The Next Generation Systems Integration Firm

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The systems integration (SI) business — also referred to as external IT services by analysts — is in the throes of a transformation.

To understand why we need to see what has changed in whom the SIs serve.

For most Fortune 2000 enterprises, and for almost two decades, IT has been the cornerstone of their strategic initiatives to increase productivity.

The CIO was the kingmaker responsible for these IT projects.

And the business of the systems integrators — like Accenture, IBM, CSC, TCS, Infosys, Wipro, and Cognizant — was primarily built around the CIO. To provide for his or her needs, whatever they may be — from providing skilled IT resources and delivering enterprise software implementations to developing custom applications and managing IT infrastructure.

The skills and capabilities of the SI employees reflected these jobs they were hired to do.

Understand current systems. Gain expertise in technologies that exist in the marketplace. Manage implementations. Provide BPO services.

The operating model was to a) hire resources in low-cost offshore and nearshore centers, b) deploy them on IT engagements sold to customers in developed countries, and c) bill customers and make money on the arbitrage.

The business model was a hugely successful one, with offshore based systems integrators building multi-billion dollar services businesses over the last two decades at 25+% EBITDA. In addition to financial performance, they measured themselves on metrics like Utilization, On-site vs. Off-Shore Mix, # of New Hires, etc. Many of the large SIs employ hundreds of thousands of employees and continue to add tens of thousands every year.

But this party is coming to the beginning of the end.

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2

Six Things are Changing.

1. New Technology Buying Centers: The CIO is no longer the only kingmaker. There are new players like the CDO (Chief Digital Officer), the Chief Marketing Officer (CMO), the Chief Data Officer and the Chief Information Security Officer (CISO). The CxOs of today have very different requirements and needs. They seek partners who can innovate, create, design, re-imagine and help chart new paths, and be accountable for success.
2. The Cloud Reduces the SI Tax: Computing workloads in enterprises are starting to move to the cloud. Currently, less than 5% is on the public cloud, but a massive transition is expected over the next decade. Which means that more enterprises will use AWS, Azure and Google Cloud for infrastructure management vs. doing it in-house or using SI hosting services. Increasing popularity of SaaS also means the days of massive SAP implementations costing hundreds of millions of dollars are over. Enterprise SaaS projects require far less customization and integration work, translating to a smaller SI tax.
3. Digital Transformation: Increasingly, digital is impacting every industry and every line of business within an enterprise. And companies need help in creating new digital products and solutions. These opportunities are dramatically different from traditional application development and maintenance projects. Digital engagements require the ability to understand user needs from the ground up, define problems, design new experiences, conduct experiments, and iterate fast with rapid prototyping.
4. The Increasing Role of Marketing in Technology: The CMO is expected to have bigger IT budgets than the CIO by 2017. Almost every aspect of marketing has been transformed by digital and data has emerged as a fundamental pillar of marketing. With digital blurring the lines, hitherto two separate industries — advertising agencies that create and execute marketing campaigns, and systems integrators who implement technology — have started to converge and compete for the same dollars.
5. The Consumerization of Enterprise Technology: Google, Amazon, Apple and Facebook are the default standards of what people expect to consume in the name of technology. These expectations are carrying over to the workplace and fundamentally reshaping enterprise technology. There is no place for stodgy and bloated apps with horrible user experiences. Millennials and tech-savvy employees are demanding consumer-type enterprise applications that are beautifully designed, simple to use and powered by intelligence. Capabilities like natural language processing, voice recognition, computer vision, virtual / augmented reality, messaging based collaboration and deep learning are making their way into the enterprise.
6. Shift to Outcome-Based Services: Increasingly, CxOs want to deal with technology and solution providers who can take accountability for specific business outcomes. It is no longer sufficient to sell technology, people and services without being fully accountable for the business impact or the lack thereof. Realizing successful outcomes is an essential part of the relationship, not an afterthought.

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What Does All This Mean For The SI Business?

The good news is that the pie is expanding. The bad news is that the old keys may not work anymore.

To succeed, SIs will first need to bring about change within themselves. So that they can help their customers drive change.

1. They need new skills and competencies.
2. They need new operating and business models, and new metrics.
3. They need to change the culture.

New Skills and Competencies

SIs need new capabilities in the following areas:

• Problem Definition, Discovery, and Validation
• Understanding Branding and Designing New Brand Experiences
• Ideation and Execution of Marketing and Advertising Campaigns
• Market and Customer Research
• UX (User Experience) and CX (Customer Experience) Design
• Business Strategy, Product Strategy and Go-To-Market Strategy
• Customer Development
• Solution Ideation and Validation
• Rapid Prototyping and Development
• Product Management
• Understanding data and actionable intelligence from a business perspective and in the context of the buyer’s journey, not just as big data and analytics projects
• Ability to connect the dots across multiple domains, and transcend silos across the customer’s organization.

A next generation systems integrator must be able to operate at the intersection of strategy, customer experience, design, product development, marketing and technology. The SI must be able to seamlessly blend multiple competencies to act as a strategic partner to CxOs. This requires them to transform from a one-trick pony with deep expertise on executing technology projects to a multi-dimensional firm that can help clients a) identify problems, b) bring solutions to life and iterate to what works, and c) realize business value and optimize over time.

