If there’s ever a book that jolts me out of complacency and forces brutal self-reflection, it is Marshall Goldsmith’s “What Got You Here Won’t Get You There”. It is also a book that lets the word “change” take center stage. Nowhere is change more thrilling, fascinating and lightning fast than in the technology space. Last decade has seen unprecedented technology changes largely attributed to growing Internet affordability, adoption of smartphones, adoption of social media & Cloud, and innovative payment methods. I am fascinated to note that there are 2.6 B smartphone on the planet (every 3rd person has one), there are 1.55 B active Facebook users (every 5th person has one), Google processes more than 24 Petabytes of data per day and there are 13 B connected devices. All this has led to a paradigm shift in the way Business and Consumers consume technologies and the way technology companies provide technology. It has also led to the emergence of new markets, new commercial models and new delivery models that are threatening traditional business like never before.
However I was reflecting in the context of Indian small & mid-size IT Services companies (Revenue of $ 50 M to $ 1 B). The larger question playing in my mind was–
- Are they acknowledging the VUCA (volatility, uncertainty, complexity & ambiguity) in the market & technology conditions and its impact on them?
- Are they changing themselves to secure their existing turf and win new business?
- Is the rate & quantum of change good enough?
The above questions also apply to the larger IT services companies, however they get compounded for small and mid-size IT services company due to their scale and limited investment appetite. It is apparent that mid-size IT Services companies have to transform from a Linear Business (FTE based) to a Non Linear Business (IP, Products & Solutions based) to survive and thrive in the new digital world.
BARRIERS
Difficulty in moving from “FTE” paradigm to “IP” paradigm
Most mid-tier IT services companies shot to fame during Y2K and early outsourcing days by exploiting labor arbitrage. They had the first mover advantage and back then there were hardly any competition, as most MNCs did not have a delivery center in India. This made them risk averse and they stuck to “tried and tested” approach and preferred doing more of it. They mainly pursue FTE based deals in AMS, Professional Services, Testing and RIMS. Leaders and Managers spend significant effort in navigating through complex disjointed manual operational systems, following heavy bureaucratic processes, creating tons of reports and battling hiring & retention. All this leads to operational fatigue and leaves them with very little bandwidth and motivation to focus on creative stuff. The first barrier for them to transform is to break free from the past and move from a FTE based paradigm to an IP based paradigm.
Product & Solutions are more than just Services++
Few year ago during my stint with a mid-size IT services company, we worked with a top consulting firm and identified a new addressable market of $ 30 B in document automation. To capture a significant chunk of share of wallet we had to build Industry Solutions to automate manual intensive business processes. It would take a year to build the same, post that, the plan was to upsell this to an existing captive customer base. Everyone was extremely excited and upbeat about the business prospect. However when it came to investing the first million dollars, the company developed cold feet, they wanted to see a confirmed order before committing. This is not a one off; it is symptomatic of companies struggling to make the transition from linear to non-linear business. In these companies seldom do leaders deliberate about products & solutions, and if they do then they are confined to boardroom discussions and pilot projects. It is no brainer that it costs money, time and resources to build a product. What has intrigued me is that in spite of India housing some of the world’s fastest growing multi-billion dollar IT services companies, none have developed a world-class products that can compete with the likes of Oracle, Microsoft, SAP, Facebook, Google, Apple or Sales Force.
Inability to view Customers from a Digital Lens
Ability to leverage the power of digital technologies differentiates successful companies from their competition. SMAC technologies have had a tremendous impact independently; however the greatest impact is achieved by deploying integrated solutions leveraging all the SMAC elements. Most mid-tier IT services companies continue to look at their customers from a traditional lens. However the real opportunity is in engaging with customers in the digital space and helping them reinvent their business model, drive significant operational efficiencies and improve end user engagement by leveraging related technologies. As Digital Technologies are in the early days, customers will be open to engaging with not so experienced IT services companies, however this could change as natural leaders emerge.
