On June 6, iSoftStone announced plans to make the company a wholly owned subsidiary of China Asset Management Co., Ltdand delist from the U.S. stock market. This is the fifth IT services (ITS) provider headquartered in China to announce plans to go private in the past 9 months. The others were Yucheng Technology, AsiaInfo-Linkage, Camelot and Pactera.
Why are these firms going private? Despite ambitious global growth plans, Chinese ITS providers have largely failed to articulate a compelling value proposition to U.S. and European clients. By focusing mainly on low-end application development services they have instead primarily competed with much bigger and much more experienced Indian providers – but without the ability to offer lower costs. In fact, the average profitability of Chinese ITS providerswent down from 10-15% to less than 5% over the past 2 years, when most large Indian firms are in the 15-25% range. Going private will give these5companies a chance to transform their current model relieved from the quarterly pressure to meet Wall Street analyst expectations.
Existing and potential customers of these ITS providers may have concerns seeing these providers going private, particularly regarding overall company transparency, including financial strength and corporate governance. I believe clients will have to balance their concerns against the potential benefits that going private may deliver, which include:
Google is officially serious about the enterprise space. I met with Google Enterprise execs hosting their very first analyst day in Singapore recently, and was introduced to their enterprise suite of services, which was, unsurprisingly, similar to their consumer suite of services.
However, while they took their starting point from the consumer end, providing enterprise-ready solutions requires a different level of product calibration. To that end, Google cites spending of approximately US$3 billion annually on building/improving its data center infrastructure, investing in undersea cable systems, and laying fiber networks in the US specifically. In Asia Pacific (AP) last year, they spent approximately US$700 million building three data centers in Singapore, Hong Kong, and Taiwan.
In addition to infrastructure investments, Google has also acquired companies like Quickoffice to enhance their appeal to enterprises weaned on Microsoft Office, while also expanding existing offerings in areas like communications and collaboration (Gmail, Google Plus), contextualized services (Maps, Compute Engine, Big Query), access devices (Nexus range, Chromebook), application development (App Engine) and discovery and archiving (Search, Vault).
Sourcing professionals already understand the importance of monitoring financial performance to assess risk in their key suppliers’ ability to deliver commitments. Sometimes sourcing professionals can also find valuable negotiation leverage in the financial results of their key suppliers, as is the case with Oracle’s Q4 2013 numbers . In my opinion, the revealing aspects that you can use to increase your bargaining power over the next couple of quarters, include:
I concluded my March 2013 report on the role of software assets in business innovation by proposing that “The combination of software assets, strong domain expertise, analytics, and as-a-service delivery models will increasingly allow traditional service providers to reinvent the way they deliver business value to their clients.” I was glad to hear that IBM recently announced a deal with L’Oréal that directly supports this position. The announced engagement actually includes all these components:
The procurement domain expertise of IBM Global Business Services addresses business pain points. L’Oréal USA grew rapidly over the past few years via an aggressive acquisition strategy that caused indirect procurement processes to remain highly disparate. The company knew that there was a significant gap between negotiated savings and realized savings in its indirect procurement operations. IBM GBS consultants brought strong procurement expertise to work with L’Oréal’s existing sourcing team to transform existing processes. IBM Global Process Services (GPS) category experts are working with L’Oréal to develop and implement category sourcing strategies.
The IT services industry is being challenged on two opposite fronts. At one end, IT organizations need efficient, reliable operations; at the other, business stakeholders increasingly demand new, innovative systems of engagement that enable better customer and partner interactions.
My colleagues Andy Bartels and Craig Le Clair recently published thought provoking reports on an emerging class of software — smart process apps — that enable systems of engagement. In his report, Craig explains that “Smart process apps will package enterprise social platforms, mobility, and dynamic case management (DCM) to serve goals of innovation, collaboration, and workforce productivity.” In other words, smart process apps play a critical role in filling gaping process holes between traditional systems of records and systems of engagement.
Many clients ask me for help in dealing with very large software companies who, in their opinion, always seem to have the upper hand in negotiations. "How can I make myself less dependent on X?" they ask, or "how can I cut the amount I have to pay Y each year?" They're CIOs or sourcing professionals who are used to being able to push suppliers around, threatening to kick them out if they misbehave, and they struggle to accept the reality that their normal tactics won't work with the likes of IBM, Microsoft, Oracle, SAP. My advice is, get used to it. These companies have grown so big and profitable that they will dominate the business technology market for years to come. Yes, they will face competition from younger companies, but they generate so much cash and have such strong embedded positions in so many enterprises that they can always acquire the upstart, or develop a product that beats it in most deals.
However, the software giants' huge power isn't necessarily a bad thing. Their scale enables them to spend far more money on development than their smaller rivals, and this usally results in excellent innovative products. Yes, they can also be inflexible, siloed, frustrating, bureaucratic - but when it comes to software development, size matters. So there really isn't much point in questioning whether the world would be a better place if these companies were much smaller than they currently are. Instead, we should accept reality and learn how to survive and thrive under their rule.
The Asia Pacific mobile payment landscape is currently in an exciting phase of development, but remains fragmented. Asian telcos will likely need to wait at least another two to three years to see traction with mobile payments. Here’s why:
User readiness. Let’s face it: Cash and credit/debit cards still dominate the payment landscape, and are a lot more convenient to use. While penetration of feature and smartphones has grown substantially in Asia, not many people actually use their phones for mobile payments. Even in markets like Australia and South Korea, cash and credit cards remain highly popular among consumers. And if demand remains low, merchants will not deign to accept mobile payments — creating a vicious cycle.
Infrastructure development. Telecom infrastructure in many Asian countries remains uneven with spotty coverage, (e.g. India and Indonesia). Without proper network access, mobile payments will not propagate outside of urban areas, if at all. While Globe’s Gcash has seen some level of success, the truth is that mobile payments remain nascent in the Philippines specifically and in Asia more broadly. In addition, there is still limited handset support for mobile payments (e.g. some Android models are not able to work with a service). Australia’s Commonwealth Bank went ahead with its m-payment launch after deciding not to wait for incompatible handsets to catch up.
China’s GDP growth slowed to 7.7% in Q1 2013. While below market expectations, this growth rate still ensures strong continued IT spending, as local organizations seek to meet ongoing demand for products and services. At the same time, we expect Chinese government stimulus packages to drive increased consumer demand, particularly in the retail, supply chain, and banking industries. Chinese organizations wishing to capitalize on these opportunities are currently seeking ways to transform their business and decision-making processes and broaden their product portfolios. This, in turn, has driven increased interest in third-party service providers as organizations seek to augment limited (or, in some cases, nonexistent) internal IT capabilities.
Recently I spoke with IT managers at two local Chinese companies; they shared their recent experience with third-party service providers.
A top 5 Chinese insurance company worked with multiple service providers to strengthen its CRM data mining and analysis capabilities. While this company started its CRM implementation project in early 2006, it still had limited capabilities to manage fast-growing customer data, which was essential given the increased presence of foreign insurance companies in the local market. In response, the company sourced application development and modernization services from Accenture, primarily to define a data architecture and deliver analysis capabilities. With these new functions added to their existing CRM systems, the company enhanced customer data analysis capabilities, grew related sales, and improved customer experience/loyalty.