New Operating and Business Models

Pure people based models need to transition to a) people plus software models that make people more effective, b) software plus people based models that deliver whole products at scale with non-linearity, and c) outcome based models that use a specific and engineered blend of software, processes and people to achieve specific business outcomes in a predominantly non-linear mode.

People, Software, and Outcome Based SI models

To clarify, let me use the example of a US retailer seeking to implement a new loyalty program.

In the people-based model, the SI sells consulting time to help implement packaged software like TIBCO Rewards. The CIO buys an enterprise software license from the software vendor and engages the SI for the business analysis and the technology implementation. It is a $8 M deal over 3 years, based on projected number of consultant billable hours.

In the software-based model, the SI sells a hosted software solution for loyalty. The head of loyalty of the retailer buys software subscription + implementation services from the SI. It is one part of a larger program implemented with multiple third parties. It is a $4 M deal for software + $4 M for services (over 3 years).

In the outcome-based model, the SI is engaged by the board and CEO of the retailer to be the outsourced end-to-end provider of loyalty-as-a-service, including the management of the data-as-a-service business from loyalty data. It is a $ 350 M contract over 3 years + variable yearly bonus based on increase in uplift + 20% revenue share from the sale of data subscriptions to CPG companies. The SI is a business partner accountable for creating and managing a company-wide loyalty program, and for specific metrics related to adoption and revenue.

Here is more contrast between people, software and outcome based models.

And the variations in deal sizes, margins, and risks.

The metrics for success in the new models are no longer just about internal metrics that optimize utilization, % of the people on the bench and off-shore to on-shore mix. They are linked primarily to customer success and customer value realization, and secondarily to revenue and profitability per employee. There will indeed be a hierarchy of metrics related to value realized and captured, starting with the client’s customers, flowing back to the client, and then to the systems integrator. Helping clients help their customers realize and perceive value is the centerpiece of this new landscape.

Changes to Culture

The culture that helped execute the old operating model was one that valued:

• obedience and order-taking over debating and challenging the status quo
• process and efficiency over creativity
• specialized skills over connecting the dots across domains
• executing a known solution for the problem customers claimed to have vs. helping them search for and find the root causes of the symptoms, and ideate new solutions.
• Utilization and billings over investments

Executing the new operating and business models demands a conscious change to the culture. In my view, it involves seven key elements.

1. Short vs. Long Term Thinking: The board and management of the SI need to make explicit trade-offs in terms of investing in the new models vs. short-term EBITDA. Or they run the real risk of optimizing for short-term margins at the cost of long-term growth, profitability and even survival.
2. Hire for Diversity: Hire at all levels for the skills and competencies required to execute the new operating and business models. Also hire for intersectional diversity in gender, ethnicity, ability and background.Liberal arts and philosophy majors can solve problems just as well, if not better than computer science majors. Diversity is an essential pre-requisite for creating a culture that can deal with reality, learn fast, and build new things. In select cases, M&A can help acquire new competencies with faster time to market.
3. Invest in Extensive Training and Continuous Education: Not just on hard skills but also on soft skills related to searching for and finding the right problems to solve, working effectively with clients, collaborating with colleagues, and building new products and services iteratively with the market.
4. Encourage Multiple POVs: Build an environment where debate and discussion is actively promoted at all levels. Let it be known clearly that it is critical for employees to ask questions, raise red flags, and provide alternate points of view. Getting to the right decisions is a lot easier when there is a culture of pursuing the truth.
5. Organize for Customer Success: Measure and incentivize business units not just on financial metrics, but also on value created for customers. Customer success should be baked into the operating and business models and be an integral part of every decision.
6. Culture of Building: Traditionally, SIs have focused on absorbing technology that already exists and implementing them. The Next Generation SI needs to learn to build intellectual property that can be deployed for multiple customers: including new software, and new outcome based offerings that stitch together multiple kinds of software and services. This needs an environment where curiosity, learning, tinkering and experimentation are prized and promoted.
7. Tolerance of Failure: This is probably the most important element of all. There can be no innovation without learning and the freedom to fail; there is no freedom to fail in an environment of fear and penalty; and no ability to learn without making mistakes.

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Every employee of a SI selling people-based services needs to ask their management team if they have a considered plan to become a next generation SI firm. Do they acknowledge the risks of their current business model? Are they paying lip service to new things, or are they serious about a fundamental transformation?

Of course, there is no quick fix and any such transformation will play out over many years.

But.

It is a journey that is absolutely necessary to skate the company to where the puck is going to be, mitigate the risks of being commoditized and made irrelevant, and help guide the SI’s portfolio of products and services towards a more balanced revenue mix across people, software, and outcome based models.

The deal for the SI is that in exchange for the willingness to transform and invest at the cost of short-term margins, you buy the option to a better future with higher gross margins, higher revenue growth, substantially higher revenue per employee and better-operating margins.

And most importantly, develop the ability to become a trusted partner to your clients.

To help them transform and become the next generation enterprises in their own industries.