Lack of Digital Talent
One of the most common mistakes organizations make is to draw talent for Products & Solutions from the same pool as traditional IT services. In an IT services company revenue is directly proportional to FTE, hence quantity always takes precedence over quality and thereby driving mediocrity. Managers are more skilled in handling operations, people and customers as against to technology. Innovation is seldom considered as a mainstream activity and in most cases is good to have. Architects, developers and testers are more skilled in maintenance work using traditional technologies as opposed to building something new using new age technologies. The harsh reality is that organizations need a different breed of engineers, architects and managers to build Products & Solutions especially in mobility, social, big data (Hadoop), and analytics, IoT using Devops etc. Demand for these resources is significantly increasing every day, Ex – demand for deep analytical talent in US could be 50-60% greater than its projected supply in 2018 – McKinsey. Product companies like Google, Facebook, Amazon, and Flipkart have understood this well. They often pay a premium to attract and retain top talent and also engage them with sufficient intellectually challenging work
WAY FORWARD
Define a Niche Space
For a product or a solution to translate into a successful business, it must address a specific business need or a problem. In today’s world, it is worth looking at ecommerce, Market Aggregator, Mobile (Wallet, Payments, security and advertisement etc.), Digitization, Health Care, Banking, and Analytics etc. It is also worth looking at missing functionalities in enterprise products, which can be a great opportunity to build Industry Solutions or add-on/ bolt-on solutions. The biggest strength of a mid-size IT services company is the wide customer base and longevity in the relationship; hence key individuals from Sales, Account Management, Pre-Sales, Solutioning, key managers, and architects must be actively engaged in identifying a niche. Once companies zero in on a niche they must then focus on identifying relevant non-linear solutions (Products or Solutions) to solve the same. Evaluate the same across market attractiveness, competition landscape and internal capabilities. It would be a good idea to setup Innovation centers to facilitate the same and bring the necessary focus. A model of co-creation with Clients will help both sides innovate rapidly, and bring offerings that are relevant to the marketplace.
Create Startups to propel Non-Linear Growth
Ideas need to convert into Products & Solutions and then into successful Business. This needs the belief, drive, passion, agility and horsepower that the startups symbolize. Hence create startups within the organization to realize the same. Ensure Products & Solutions are adequately funded. Hire top talent and let them operate with no job insecurity and keep them insulated from organization bureaucracy. This will require companies to consciously tradeoff on EBIT for long term benefit. Set clear accountability and VC kind of governance so that these investments do not go futile.
Capitalize on B2C Boom
What has amazed me is the lack of focus most IT services companies have on the consumer segments with all their focus on enterprise. With increased adoption of smartphones, social media & cloud and innovative payment methods, the consumer segment has been booming like never before. In today’s world, consumer is the center of the universe. In India there are over 3,100 startups with almost 2/3rd of them working on B2C. If you look around, you will see several resounding B2C success stories in the last 2-5 years like – Flipkart, Portea, Paytm, Makemytrip, Uber, OLA Musigma and Manthan. Most of these are driven by Ecommerce boom, which is a $1500 B, market growing at 20%. This is fueled by an $ 86 B Mobile Apps market, which is growing at 27% worldwide. This is one segment that IT services companies must exploit without falling for the temptation of “me too” kind of products & solutions.
Build Digital Engineering Talent
Converting an Intent and Idea into a successful business needs a rock solid team. IT Services companies need to take a 2-prong approach, first they need to pick some of the best talent in the organization and secondly they should inject fresh talent from the market. This needs to be championed by someone very senior in the organization with direct access to the CEO. Focus should be on building strong capabilities in technologies like Hadoop, MongoDB, HTML 5, LAMP, AWS etc. Building strong Digital consulting capabilities will also help companies to engage with customers in defining and executing their digital transformation journey. Compensation and Incentive structure for this team should be on par with the best in class. Companies like Infosys are now setting up separate teams with different salary structures to attract and retain bright Product Engineering and Digital talent.
CONCLUSION
For mid-size IT services companies to survive and thrive in today’s digital age, it is of paramount importance that they reinvent themselves. There must be a burning desire to transform from a Linear Business (FTE based) to a Non Linear Business (IP, Products & Solutions based). The transformation can be extremely disruptive and will involve major cultural and adoption challenges. Instead of taking a big bang approach, it might be a good idea to embark on this journey in a staggered manner before going the complete Product & Solution way.
***Special thanks to Vinod, Vinay and Sharath for their invaluable inputs.
https://in.linkedin.com/in/vinodshankar
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