We at Greyhound Research, participate in, on an average, 10 inquiry calls with IT services firms in a month. That translates to almost a hundred every year. In 6 out of every 10 of these calls, the conversations veer towards the existential crisis that midsize IT services firms are facing in these increasingly turbulent and brutal times. There are big question-marks on the wall with respect to the sustainability of their ongoing business models.
In our experience, while we have seen great intent among leaders in these firms, the quest continues to remain elusive on the ground despite various actions these firms have taken to fight it out. These actions range from exercising mergers, acquisitions, private equity, IPO, and strings of strategic partnerships across the board. While tactics differ, the outcomes don’t.
While every case is distinct and there’s a bit of contextual applicability to these strategies and tactics, we believe their stakeholders need to watch out for the following red flags:
The strategic value proposition that really matters is not the one for investors but the one for customers.
Global technology environment is becoming dynamic and almost brutal, with customers demanding value that goes beyond efficiency and costs. They expect strategic technology partnership, and that is not necessarily correlated to deal sizes. It’s about competence, and not necessarily about size.
While financial and operational metrics are important, what’s critical for these firms is human metrics.
IT services is a people-driven business. One of the reasons these firms struggle to create the strategic value proposition for their customers is the challenging internal cultural alignment and talent transformation.
Many of these tactics lead to a short-to-medium term pressure in the form of high attrition rates.
While IT services firms already struggle with higher than average attrition rates, it becomes even more challenging to retain the star players in the times of increasing uncertainty induced by M&A or financial leverage tactics. How these firms address these challenges remains a concern.
It remains to be seen how midsize IT services firms adapt to automation-led models, as against the ones driven by people.
Automation is a major trend governing some of the M&A activities in the past couple of years globally. Midsize IT services firms have not (yet) demonstrated aggressive intent to go down that path. We believe, the challenge lies in not recognizing this need, but the ability to convince the board to agree to such mergers or deals that are more automation-led and not people-led.
The real trial by fire is in new age technologies.
The technologies trends of the past allowed these firms a breathing space and scale to build the capabilities almost on the go. The times have changed drastically. Technology environment today is much more dynamic and fragmented and requires proactive investment in new age technologies, such as AI, IoT, machine learning, robotics, analytics, VR, AR – the list is long. The key lies in proactive investment without an immediate billing outcome, which unfortunately is still very counter-intuitive for many IT services firms.
If these midsize IT services firms have to resolve this existential crisis, they have to recognize the fact that it is not really about getting bigger as much as it is about becoming more competent, with customers as external focus and people as the internal focus. Size, then, wouldn’t matter, but would be the after effect!
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Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, an award-winning global research & advisory firm. To read more about him, click here.
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