Trying to analyze why one Indian service provider had a better quarter vis-à-vis another is becoming pretty moot.
Yes, there are various nuances clearly helping or hindering some of the W-I-T-C-H firms with certain deals, such as TCS’ flexibility to win selective large complex deals, Cognizant’s savvy US leadership team, HCL’s price aggressiveness to pillage legacy EDS contracts, and the fact that Wipro and Infosys somehow “lost their mojoes” in the kerfuffle. However, the bottom-line is clear: The Indian services business is hurtling toward commodotization, and there needs to be a much more radical play from their ambitious leaders to alter the game.
In order to highlight this dynamic, we took quarterly revenue and growth performances over the last 4 years and created a predictive revenue forecast for each of the W-I-T-C-H providers, based on the past four-year historical variances:
What this data tells us, is that the growth trajectory is now declining at such a clip that none of these providers may make the HfS IT Services Top Ten if they continue with their current growth strategies.
Why the WITCH providers can either fight for the old dollars, or revamp for the new
Essentially, what these five great firms have achieved is to create huge factories of (predominantly) young talent that can service operational technology and business process work that can be standardized, externalized and run from their Indian centers. The simple fact that their margins have remained largely unaffected, despite increasing price pressures, is two-fold:
A weak Rupee which has kept the Indian firms hyper-competitive throughout the Recession years;
Industry-leading innovations in training and developing hundreds of thousands of employees from the Indian colleges.
Only Accenture and IBM, and more recently Capgemini, have really been able to compete aggressively for the operational work, because they invested heavily in developing their own Indian (and other global) delivery centers in recent years in order to catch-up.
However, as this data plainly dictates, we’re now on a fast-track to lower growth that will likely be dipping below the 10% mark by the end of next year, for some of these firms. So… this leaves two stark choices for the WITCH firms:
1) Accept the industry is commodotizing and be prepared for slower growth and reducing margins.Hell, we’ll still be massively wealthy and our owners and long-term executives are so rich, who cares?
2) Aggressively acquire the capabilities to find new sources of growth.Relying on the same tried and trusted formula of hiring kids, keeping prices low and selling ever-harder is clearly going to see us sink into the middle-of the-pack – we have to make radical changes if we are going to buck the trend.
The Bottom-line: It’s a clear decision for today’s leading Indians – prepare for commodotization, or invest for new growth
The WITCH providers will forever go down in the folklore of business globalization in the way they quietly infiltrated the major global financial institutions, moving from 10 to 50 to 250 to 1000+ FTEs in many of them, before their Western incumbent competitors realized they’d just had their lunch eaten (and for some it was too late to come back). Other major industries followed, from manufacturing to retail, life sciences to insurance, hi-tech to energy.
However which way you may want to criticize the low-cost model, they disrupted the industry and their competitors struggled to respond. But – like any market disruption – once it’s been disrupted a new landscape emerges and the next wave of winners will be those who continue to satisfy the customers’ needs profitably.
While wage arbitrage will continue to provide a lever for new investments, the next wave of customer demands is shifting into new areas where no clear leader has yet emerged. It’s no longer going to be all about ABAP programmers, help-desk jockeys and accounts payable clerks. The next round of winners will be those who can re-invent their clients’ business process to work around SaaS platforms such as Workday and NetSuite; who can recreate an organization’s entire approach to managing and analyzing its data; who can become genuine partners to both their clients’ front and back offices; who can consult, think, act and create for their clients. Tomorrow’s businesses want to get smaller, smarter and leaner, not fatter, more bloated and too sluggish to adjust to today’s global environment.
I do not believe today’s WITCH providers can get from today’s commodity needs to tomorrow’s emerging needs by making the occasional niche purchase to fill a few competency gaps – it’s just too slow and painful a process. The only genuine strategy is to go for the “big bang buy”, the game changer that will force the shift to Sourcing 2.0. We’ll take a look at some good potential candidates shortly… stay tuned.
Forget all the “phases” of outsourcing that have been debated so vigorously over the last twenty years – the industry is only now evolving to a new phase, where middle and upper managers are being challenged like never before to bring value to ambitious organizations, or face worrying consequences.
