Dangers in Overreacting to Services Industry Challenges
Timing can be crucial. I recently blogged about trends that are powerful enough to drive substantial changes in the services industry, even to the point of restructuring the hierarchy of the industry. We at Everest Group believe these are very important trends and service providers must develop their strategies for reacting. Here is our guidance to avoid overreacting to the impending changes.
As a provider, if you react to the challenges by putting new emphasis on new models too fast, you will lose focus on your core business. But if you don’t change quickly enough or are not able to make the requisite changes, you run the risk of becoming a dinosaur. The industry saw this happen 15 years ago when the Indian ISPs with their labor arbitrage and factory models caused tremendous disruption in the MNCs that dominated the industry at that time (e.g., Capgemini, CSC, EDS, HP).
Organizations struggle when changing business models. It’s difficult to change a services organization without losing its identity and value. There are basically two strategy paths providers can take in dealing with the industry changes.
Two strategies for changing
First, don’t fall into the temptation of trying to make your company be something it’s not. For example, most of the Indian ISPs are effectively talent companies; they manage and deliver talent. There will always be a need for talent. The kind of talent and the work the talent undertakes will change, but there will still be a need for talent. So one potential strategy is to stay true to your company’s identity and value and manage talent.
Another strategy is to try to develop completely new business offerings and intellectual property (IP).
However, this strategy carries several risks, and some companies that take this route run into significant problems. Some try to build a new business model but use philosophies and structures that evolved for the talent-pool model instead of digital-age models. Others rethink their philosophies and structures and also change their IP, investment model and pricing structure. They also must change their customer interaction model.
It is particularly instructive that there are very few examples where companies were able to develop their new IP in house. IBM is an example of changing IP numerous times, but they tend to do it through acquisitions, not through developing new vehicles in house. If that’s the strategy other providers adopt in reacting to the impending changes, we can look for a big spree of well-funded service firms buying software or as-a-service products.
However, providers need to change their acquisition strategies. Yesterday’s strategy was to buy tuck-in companies at low valuations and leverage them for customer access, but today it’s necessary to buy technology. Should you buy an early-stage startup that’s affordable but hasn’t fleshed out its business model and hasn’t honed its pricing structure or built market momentum; or should you buy one that has – and pay a premium for it? Obviously there is a huge difference in valuation. And the valuation can change in the course of three months for a fast-moving tech company. So the pace at which you make the valuations has to change, and the risk is different. As I mentioned earlier, timing is crucial.
Another acquisition issue: should you nurture the company and hold it separate so it doesn’t get cannibalized and shut down? Should you let them have an independent sales force and marketing arm, or should you roll them under your existing teams?
So there are substantial challenges and some daunting issues along the road to evolving to an IP-driven organization. There will be a huge learning curve at every level of change.
So which is the best strategy?
You basically have three choices in strategies for dealing with the impending industry changes:
- Stay the course and stay true to your talent model and refocus it on the opportunities that the new digital-age technologies will present.
- Fundamentally change your DNA in order to play in the new services world.
- Attempt to do both #1 and #2.
All the necessary change I described above is a difficult and risk-filled proposition. But it’s even more difficult to try to sustain both models at the same time.
The consequence of option #1, to stay the course with talent, could be that your company ends up on the sidelines and has to watch your talent get commoditized, deal with reduced earnings and slower growth while other providers soar to huge valuations.
The consequence of option #2, shifting to the digital-age models, include a huge learning curve. Can you make that pivot fast enough to offset the revenue runoffs or the lack of growth from your shift in direction? Will it confuse your existing client base? Can you learn the new business model quickly enough to compete successfully?
The consequence of option #3, trying to maintain the old while shifting to the new, will feel and look schizophrenic. You’ll have a split focus in every aspect of your business. And all the while, each model will seek supremacy. If you allow that to happen, you’ll lose focus on the other model.
There is no obvious “right” answer to which strategy your company should undertake in dealing with the impending industry changes. Choose the one that you can best execute on and is the best choice for maximizing shareholder value and growth opportunities.
