It may come as no shocker to tech firms across the world that ‘Tech development’ as an industry has been slowing down. Large enterprises don’t seem to be buying as frequently and fervently as before. Smaller development projects seem to have dried up. Growth estimates (Gartner Q1 2017) to 2020 hint at a 3% CAGR over the next 3 years. At the same time, for the first time in history, 6 among the 10 most valuable firms in the world are technology companies! If the logic of stock price being indicative of future earnings, something seems to not add up. What is really happening and what should a tech company be doing?
Understanding it takes some retrospection.
What happened while I was working?
Over the 20-year period beginning in the mid-80s, there was a flurry of businesses which jumped on the convergence of affordable computing and leap in telecommunication and the opportunity it threw up for businesses across the world. Large enterprise technology development efforts with large organizations starting to implement technology as infrastructure to add efficiency in operations and bring data sets together became the new age conquerors of this portion of the information revolution. Some big names that emerged were the IBMs & Oracles of the world and closer to home, the Patni, Infosys and TCSs of the country.
Around 2005, a new buzzword emerged with the improvement in telecommunication ecosystems across the country – Cloud. Information could now be stored anywhere and accessed anywhere. One did not have to maintain physical infrastructure to be able to house information, which meant that a small business could now hire only the infrastructure they needed at the efficiency of a large data center. Smaller organizations now jumped in as infrastructure costs and setup costs was virtually nil and barriers to entry were virtually eliminated. A few years in, a tiny revolution was brewing with the name of SaaS. A new revenue model of charging for use and value rather than the committed models that existed. This picked up immediately as now the cost of subscribing to technology solution was close to nil. The ‘innovators’ and ‘early adopters’ of early 2005 now made way for the ‘late majority’ in less than 5 years.
Business as usual was threatened for the first time.
An early realisation for a few
Many businesses across India, while cognizant of the change, decided to continue as usual and wait it out. They believed that enterprise technology over a one size fits all model was a passing fad as large organizations were not going to take the bait for a few pennies less. A few others on the other hand, understood how it challenged the entire world.
One company among them, whose efforts to take this cognizance head on, was Cognizant Technology Solutions. In late 2011, with the help of sound consulting advice of a large consulting behemoth and introspection on the lines of ‘The Innovators Dilemma’, Francisco D’Souza (Frank) took on the challenge of keeping Cognizant relevant. While the obvious strategy would have been for Frank to concentrate on growing the reach of the core businesses and get the new blood’s brightest working on the building the future businesses, he did the exact opposite. He first broke the business into 3 strategic verticals.
The core businesses which made up the mature service & product lines – mature cash cows where competition was high and so was the competence
The businesses that can potentially become great money spinners in the near future – higher margin new competencies existed and can be fostered and built into a core business in the short term
The forward future technologies and business models – that are highly profitable, if you could find a customer
He jumped right into the 3rd giving up all operational activities. He built crack teams to scan for the latest in technology and build expertise. He got them to meet every client and learn from them. If it was important enough a technology to have immediately, acquire. If you could cultivate, invest heavily and wholeheartedly. He would effectively spend 70% of his time on this vertical which would later get the name of ‘Emerging Business Accelerators’. A costly choice in the short term which would draw up all possible accumulated reserves and if the strategy did not work, a sure collapse.
Work it did. CTS is still valued at twice the PE multiple of its peers and continues to boast of one of the highest earnings growth in comparison to most IT behemoths. While it seemed counter-productive in the short run, it paid off many Xs over in the longer run.
The next wave is rising
In 2015, this further matured. With the evolution of the SaaS business model, companies now began to be able to deploy solutions at virtually pennies on the dollar. And in 2017, another big leap happened. The first day of the internet of sorts. An even bigger transformation. AI & ML. Essentially, if it’s a problem that’s been solved before. Consider it solved forever. Self-repairing and regenerating software. Doomsday conspiracies aside, this is going shake things up all over again. In under 30 years, the industry transformed 5 times.
Are we looking now?
While many tech companies have found a new niche, a lot of the infrastructure is not leaner, on-demand and more potent. Companies have begun to build trust on platforms rather than on native solutions. Rather a known referred & recommended devil than an experiment of a few million $ right? While the choice has been obvious, the sheer math is threatening.
Are we really looking?
Let’s understand the math. A disclaimer, a very simple dumbed down math for the benefit of all who read this, who may not be a technocrat but in pure software development services for other product companies.
As client-server models have started becoming service-oriented-architecture (SoA) platform businesses, the billings initially increased. Development time for creating a platform meant the seller has a lot more control of how he wishes to price as it requires ‘product minded’ development companies (say, 100 hours).
Redundancies in common requirements across similar organizations are removed as platforms have grown. Say, savings of maybe 70 hours.
So, under SaaS/ PaaS/ IaaS, the 70% time saved is effectively billability lost today. This could have been billable revenue for a development company, 7 years back when platforms were not yet mainstay.
Evidence? The enterprise market will register 7% CAGR as compared with IT services which will be looking at a CAGR of under 5% over the next 3 years. Add to this, 28% of all IT expenditure will be towards cloud-based solutions by 2021 with IaaS growing at a 23% CAGR by 2010 as per Gartner.
What is everyone doing then?
A lot of the technology development firms are beginning to face the heat as many large development projects are now requests for customization of existing SaaS platform solutions. Many them are starting to work with advisory firms across the country and begin planning for enabling their sustainability and continuing generating shareholder value. The good news is that, unlike manufacturing or infrastructure businesses, as fast as the industry changes, businesses can too.