All that rhetoric, all that PowerPoint, all those white papers. Many providers and advisors desperately tried to portray the outsourcing of IT and business operations being more than simply saving money. But they were all really painting a pretty veneer over why enterprises were really interested in it: they wanted to reduce the cost-burden at the bottom of their enterprises. They wanted to get smaller. That really was the premise behind Sourcing 1.0.
Welcome to 2013. We’re only now limping away from five years of cost-containment and reactionary measures, into a world where much of the cost-burden at the bottom of most enterprises’ operating functions has now been hacked away. Ambitious enterprise leaders are now zoning in on those next layers upwards of their staff investments to understand how to become even more cost efficient and even more nimble, in terms of managing their global operations. Big and clunky is ugly, lean and scalable is the new corporate sexy.
The transformational capability of middle and upper management is under intense scrutiny as enterprises shift from the reactionary to the radical
Times of economic recovery pose an entirely new set of challenges and skill requirements for middle and upper managers: no longer is their primary job focus simply to keep a lid on costs and keep the machine ticking along. Suddenly, they are expected to come up with the “what next?” Managing operations to drive new ways of achieving value is far, far harder than keeping the lights on and the costs contained. And it’s exposing many middle and upper managers as being legacy-thinkers and legacy-operators – unable to grasp new ideals, new ways of doing business and letting go the inefficient, cost-bloated ways of the past.
Suddenly managers, whether they sit in IT, finance, procurement, marketing and so on, are expected to be transformation experts, constantly innovating and aligning their focus areas with the objectives of the business. If they are incapable of driving value beyond maintaining the status quo, they become walking bloated costs waiting to be exposed, analyzed, and eventually removed or replaced. I cannot count on both hands how many conversations I have had over the last few months with executives who have found themselves moved out of their firms because they were not seen as “transformational” enough in their approach. Most were not bad at their job – it fact, some are very capable, but the common thread is simply that they had found themselves overseeing a static operational function and no longer could prove their value beyond keeping the lights on.
The Onset of Sourcing 2.0: Embedding third-party services into the broader Business Operations Value Chain
You only have to analyze the prime motivations of enterprises – and how they are shifting – to understand the new challenges facing middle and upper managers, as their business leaders seek to manage their operations in their entirety across outsourced, shared services and inhouse elements. Suddenly, we need managers who understand processes, how they are enabled by technology, and how they can be best delivered by their own staff in tandem the workers contracted to their outsourcing partners.
We’ve taken the data from our 2011 State of Outsourcing Study and compared it with the same study we ran earlier this year to see where the motivations are shifting across delivery frameworks, whether they be predominantly outsourced, predominantly inhouse, predominantly shared services, or predominantly a hybrid approach:
Click to Enlarge
Externalization of internal capability still remains a significant objective of most organizations. HfS Research analysis (see above) of several hundred major organizations’ outsourcing behaviors, over the last three years, shows that 45% of companies in 2013 are decreasing reliance on in-house operations, up from 35% in 2011. While interest in pure outsourcing has slid from 70% in 2011 to 59% in 2013, 62% of companies in 2013 are looking to build hybrid shared services and outsourcing operating models. This clearly tells that, while externalization of operations is increasing, enterprises desire operating models that encourage inter-company collaboration across the base of external partners.
The Six Tenets of Sourcing 2.0
So how can today’s middle and upper managers approach sourcing in today’s environment to find new thresholds of value?
1) Value is created by collaborating with multiple providers
The first major shift with Sourcing 2.0 is that value can no longer be generated solely by a single company. In fact, value in the future must be leveraged by an extended value chain of services provided across marketing, human resources, finance and the business units. Successful companies of the future must actively collaborate to identify mutual sources of value.
2) Innovative services are inspired by some providers’ creativity and investments
The second major shift is that a company’s providers have an onus to innovate on behalf of their clients in order to win their business. Today’s enterprises simply cannot create every innovation for every function, process and technology. They are becoming increasingly reliant on their providers’ investments and creativity to drive value for them. The challenge, of course, is on the enterprise executives to build the right alliances that encourage their providers to deliver innovation in the areas they need it most. Today, the vast majority of companies are failing miserably at communicating their strategic needs and encouraging their partners, or potential partners, to meet them. When it comes to funding, few enterprises are willing to invest in either their internal or external resources to improve their provider relationships. Instead, their managers persist in grinding their providers’ prices lower and lower. How can companies expect to achieve innovation from their providers when the benefits are not shared or funded?
