap new avenues of growth.

One such avenue that offers long-term growth avenue for engineering service providers with enhanced margin proposition is that of targeting the customer of customers domain. By no way it refers to disrupting the customer’s play-game however it mainly involves technology solution providers adopting forward integration strategies to establish a direct connect with the customer of customers. For example engineering service providers in addition to working for its usual customers railway, aerospace, electric or hi-tech OEMs can also work directly with customers of customers such as railway stations, airports, utilities, governments, among others.

Before we delve into what options such players have while exploring forward integration strategies, let us decode why it makes sense in present-day times to invest in such measures.

The combined business potential arising out of key domains, namely telecom, cyber security, 5G, sustainability and ESG is estimated to rise from USD 560 billion presently to USD  800 billion by 2025. This is mainly because of foreseen higher spend on digital engineering-led innovation as enterprises and consumer brands gasp to be relevant to the needs of new normal world scheme of things. Compare this to present day situation where engineering service providers are largely restricted to work with OEMs with the latter having a close connect with the customer.

Having decoded the ‘why’ bit, let us now deep dive into the ‘how’ part.

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Engineering service providers can embrace this forward integration by building capabilities that equip them to do so. However in advent of shortage of talent, this approach may end up consuming more than desired time resources. It is therefore logical to pursue acquisition-based possibilities that offer not only capability enhancement but also expand the geographical presence. This also scores well on enabling faster GTM capability for customers.

With engineering service providers finding conversion of new client logos a bit daunting in recent times, the customer of customers avenue offers them a chance to mine more from existing accounts also and thereby keep intact the growth related considerations.

In recent days, the engineering services landscape has witnessed two of such developments. The first involved Chrys Capital acquiring Xoriant while pure play engineering services firm, L&T Technology Services acquired Smart World & Communications business (SWC) of its parent company Larsen & Toubro (L&T).

While the first development is mainly from the point of view enriching the investment portfolio, the latter provides a sense of things to expect while pursuing the customer of customers opportunity. Combined with LTTS’ ER&D capabilities and global presence, SWC’s integration will enable the combined force to tap higher number of opportunities in the market.

Also taking cues from the earlier commentary by Rajesh Gopinath of TCS wherein he reasoned that on some deals it make sense to enter on competitive pricing and then gradually scale it up with revenue productivity to stable margin band over a long-term horizon, the LTTS-SWC integration is likely to empower LTTS score higher on margin front.

The Indian engineering services landscape has been on an ever-evolving trajectory all these years. What started with outsourcing with OEMs then  partnerships with ISVs, is all set to migrate to the next frontier i.e. the customer of customers opportunity. With tendency of the industry to eventually follow suit and crowd, any such progressive and futuristic, early mover advantage by engineering service providers may end up being the much-required competitive advantage.


Decoding the growth avenue offered by customer of customers play for engineering service providers

This blog first published in Times of India on Feb 16, 2023.

Pareekh Jain

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Gridlove Pareekh Jain Founder of Pareekh Consulting & EIIRTrends