“In Biggest IT Deal, HCL Tech To Buy $1.8 Billion of IBM Software” screamed the headlines. While the size of the font in the headlines was because of the dollar figure, one wishes it was more because a leading Indian IT Services company was investing in products. There is reason to be skeptical, though. This happening may be no cause for euphoria (as evidenced by the thumbs-down given to the deal by most analysts) for a number of possible, and more probable pan-outs as has happened in the past, with Product acquisitions in Indian IT Services companies:
a. The clientele that these products bring into the IT Services company gets targeted for the traditional service offerings, and that gets classified as success enough for these acquisitions;
b. The revenues from ‘servicing’ these products (maintenance, customisation) become too tempting as ‘low hanging’ fruit;
c. The acquired products are seen as platforms to ‘hang’ some of the other services that the acquiring entity is known for;
d. After about 3 – 5 years, these products become ‘service’ offerings.
No business in Indian history has had the kind of spectacular success that the IT services exports has had, in the last 3 decades.
True to the maxim that success is the greatest enemy of change, all suggestions to do anything other than manpower-intense IT services were curtly rejected.
The number of jobs and those swanky campuses spawned the inertia that has now become a gigantic mountain to climb.
There is this fear of one’s image in the eyes of the customer as IT Services provider getting damaged – services being always product agnostic. Then there is the possibility of antagonising the global product companies whose blessings are essential to perform majority of the services at the customer sites. Not to mention the competence and ability to explain – to employees, shareholders and customers – the common strategy umbrella that accommodates both products and services. (Note that the shares of HCL Tech fell 7.7% on the day of this transaction.)
On the flip side, taking advantage of the absence of taxes on dreaming, as also the lack of penalties for doing so, let’s go ahead and celebrate this event as the beginning (2.0?) of the IT Services industry embracing products. Here’s how and why it could be transformational.
A. Products are for Markets, Services are for Customers
Markets are aggregates of customers who buy for the same reason(s). With Products, you get to serve multiple customers with similar aspirations. A Service is, almost always, bespoke.
B. Products encapsulate a company’s Intellectual Property (IP)
You pour all you know about the Markets you serve, and the technologies you understand into a product. The IP in a Service belongs invariably to the Customer. HCL’s price for the IBM products looks so good because of IBM’s IP that comes along. Note the 11x revenue that IBM paid, to buy Red Hat a few weeks ago.
C. The E/S ratio in IT is highest in the Products’ business
The Earnings-to-Sweat ratio is highest with Products. Just watch the huffing and puffing in each project that our IT Services people deliver.
D. Needs Organisational structures that are a mix of Market and Technology
Tremendous discipline is called for, in putting a Product organisation together, with no fat, and very little scope for error. It has great impact on all other parts of the company as well.
E. Calls for deep and good quality Market knowledge that will ensure our relevance and longevity in the global IT Business
All IT Services companies are either revenue-driven, or technology driven. Being Market-driven is the only way to build a self-perpetuating business.
IT Services, as an industry, became and remains an inspirational model for export-led industries in India, such as Pharma and Auto Parts.
The business turbulence of the last few quarters in IT Services is a signal that as an industry, a quick re-boot is called for. Maybe the IBM products in HCL’s basket will be the spark.