3) The flow of data across the operations value chain creates invaluable IP with which providers can arm their clients
The third major shift is the massive amounts of data and IP embedded into processes that is increasingly transferred outside of enterprises, or even owned by providers. With increasingly large networks of providers, data flows across an enterprises’ entire operational environment is becoming increasingly complex to manage. Highly proprietary data frequntly flows through shared services centers, internal business units and across the various interfaces of the externalized operations being managed by the service providers. The question of intellectual property ownership is increasingly being tested as providers’ inventions are used to drive client value. Moreover, enterprises need to develop capabilities that create a visibility of processes to manage risk and compliance across their internal and external operational partners.
4) Enterprises must treat their providers as strategic partners and judge them on capability, as opposed to merely being low-cost
Providers have become integral to the success of the smart enterprise. They need to play a major role in driving the capability and productivity of the people that remain in their clients. They need to have a meaningful impact on the operational effectiveness of their clients’ business, but their clients have to treat them fairly and engage them as an extension of their own enterprise, as opposed to the “master/slave” model of Sourcing 1.0. Successful enterprise managers view alliance-building as more than a contractual document and more powerful than cross-functional team facilitation. Pulling together a disparate set of executives across various internal and external entities and encouraging them to team together to improve the competitive nature of their enterprises is a critical capability for the successful operations leader.
5) Operations executives must align themselves with the front office of the enterprise. The need for creative thinkers, who can act as peers to senior stakeholders and can understand and influence their businesses’ needs, is a pre-requisite for today’s workplace. Operations executives must be more commercially-orientated to the business needs in a way that better achieves corporate objectives. This is already happening in IT, for example, where many CIOs are being put in revenue-generating roles where they need to talk to customers and be much more aligned with their product marketing and sales teams. Many “old-school” CIOs are finding themselves quickly being cast aside as their companies look for innovators leading their business functions, as opposed to “operators”.
6) Enterprises must shift their negotiation focus to collaborative deal-making. Collaborative deal-making must over-ride the ability to grind every last penny out of providers in negotiations. The Sourcing 2.0 skillset requires a shift of focus toward maximizing the size of the entire pie to the benefit of all participants. Smart operations leaders need to learn the capabilities of their providers better in order to create contracts that inspire co-investment an co-learning from both parties. For example, helping providers develop technology and IP that can leveraged across their client base is a smart way for many enterprises to benefit from innovation investments without paying exorbitant consulting fees. On the flip-side, if the provider only really operates with a low-cost, standard-value model, then the buying organizations needs to make a strategic decision whether cost trumps long term value for the services in questions.
The Bottom-line: Executives ignoring the Tenets of Sourcing 2.0 run the risk of Extinction
Lets not make any bones about it – there is an increasingly large number of former middle and upper management entering the job market today realizing that the 30 year career job is fast becoming a thing of the past. The last 20 years if outsourcing has essentially created a culture of externalizing staff where possible, as companies simply do not want to employ hundred upon thousands of people to turn widgets, write code, scan documents, cleanse data, run reports etc. Now many of those tasks have been externalized, the onus has shifted to the next layer of staff upwards to prove they do more than run operational tasks, that can easily be replaced by others for half the wage (or even less). Operations executives running business functions have to get smarter about how they source their work and drive value into their businesses. In most cases, there won’t be a rule book published entitled “Steps to get more valuable in your organization”, you just have to figure it out for yourself!
Firstly folks, apologies for the dramatic title, but it certainly worked – we had a record 1,400 participants tuning in to yesterday’s webcast, to discuss the key findings of the largest-ever global study of enterprises’ outsourcing intentions and dynamics, covering 1,355 industry stakeholders, which we conducted with the support of KMPG’s Shared Services and Outsourcing Advisory group.
A hat-tip to to KPMG’s Dave Brown and Stan Lepeak for their excellent contributions to the discussion.
