Key Steps for IT Companies to Transform Business Models from Staffing to Solutions
Cognizant was founded in 1994. Its current sales and valuation are approximately $ 17 billion and $ 40 billion, respectively. Driven by the year 2000 (fear of year 2000 software bugs), hundreds of Indian IT service companies were formed in the 1990s. Unlike Cognizant, many survivors have incomes of less than half a year. -billion dollars.
One of the reasons for this disparity is that many companies have failed to transform their business models from staffing to solutions. In staffing, IT companies place engineers directly under the supervision of customer managers, who define and control their deliverables. Solution companies sell specific technology offerings, not engineers.
Recruitment companies are like recruiting agencies, while solution companies are like consulting firms. Most Indian IT companies sell both models, but the big brands have strong solutions capabilities.
The endowment model faces three existential threats. First, the commoditization of traditional application development, maintenance, and enterprise platforms is putting pressure on margins. Staff margins are often very high, leading to single-digit EBITDA (earnings before interest, taxes, depreciation and amortization). Two, low-end jobs that deliver volumes are being replaced by automation or software-as-a-service products. Third, in the high-end market focused on niche digital skills, talent is limited, expensive, and prefers established brands. Therefore, while solution firms can generate revenue multiples of 2+, recruiting firms are often valued at equal or lower revenue.
After directly observing multiple efforts to move from staffing to solutions, we have identified three philosophical imperatives that underpin successful transformation.
First, leaders need to recognize that staffing and solutions, while related to technology, are fundamentally different businesses. People relationships are typically with purchasing and human resources, while solutions require relationships at the corporate and CIO level. Staff relationships with customers do not easily translate into solution opportunities. Providing development and delivery capabilities is necessary for solutions, but not for staffing. Transformation to solutions requires new leadership, requiring old leadership (which ironically desires to transform) to create space. Second, transformation requires investment: to create new offerings, create pilots, attract new leaders and talents. Shareholders (often former HR managers) must forgo short-term liquidity for potential long-term value. Third, transformation takes time. In our experience, a transformation that creates significant shareholder value takes three to five years. Shareholders must invest and trust the new leadership during this extended period.
Unfortunately, many transformation initiatives fail because shareholders do not internalize these principles. Even if they bring in new leaders, they are not investing enough time and money. However, once these philosophical foundations are in place, the focus can be on developing a transformation strategy and executing it.
While there are many parts to a transformation strategy, the key is to identify the right mix of solutions and associated customers. Themes lead to assessment: it is important to identify a manageable set of solutions that will be requested in the medium term, as well as identifying trusting relationships with clients that will provide the platform for establishing a track record. These customers are usually existing relationships, although there are exceptions. In addition, the existing relationships determine the target industries. Transformation begins with effectively identifying those intersections between what customers need and what the business can actually deliver.
Execution involves building the trinity of practice, sale, and delivery. Practice builds solutions and associated capabilities; sales bring these offers to market and delivery ensures customer satisfaction, which leads to repeating the job. This is an iterative process that is refined over several cycles. A large part of the investment, both in time and money, is devoted to this cyclical fine-tuning. It starts out slow, but if done right it builds momentum over time.
Given these complexities, transforming staffing into solutions is complex, such as rebuilding an aircraft in flight. One way to do this effectively is to segregate the staffing activity under existing leadership and use it as a source of cash to drive the transformation under new leadership.
While this can be done under the existing brand, our experience is that a new brand helps position the solutions business independent of staff heritage.
Finally, like any effective transformation, having a coach who has been there and who has done that helps. The staffing model is under threat and transformation to solutions is not only a choice for higher value, but also for survival.
Abhisek Mukherjee is co-founder and director of Auctus Advisors.
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