Profit Warning! A Software Asset Sprawl Will Weaken IT Service Providers' Financials

I recently reviewed a portfolio of about 600 software artifacts from 16 large IT service providers. This daunting exercise complements a research stream I have been working on since the beginning of the year on the future of the IT services industry. While I believe the move to software asset (SA)-based IT services will drive maturation of the services industry and help IT service providers remain relevant to their clients, the analysis of this SA inventory raises a few significant challenges:

  • Most software assets face scalability issues. Traditional sales and marketing organizations within IT service providers fail to sufficiently scale up the number of clients for their SA-based offerings. Case in point: 68% of the software assets analyzed in this inventory have fewer than five clients. This low number raises concerns on the financial viability of these offerings for service providers.
  • Service providers will face a SA sprawl over the next couple of years. On average, service providers currently have about 20 SAs in their SA portfolio. The analysis shows that this number is growing exponentially (see below). The number of SAs created has increased by an average of 26% each year since 2009 and is accelerating. More assets were created in the first six months of 2012 than in any previous entire year; SA-related investments are following a similar trajectory.
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IT Services Markets In Asia: Preparing For New Growth Opportunities

Last Friday, we hosted our first roundtable in Singapore focusing on the IT services industry in Asia. The goal of these quarterly events is to create a community of services leaders who can network and exchange ideas on the growth opportunities and challenges in the region.

Senior leaders from 14 large services vendors gathered this morning to discuss how a perfect storm of technologies (including cloud, social, big data, and mobility) is transforming the way clients engage with service providers in Asia. Forrester analysts John McCarthy, Frederic Giron, and Dane Anderson brainstormed with business leaders from services vendors including Atos, BT, HCL, HP, and IBM around the four factors that are reshaping the IT services industry (see Figure 1):

  • The restructuring of the Asian economy. The economic uncertainty has now spread to emerging markets, and economic growth is expected to slow down significantly in India and China this year. Forrester has revised its IT services spending forecasts downward by two to four percentage points in these countries for 2012 and 2013. Participants corroborated this downgrade and mentioned they were seeing the process of making decisions on large transformation projects getting longer, especially in the manufacturing industry.
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Atos Aims To Cloud-Enable Chinese Companies

 

In November 2011, Atos and Yonyou (formerly Ufida) announced the creation of a joint venture dubbed Yunano™ aimed at the European SMB market. The two companies are at it again, this time focusing specifically on the Chinese domestic market.  I recently met with Herbie Leung, CEO of Atos in Asia Pacific, to discuss the partnership and future market opportunities in China. This new agreement essentially covers three areas of collaboration:

  • Bringing PLM and MES expertise to Yonyou customers. With more than 1.5 million customers, Yonyou is one of the largest software providers in China with strengths in ERP and CRM solutions. However, the company lacks capabilities in adjacent areas like product lifecycle management (PLM) and manufacturing execution systems (MES). Following the SIS acquisition, Atos has significantly strengthened its capabilities in these domains and will offer them to Yonyou clients.
  • Helping Yonyou’s customers migrate to private cloud architectures. The lack of private cloud technical skills in China led Yonyou to leverage Atos’s expertise to develop private cloud assessment workshops and ERP migration services targeting the China market. Atos will in turn leverage Canopy, a company it recently created in partnership with EMC and VMware to provide cloud solutions to its clients globally.
  • Helping Yonyou expand into new markets in Asia. Like many Chinese companies, Yonyou has global aspirations.While theYunano joint venture focuses on bringing Yonyou’s ERP solutions to the mid-market in EMEA, the new partnership will leverage Atos go-to-market capabilities to take the Yonyou solutions to other markets in Asia.
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A Peek Into Capgemini's Future Global Offerings Strategy

During a recent global analyst event in Paris, Capgemini presented its strategy to a panel of market and financial analysts. It hinges on two main objectives: improving the resilience of the organization in an uncertain economic environment — especially in Europe — and finding new levers for margin improvements.

From an operations point of view, Capgemini intends to continue leveraging the usual suspects: industrialization, cost cutting, and accelerating the development of its offshore talent pool. It also aiming to optimize its human resource pool via a pyramid management program aimed at, among other things, allocating the right experience level to the right type of work.

More interestingly, the company showcased some of the global offerings it has put together or refined over the past 12 months. Capgemini’s strategic intent is to develop offerings addressing three major client-relevant themes – customer experience, operational processes, and new business models. The offerings will be enabled by a combination of cloud, mobile, analytics, and social technologies. Among the set of offerings managed globally, I found the following of particular interest due to their emerging nature and Capgemini’s interesting approach to developing them:

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Enabling The Shift to Software Assets: Accenture Software Shows Progress

I recently finalized a report* on software asset (SA) based IT services, this time looking at vendors’ best practices in terms of governance, organization, skills, tools, and processes. Needless to say, the move to software asset-based services will have a huge impact on the traditional operating models of IT services firms.

Obviously, IT services firms need to learn from their large software partners to understand and implement specific software asset management processes such as product sales incentive schemes, product management, product engineering, and release management.

This will induce a formidable cultural change within the IT services vendor’s organization, somewhat similar to the change Western IT service providers had to undergo 10 years ago when they finally embraced offshore delivery models.