As per usual, we’re sharing our collective learning and data with the industry, along with the replay
The whole discussion surrounding Visa Reform, and how it could damage the outsourcing business, raised much bigger questions in my mind than clients simply having a few extra dollars-per-hour slapped onto an invoice. It has highlighted the failure of outsourcing to become truly global and deliver more for clients than offshore body-shopping services.
It’s the over-reliance on the offshore that is holding back the whole industry from moving beyond the back office and into the front office, where providers can truly help clients with solving business problems and driving new growth, as opposed to merely making processes more cost-efficient and cheaper to run. The more a provider can present itself as a local partner, a business companion, an extension of its clients’ enterprises, the more its clients will think about their provider as a business partner, as opposed to an “outsourced” service. Hence, if Visa Reform can be a catalyst for driving more local investment from Indian-centric providers, then it will eventually prove to be a blessing in disguise for an industry still struggling with its identity.
I am already seeing positive steps with most of the Indian-centric services firms developing onshore workforces, but we need to see it happen more publicly and more aggressively. I would advocate more acquisitions of onshore services firms from the Indian leaders to speed up the rate of progress… there are plenty of candidates out there. There also needs to be greater focus on developing management and marketing leadership outside of India. You just can’t keep putting the same lipstick on the same pig!
One example of an Indian-centric provider which is setting the standard for many others to follow is up-and-coming BPO provider EXL, which has not only invested heavily in local delivery resources, but has also put significant resources into developing its corporate, sales and marketing leadership in the United States. With revenues at the $500m level, EXL has greater capable US marketing presence than most Indian-centric services firms several times its size. It is also becoming much more effective – just check out its new website.
Substance over Puffery: Becky Dennis is Chief Marketing Officer for EXL
When EXL first started hawking its services about a decade ago in New York City, its first sales recruit told me he was paid $40/day to knock out 150 cold calls daily, with the marketing support being a single poster he could mail to interested prospects. The firm relied heavily on executive networking and pure word-of mouth to grow its business. About two years ago, the firm’s leadership clearly had an epiphany: it realized that most of its Indian-centric competitors were also pretty weak at marketing themselves and it could gain a significant jump in the market if it invested in some quality marketing resources.
Hiring Becky Dennis was one of the smartest steps the firm could have taken. Becky had earned her BPO marketing chops at ACS, during its golden years, and more recently WNS, before EXL’s leadership realized it was time to unleash her potential and give her the CMO reins in 2011. What I like about EXL’s leadership is they tend to be a pragmatic bunch, who can see beyond the spin and puffery when they do things – and Becky provides exactly that. She understands the business and is willing to get her hands dirty and execute. Where some people may talk a big game, Becky just figures out what’s realistic and achievable and gets on with making it happen. There is too much talk (80%) and not enough substance (20%) in this industry today, and Becky is one of the 20% who has her foot on the pedal.
Becky proudly contacted me last month too show-off her hard work overseeing the launch of the new EXL website. I have to admit it’s refreshing to visit a website that is more than a mere poster board of corporate info and corny, over-used and meaningless buzz words. It’s actually relevant for buyers, analysts, consultants etc who want to learn more about the firm and the business services industries within which EXL operates – it’s also easy to navigate to find what you want. So I asked Becky to show off her achievements and tell us a bit about what’s she’s been up to…
Phil Fersht, HfS Research: So Becky, tell me (in a nutshell) about EXL – what has evolved over the last 18 months? What’s different today?
Becky Dennis, EXL Service: Where to begin, Phil … The evolution started shy of two years ago when EXL, a business process solutions company, consciously decided to invest more in strategic marketing activities. Recruiting a highly seasoned marketing team was the first of many steps to help EXL build greater awareness in the marketplace. Our company has been a “best kept secret” for too long and we haven’t publicly articulated or celebrated all the ways we drive impact to our clients’ businesses.
So part of EXL’s marketing evolution is how we better articulate our value. We previously went to market in a way that was more internally focused on how we were organized. Today, we are more client-centric in our market approach. Too often, providers focus on the “me” rather than the “you.” If communications do not better inform our clients, they are not as valuable as they should be.
Now we are increasingly seen as a provider with a point of view. As a result, we are more often sought out as a speaker or expert through the media or different industry conferences. I attribute that to two things: 1) being more vocal about the thought leadership we have to offer; and 2), simply focusing on the channels that reach our clients through initiatives such as PR and targeted campaigns.
