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Monday, April 02, 2007

Service Firms : Investments Make The Difference

The Goldman Sachs IT spending survey predicts continued growth for services. IDC, Saugatech, Alinean – all confirm healthy & sustainable growth for the tech industry and by extension for the service industry in the near future. Business around the world look towards technology for shaping business models.

Vinnie writes about building the middle layer more aggressively in service firms. I do think that large offshore players are really working hard in building this layer – otherwise, the choices are quite limited for them to grow – which no mainstream offshore player can afford to ignore. A quick look at the qualitative assessment of quantitative numbers of a well established global name(not an offshore player) provides interesting insights – this is only for illustration – I hold the company that am discussing in very high esteem and that's the reason, am taking their data as reference – this is more to show that nature of business and the inter-operational forces shaping the services industry as such:

Look at some numbers (based on publicly disclosed data):

- They added roughly 40,000 plus employees in 2006 and are projected to add 50,000 to 60,000 employees this year. (Scale is non-negotiable)
- The attrition rate is hovering around 18% (Global phenomenon !! – the global company does not publish countywide attrition rates)
- Utilization is at upwards of 85% ( Highest levels of efficiency!!)
- Average revenue per employee is coming down – coming down by more than 10% ( Not sure if this is just due to offshore mix)
- Recent assessments show that for this global leader,to get 1% additional revenue, they may need to add 1.5% to 2% of their workforce. (Interesting trend)
- In 2007, they may have the same number of consultants as that of theier competitor & marketleader, but may globally report half their revenue. (Business model effect?)

In general, since scale, range of service offering & global reach is quite a differentiator for service firms, the issue that need to be closely monitored is essentially the quantum of investments that firms are making and where they are directed towards (not just the headcount increase or making more lateral induction of specialists). For example, Accenture recently reported investments on SOA centric technologies. IBM has made huge investment commitments towards research centered on SOA. Many service firms make skimpy investments (am not singling out or alluding to any),but investments are the key that would ensure quality of growth. Many large firms have attained substantial capabilities in institutionalizing processes, the differentiators for growth would come in terms of acquiring deep capabilities in acquiring cutting edge horizontal & vertical skills. Some try to do this by hiring industry veterans and asking them to build a competency and engagement around their specializations and reinforce this with aggressive partnerships with industry players. Some do targeted, niche acquisitions for specific industry or technical skills – like what Wipro & TCS have done in the bygone quarters. Some build truly worldclass training infrastructure to generate quality consultants & good leaders. Several other players continue to make investments aimed at creating various differentiating value to their operations and by extension their customers.

Unlike these, there are some who think that by creating a good recruitment machinery, one can be infinitely scaling up in services business – definitely not. Falling profit margins and slower growth will sooner than rear its ugly head.

The key thing would be to see the level of innovation and differentiable IP’s that service firms can showcase – this needs to be tied to increased productivity and reduced cost for customers. Ultimately, service players that have invested in emerging areas well ahead and in right measures, stayed close to customers, and focused on efficient execution are well positioned to capitalize on the market as it improves. Companies that will succeed in the services market going forward will be those that embrace the evolution of the software environment, collaborate closely with partners and customers, possess a strong understanding of industry-specific business processes, and have a mature and seamless global delivery capability – all these are achievable only by making right quantum of focused investments in the right direction at the right time. So, if you want to see where the well established service firms are headed – I would think look at their business model, closely scrutinize the investments that are being made – the quantum & nature of such investments. All other things being equal, this would make the difference between winners and laggards.

Update : Vinnie responds.

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