I see a few critical steps that IT services firms need to take in order to facilitate this shift towards software asset-based business models:

  • Build a client-relevant SA strategy. Building an SA base offering is not (only) about doing an inventory of the existing intellectual property (IP) that you have on employee hard drives and team servers. More importantly, it’s about making sense of this IP and building strategic offerings that are relevant to your clients by centering them aounrd your clients’ most critical business challenges.
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From Jugaad To Reverse Innovation

Next month, I will be relocating to Singapore after two years in India. These two years have been an amazing learning experience for me, both from a personal and professional point of view. A very intense experience too! Of the few Hindi words I learned during my stint in India, there is one that I am particularly fond of: “jugaad,” which can be translated as “making things work.” This is one way to summarize what India is all about — and why India works as an economy, in spite of the gods and despite all of the challenges that India currently faces as a society.

This concept has taken on a lot more importance on the global scene in recent years from an innovation management point of view. A former Forrester colleague has recently coauthored a book about the concept and how it could “reignite American ingenuity.” The economic and ecological crises that we have been through over the past few years call for new ways of approaching economic development and growth. And the “jugaad” concept could bring interesting solutions to our modern societies.

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IT Service Providers Will Soon Face Operating Model Mayhem

Several recent Forrester reports, including “Mobile Is The New Face Of Engagement,” have shown how new business success imperatives are pushing clients to change the way they leverage IT solutions. In my report “The Move To An Asset-Based Services Play,” I describe how IT service providers will have to adapt to these new rules of engagement if they want to stay relevant to their clients in the long run. In particular, the increased focus on business innovation will push service providers to invest more in the development of software assets — or solution accelerators (SAs) — that provide strong business value to multiple clients.

The move to asset-based services will force service providers to invest in new operating models that differ significantly from their traditional models and are closer to the ones leveraged by software providers. In my next report, I will cover some of the associated best practices in terms of the organization, people, processes, and tools that IT services firms need to implement to make this shift happen internally. Service providers will need, among others, to recruit new skills such as product and portfolio managers, incentivize the creation of software assets, fund and incubate the creation of solution accelerators, and overhaul their partnership management processes.

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Why The Recent Infosys/Airtel Deal Is A Glimpse Into The Future Of IT Services

Infosys announced last week that Bharti Airtel, India’s leading mobile service provider, has selected its WalletEdge platform to operate Airtel Money, the first mobile wallet service in India. This announcement is interesting from a few different perspectives. First, it will provide a new source of revenues for the Indian telecom industry, which has been struggling with low ARPUs for several years. Second, it’s a boon for the banking industry, which will find a way to accelerate financial inclusion initiatives in line with the recommendations from the Reserve Bank of India. Obviously, the urban Indian consumer will also benefit from the “pay anytime, anywhere” convenience of such a service.

I also look at this deal from an IT services industry perspective, and I believe that it embeds a set of very interesting attributes that will become increasingly prevalent in the way IT services vendors engage with their clients moving forward:

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Is This The End Of India's IT Services Success Story?

I’m currently working on a report entitled “IP-Based Solutions Will Transform The Global IT Services Industry.” In a nutshell, I believe that the business model of IT services firms (consulting firms, systems integrators, and outsourcing firms) will transform from a traditional human capital-intensive model to a software capital-intensive model over the next five years. As I will detail in my report, I believe this transformation will have far-reaching implications on the IT services firms’ organizations, including their sales, marketing, portfolio management, and delivery capabilities.

As I’m based in India, I also see this change as a major disruption for India’s export-oriented IT services industry (AKA “offshore services”). I believe that the growth model for India’s IT/ITeS industry’s in the next 20 years will be much different than it has been for the past 20 years. Software assets — what I also call IP-based solutions — will become critical to the competitiveness of the Indian IT services industry. The recent investments of companies like Infosys, HCL, and NIIT Technologies in such IP-based offerings are strong proof points.

This means a couple of things for the Indian industry:

  • The Indian IT/ITeS industry will create far fewer jobs than in the past. This is what some Indian firms refer to as “non-linear” business models.
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Is Dell Finally Ready To Strengthen Its IT Services Activities?

In an interview with the Economic Times in India, Dell announced yesterday that it was readying a war chest of about US$1 billion for IT services related acquisitions in India. Here is why I think this announcement is important for Dell:

First, Dell needs to continue strengthen its global delivery network and industrialization capabilities. Dell bolstered its IT services market position with the Perot Systems acquisition in 2009. Since then, the company has made clear its development ambitions in India from an offshore perspective — including during the first analyst event they hosted in India in September 2011. The company lags far behind the services behemoths, including IBM, which has more than 100,000 staff in India working for international clients.

The India domestic market is also becoming a top priority for all major tech vendors. Forrester expects this market to grow by 20% in 2012 in local currency (see my recent report on the future of IT services in India). Japanese companies like NTT Data have launched aggressive inorganic growth strategies to tap this booming market (Dimension Data in 2010 — which was at the time part of the top 10 IT services firms in India via its Datacraft subsidiary — and more recently Netmagic Solutions). And Forrester expects more Japanese investments in the coming few months.

While IBM, HP, and Wipro Infotech are leading the IT services market in India, Dell is still marginal in terms of system integration and managed services activities. So it’s high time that Dell strengthens its presence in India.

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