We’ve also changed our approach to the industry. While EXL has traditionally enjoyed deep relationships among the industry influencers, we lacked a formal approach as to how we conduct and strengthen these relationships. With a global program in place, we now have more meaningful opportunities to engage with influencers and their clients.
While we’ve bitten off quite a bit in the first 18 months, we’ve built tools such as campaign scorecards to ensure we are spending time on the right initiatives: ones that will drive impact for EXL and the clients we serve. Until we had a message that resonates with our clients, we put the development of content assets on the backburner. By building new assets that are high-impact, we are seeing a tremendous difference in the stats on our website. For example, last month we saw a 185% increase in web queries over this time last year because I believe visitors are finding the content to be more salient to their needs..
Phil: And the work you have done marketing and positioning the firm – what is driving this and what are the key messages you want clients and prospects to take away?
Becky: After 21 years in this industry, I’ve seen a lot of engagements, but I’m particularly impressed with some of the ways EXL helps clients … and in a tangible way. A few examples that continue to “wow” me are how EXL saved a client $1.5 BN in annual spend by identifying attrition root causes and developing a retention strategy. For another client, we increased their cash collection per hour by 66% by optimizing their collections process through the use of predictive dialers, better inventory management, and agent up-skilling. Many providers view their capabilities as silos. One of the ways EXL is able to achieve results like this is through integrating our people business of process management with technology and analyzing data and performance metrics. This makes a big difference to the buyer and generates far more value than just having a partner who reduces costs.
At the end of the day, I want clients to see EXL as a company that looks deeper to drive business impact through integrated solutions and industry knowledge. We solve a wide range of business challenges, including helping clients take products to market faster, building models to be compliant more quickly with new regulations, turning volumes of data into business opportunities or driving out costs while trying to grow.
Phil: You’ve clearly put a lot of work into the new website, what’s so special about it in your view? What do you want people to take away from their visits?
Becky: What I like the most about our new website is that it’s quite different from those of our direct competitors. We’re going to market through three strategies: 1), as an advocate for our clients; 2), as an expert who can help our clients with their evolving needs; and 3), as a challenger who look deeper to solve complex problems.
By moving away from the typical website that contains volumes of capabilities, we took a challenger stance to simplify and basically ask “what can we do for you?” Our site is based on adding more and more content that easily answers the strategic questions that clients are asking, rather than forcing them to navigate across a complex site that satisfies our own needs.
Phil: And, finally, is brand really that important in BPO services today? Surely it’s just a people business, right?
Becky: In my experience, as a company grows and matures, it undergoes a need to define and articulate its identity and promise to the market. I think the more diverse your client base and the wider the variety of services a company provides, it has a tendency to dilute the brand if the employee base is allowed to “spin” the company as they see fit individually. You tend not to have a true identity and fall victim to being a commodity.
A company like EXL—one that hires talent from our clients’ industries so we not only speak their lingo, but invest in building academies to ensure our employees truly understand their businesses, is not a commodity. It’s what the market is demanding as they face tougher competition as a result of economic turbulence. Now marks a time for EXL to enhance our image through a consistent means of identification that focuses more on the value we provide as a partner.
Sure, our clients cite attributes that are indicative of us being in a people business, such as the obvious passion for what we do to serve them, our knowledge of their industries, the seamless execution of our operations and a high level of senior engagement. But to advance to the next level of value, EXL is simplifying our means of going to market: a business process solutions company with advocates, experts and challengers who look deeper to provide business value.
Thanks for the opportunity to articulate this, Phil. You’re always looking at the provider community to challenge the status quo. That’s what EXL strives to do on behalf of our clients.
Phil: Well, it’s refreshing to see a firm like EXL starting to shake things up… and thanks for sharing your success with our readers.
Missed yesterday’s record-breaking webinar on the proposed Visa Reform? Or, were you one of the 870 registrants who enjoyed the discussion so much, that you’ve come back for more? Either way, we have what you’re looking for…
As promised, you’ll hear from both the offshore and an onshore perspectives, from a lawyer, a buyer, an onshore provider and offshore provider and a couple of analysts. We agree…it doesn’t get much better than that!