Let me take you through some of our experiences over here of how you can be agile in 2018. Almost all of the organizations in the technology industry we have advised, that have gained a certain scale have started sensing the need for a course correction exercise. A few specific examples of how they were able to achieve transformation could help perhaps.
Let’s take an example of one of the companies we have advised, Gilfrend (names and some specific information have been changed/ kept out to honour our commitment to client confidentiality). They have been running a profitable business concentrated on development services for the media industry. Since the last 2 years, they have been finding themselves losing to competition. Their CRM on win:loss showed a clear indicator of pricing being a key point of decision-making on lost bids. Outbidding typically meant under-pricing here.
The management took initiatives to reduce the cost of operations to be able to bring down price expectations but to no avail. Smaller outfits, with lesser infrastructure spends, could afford to undercut on contracts as credibility was now shared by a platform company. Under-pricing meant digging a deeper unprofitable spiral.
3 months into advising the company, the real problem slowly surfaced across various board meetings and market review. The technologies they had built a significant competitive advantage around was also the most price elastic. They had built a silo of expertise in a soon to be crowded segment. While making a strategic choice, their strategy to specialise was costing them viability.
Getting out of this situation would require a concerted rethinking of what the company stood for. Over the next 3 months, they embarked with our help into redesigning the way in which the management viewed the business. ‘No more Business as Usual (BaU)’ was the mantra across the management.
Step 1. Understand and challenge why we were working on each vertical. Now that there was no BaU, everything was questioned. GP profitability was not enough of a reason.
Step 2. Understand and evaluate what segments & technologies are worth spending time on growing competencies in over the next 3 years.
Step 3. Understand how the buying process works and what are the expectations from each vertical and the ability of growth in accounts of each vertical – cross-sell/ up-sell opportunities.
Step 4. Do a thorough analysis on market attractiveness frameworks to identify the verticals and develop a strategic roadmap for the organization as a whole.
Step 5. Run simulations on multiple scenarios of strategic choices and evaluate the impact on cash flow, ability to sustain growth, use internal talent pool, longevity of relationship, difficulties of sourcing, fitment to plans and future potential.
Step 6. Nib what doesn’t fit. Do more of what does fit.
Step 7. New mantra: ‘Experiment. Simplify. Concentrate’.
Over a period of a year, the company would potentially add over 12% to their bottom-line while becoming leaner by 20% and reducing unutilised time by 15%.
While this may sound magical, none of it was rocket science. Mostly common-sense in retrospect, but seldom prospectively. it meant taking some hard calls for the management. A BaU routine meant that they were so busy with operational activities that looking inward was something they had forgotten. Having a flexible, dedicated, concerted effort on finding research backed outcomes is what an advisory team brought to the table in this situation.
The same rules or approach need not apply ctrl c + ctrl v (If they did, a consultant would be replaced by AI this year too). The sensitivities and culture of a business is what makes one organization different from another. Understanding this is probably Step 0 and marrying this Step 8.
What can I do myself?
If you look at what you need to do, for yourself as a company if you are unable to access a professional who can help you do this well, let us break it into simple overarching mantras.
Logically speaking, if you are a pure services company or a company with run of the mill development strengths (anchored on cost or labour arbitrage), by building great products for your clients, you may have shot ourselves in the proverbial foot. It’s not all bad news though. While the nature of game has changed, the size of the pie has increased. More and more organizations can afford and are letting in technology into their businesses. There will be more development effort to come your way.
But….
You need to step up.
Learn new skills (read technologies).
Learn to sell better (read solution selling than price warring).
Learn to price better (read Equity + Revenue rather than just sales).
Remove internal redundancies (read Performance rather than cost cutting).
You shouldn’t be worried.
If you are product company or a services company with a defined focus (seeping through the DNA of the organization) or in a new age technology specialisation, you are set. This is the time to make merry.
The world is now your oyster. It’s becoming easier for people to find you and for you to find people. There can’t be a better time in history to exist. Your Innovators and Early Adopters are weeks from each other if you have something worthwhile to give the world.
What happens next?
The Bad
Security to get all the attention. More instances of security breaches will emerge as data has become the new asset class worth more than the cash flows of a company.
Debate. The debate of technology taking away jobs will take up a new heat as large companies begin to let go of teams in the advent of better technology and AI/ML.
The Neutral
Skill-gaps. Education and knowledge building in recent technologies and newer development methodologies.
Consolidations. Industry-wide consolidation of enterprises will lead to companies merging strengths together and capitalising on higher utilisations and lower costs.
The Good
User Vs. You. Businesses will be keener about user c-sats as now individual users have more choices and the cost of switchover is low.
Level-ler playing field. You don’t need to be a mammoth 100,000 work-force to deliver a quality product. A 13-member team at Slack delivered a $Bn giant in under 18 months.
Conclusion: A beginning
Let me quote some Dylan for explaining my thoughts to the point:
Don’t stand in the doorway Don’t block up the hall For he that gets hurt Will be he who has stalled For the times they are a-changin’
Credits: The Times They Are A-Changin’ – Bob Dylan
If you think your organization is facing a similar set of dilemmas, situations commanding an understanding of Strategic Finance or you know you need to go forward while you’re still ahead, I can be reached on nag[at]prequate.in.
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