And a big thanks to Steve Semerdjian, Ed Caso, Stephanie Moore, Jeff Lande, Joe Hogan and Tim Norton for taking time to share their insights with everyone.
New research from HfS clearly shows all is not as it seems in the global services landscape. HfS’ Jamie Snowdon investigates…
It would be easy to forgive anyone for assuming that the Indian services majors Wipro, Infosys, TCS, Cognizant and HCL (aka the “WITCH” providers) are dominating the global battle for services supremacy, given the hype that surrounds India’s dynamic IT outsourcing economy. However, In spite of their impressive growth over the past ten years, none of the WITCH providers have yet to make the HfS Top 10 of global IT services firms, despite dominating the application development and management business:
The first of the WITCH providers likely to break the Top 10 is TCS, provided it can maintain its current growth trajectory, break through its landmark $10bn revenue barrier, and there aren’t major acquisitions or merger amongst the Top 20 providers.
The IT services competitive landscape is still dominated by the traditional large global IT firms (HP, IBM, Accenture), the global enterprise software companies and local IT services firms with strong domestic/regional market positions (Fujitsu, NTT, Capgemini, CSC, CGI).
HfS Research’s new Global IT Services Market Size and Forecast 2013 provides an analysis of the recent financial performance of the leading IT Services companies and the key drivers and inhibitors that are driving growth in these markets, particularly how they are coping with the endlessly on-going economic crisis in Europe and the key technology and business dynamics driving growth in 2013 and beyond.
Ten ways the WITCH providers can break the IT Services Top Ten
1. Develop a greater client base outside of the US – particularly continental Europe where the benefits of offshore development are beginning to be recognized
2. Move up the value chain – too many of them are being “ring-fenced” into the IT back office and struggling to get a bigger chunk of the integration business
3. Expand into the upper-middle market ($1-$5bn revs), where the heritage western firms are much less dominant and demand is highest
4. Acquire more consultative capability to move clients into the cloud
5. Invest in word class BPO and business transformation capabilities to become genuine “technology enablers” and not solely IT body shops
6. Focus on verticals where they can really differentiate with institutional expertise and stop trying to be “all things to all people”
7. Become more global in nature, establishing more middle and upper management in locations outside of India
8. Diversify more aggressively IT infrastructure-based services and become less reliant on lower-level ADM work
Jamie Snowdon is EVP Research Operations, HfS (click for bio)
9. Diversify beyond legacy ERP services into supporting SaaS enviroments such as Salesforce.com, Workday, Netsuite etc.
10. Acquire a “traditional” onshore IT services business that can add many of the areas mentioned in points 1-9
Rather than panicking about the next quarterly earnings, Michael Dell is focusing on building something for the next couple of decades
I don’t want to shock everyone, but occasionally I do have positive things to say about some providers. And it’s nice to be pleasantly surprised by one which is clearly on the right path, because when Dell acquired Perot Systems in 2009, many of us were skeptical as to whether a product-centric firm, such as Dell, could make a genuine push into high-end services.
It is my personal belief that the likes of HP and CSC will be sweating from the oncoming threat from the Austin-based firm’s $8.5 billion services arm in the not-too-distant future, not to mention some of the flagging Indian firms struggling to rediscover their mojoes.
Why Dell is a dark-horse future services powerhouse
Strong leadership and deep resources. Michael Dell is a great guy, liked and respected by everyone who knows him and works for him. He is also a smart businessman and smart communicator and his no-bullshit style has permeated its way throughout the company. Moreover, he is very, very rich – with his Dell investment rumored to be only a third of his entire personal fortune.
Taking Dell private will shelter the firm from the intense public scrutiny being placed on services firms today, consumed with unrealistic margin pressures and gobbledygook strategies that mean little, but sound impressive. It is clear that Michael recognizes which elements of his business are nearing the sunset or maturity phase of their evolution, and where the future growth is coming from. He recognizes that the services industry is hitting crunch-time with too many competitors and too many copycat strategies. Being able to take a detour from the impending turbulence will enable the firm to weather the storm, make some strategic tuck-in acquisitions and re-emerge in the future onto public markets as a real Tier 1 force.
Talent in abundance. Michael has assembled an unbelievable array of talent through his acquisitions and direct hiring from competitors. In services, snagging Suresh Vaswani to lead Dell’s services shortly after he was displaced as Wipro’s CEO is proving a masterstroke. Suresh has built a very dynamic team, including Ashutosh Vaidya, Wipro’s former head of BPO, Tanvir Khan, who helped establish Minac’s US operations, and Sid Nair, one of Wipro’s US sharpshooters to drive the healthcare services offerings. In addition, what impressed me most was the talent in the middle-management layer, for example, former star Redmonk analyst, Michael Coté helping devise cloud strategy, and Cameron Jenkins, former COO of legacy modernization firm Clerity, helping drive Dell’s thriving application modernization business. While many of Dell’s competitors only push their thin veneer of senior leaders in front of the industry stakeholders to mask a mediocre middle-layer of sales people, Dell is proud of the people it has assembled throughout the organization.
Positive culture. Let’s make no bones about it, several of today’s services firms are suffering from low morale and executive burnout. Some have really lost their way and much of their top talent – and it’s sometimes hard to pinpoint people you still know in those firms. However which way we look at it, services is still a people-business, where passion and energy are still the core ingredients to inspire clients and drive new thinking and ideas. You don’t get that feeling from the Dell crew, even after several mojitoes… these folks are genuinely happy to be where they are.
Limited bullshit. When your leader is a straightforward guy who clearly articulates what he wants to achieve, the rest of the firm normally follows suit. This really is the case with Dell, where everyone talks a straight game regarding their strategy and game plan. The firm’s offerings are, quite simply, uncomplicated: IT products and services across all key areas, namely security, private cloud enablement, enterprise mobility, service management, application development and infrastructure management. I was particularly impressed with its cloud strategy, based on its own datacenter and hardware heritage, and also its modernization business, where it was addressing many of today’s businesses still plagued by legacy mainframe environments.
There is also a stealth BPO strategy where the firm is pushing into verticals where is has deep domain expertise (both onshore and offshore), such as healthcare, life insurance, transportation, retail and hospitality, as opposed to getting crushed in horizontal areas such as F&A and procurement, where it hasn’t established much presence. An estimated $350m a year of non-federal BPO business is enough to get Dell to the big boy’s table in its selected vertical areas, and open up the potential for acquiring additional BPO capability as it grows.
Very strong edge in the upper-middle market for IT services. There is a host of clients in the $1bn-$5bn range which are struggling to get the red-carpet treatment from the Tier 1 providers, still feasting off the fruits of the high-end enterprises. There is a great opportunity for Dell to exploit its massive installed base of hardware clients with no-nonsense IT services offerings from simple Windows migration projects through to complete apps and infrastructure modernization engagements. It also has a pretty decent brand to work from (with a concerted marketing push). It will need to contend with competitive friction from the reseller channel, but Dell knows it must develop its broad services business offerings if it wants to survive and prosper. In addition, many of these “upper middle market” clients are going to be the F500 of the future, and building a solid base of clients in this sector is laying the groundwork to attack more high-end business down the road.
The Bottom-line: Dell’s enterprise services journey is in the early stages, but it has a much brighter future than many of its counterparts
Dell has a lot of work to do, but Michael has spend the last three years putting together the framework and game plan to take the company forward. Being able to shield the firm from the Wall St. headwinds that are consuming the leading service providers, is a huge benefit for the firm seeking to take its time adapting to a rapidly changing environment and re-positioning itself in new growth areas where it needs to develop its brand and reputation. Rather than simply panicking about the next quarterly earnings, Dell can focus on building something for the next couple of decades. The firm does need to acquire additional scale and depth across most its service lines – and may need to sunset or divest of some of its own legacy businesses, which simply make less sense to own in today’s environment. However, for many of today’s ambitious services executives, this is one firm that has a great culture, strong leadership and a no-nonsense vision that is in tune with the realities of what is needed to survive. I hope to link back to this post in a couple of years with an “I told you so” smirk on my face 🙂
Barely more than a year since SAP made its bold move into the cloud with the very expensive acquisition of Successfactors, does the hotshot visionary and symbol of the attempted “new look SAP” leave the firm… Lars Dalgaard.
Lars Dalgaard… sporting a fine red tie to an SAP event
Anyone who has met Lars over the last decade has been drawn to his incredible passion and vision for the future of enterprise software with the shifting sands away from legacy on-premise software and expensive lock-in licenses.
Lars joining SAP was the acid test as to whether old-world ERP vendors could find a rapid path into the shiny new world of cloud and multitenant delivery models for enabling global business operations. He was a true visionary who had almost single-handedly taken on the legacy enterprise software firms, building up Successfactors from nothing to something, that would entice SAP to part with $3.4 billion to take it out.
The stark reality is there’s just so much vested in today’s legacy enterprise model
Lars leaving so quickly symbolizes SAP’s struggle, in my mind, to change its culture and approach to disruptive business models. The economics of the cloud cannot print anywhere near as much money for our German friends as the current legacy ecosystem of clunky enterprises, whose IT managers simply do not want to invite change or disruption. If your clients don’t want to change, why should you?
Net-net, SAP has created a nice cosy industry around itself that has created, literally, millions of careers. What are all these developers and project managers going to do if companies suddenly had single instances of SAP available in the cloud? What are many of the service providers going to do if they can’t earn tens of billions trying to stitch all this stuff together? And what would SAP do if it can’t command such incredible revenues from its consulting, services and multiple-license revenues?
The startling truth is that there is a $255 billion industry (Source, HfS Research) that feeds off this ERP chaos and dysfunction centered around both SAP and Oracle, and and estimated $156 billion of this is purely the annual cost of keeping enterprises’ SAP worlds ticking over in 2013; the external services, the licenses, the hosting, the internal staff to maintain and develop the software etc.
Why do you think these little upstarts, such as Successfactors, Workday, Netsuite and SFDC command up to 40 times their annual sales income in valuation? Because they threaten the status quo of a much, much larger industry that is scared stiff of being blown out of the water by disruptive technology:
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While the decrepit old enterprises stick to their legacy IT infrastructures, the evolving mid-market firms are breaking the mold
I recently spoke to a senior executive at a legacy software vendor stuck in multi-instance and fake-cloud land, who confided “we’re purely in the protection business now. All the new logos are going into Workday. Fortunately our existing clients still spend enough to keep us solvent.”
This pretty much confirmed my viewpoint that it’s the small to middle-market organizations (under $5bn in revenues) seeking technology and sourcing solutions that can drive nimbleness and cost-effectiveness, as they simply do not have the people and technology resources within their IT, finance, HR, marketing and supply chain operations to manage their evolving needs. Moreover, many of these organizations are moving from prehistoric infrastructures to cloud-based ones… bypassing much of the painful inch-by-inch transformation where so many of today’s high-end enterprises are stuck.
As the existing high-end business opportunities slowly shrivel up, the new logo opportunities are springing up in the mid-tier, will the likes of SAP and Oracle be equipped to take them on, when compared with the evolving array of developing cloud solutions from the upstarts? Remember, many of these new mid-tier logos will make up a significant chunk of the F500 in the future… so clearly the failure to evolve to true cloud models is eventually going to come back and bite the incumbents. Surely they can’t keep spending billions and billions on new acquisitions to control them when they start to hurt their business?
The Bottom-line: The evolution to the cloud for firms likes SAP is simply way, way to slow for a guy like Lars
SAP’s enterprise customers, and many of the services giants which feed off the beast, are still many, many years from being forced to evolve, but one thing is clear… eventually they will be forced to comply. The big question is whether it’s still another 5, 10 or 15 years away…
Simply put, SAP was never a place for the likes of Lars… and won’t be for many years to come. There is no burning platform for SAP to really jump into the cloud just yet, and guys like Lars do not work in the slow-change business. When that burning platform does come, it will need people to change the mindset a lot more aggressively than they are prepared to in today’s market. Maybe then, they’ll wish they had a Lars to call on.
Let’s just hope, for SAP’s sake, he doesn’t pop up at one of these other cloudy upstarts anytime soon…
Forget all the “phases” of outsourcing that have been debated so vigorously over the last twenty years – the industry is only now evolving to a new phase, where middle and upper managers are being challenged like never before to bring value to ambitious organizations, or face worrying consequences.
