‘Going Digital’ – Service provider’s perspective

What Digital really means? Some say it is bringing intelligence & collaboration to a business as well as the way its clients are engaged thru innovative tech; some others restrict the definition to deploying SMACI tech to make business more efficient & profitable. I recall a recent McKinsey article that goes as far as saying that Going Digital should be seen less as a thing & more as a way of doing things – a broad definition.

Despite the lack of a commonly agreed meaning for ‘Digital’, I believe in the need for a co’s business leaders  & its IT dept. / IT service providers to have an alignment & a shared vision of the outcomes to be achieved.

Based on the diverse application of this term & my own work with clients / the firm, I feel there is a difference (contextual among other aspects) in how an service providers view Digital to how say a CIO / business leader looks at it.  This piece will focus on how technology providers are re-shaping to meet the client’s ‘Going Digital’ impetus. Management consulting is a big part of this client journey; but while being a perennial interest of mine, MC is not something I profess expertise over to the point of writing an high-quality piece.

I choose to explain perspectives from 2 angles – Portfolio & service scope, Organizational change needed to deliver strategy

Portfolio & Service scope

Around 3 yrs ago, when I heard Digital in the current context being first mentioned, it was almost synonymous with delivering SMAC (Social, Mobile, Analytics & Cloud) services to clients.  While this isn’t incorrect today, what’s changed is that a Digital service portfolio of a provider sounding more granular, specialized & offering-based rather than just tech solutions.

I’ve tried to write up a catalogue of what commonly constitutes Digital services (hopefully an exhaustive one):

1. Social & Collaboration
2. Analytics (big data, data mgmt., analytics reporting et al.)
3. IOT (Connected devices, smart environments – this is highly domain specific)
4. Digital customer engagement (CRM, customer care apps et al.)
5. Design & User experience
6. Digital enterprise (Finance, workforce mgmt. & performance analytics, learning, compliance & risk analytics, enterprise mobility et al.)
7. eCommerce – B2B & B2C
8. Digital Marketing (Campaign mgmt., Ads incl. spend optimization, marketing analytics et al.)
9. Digital supply chain (mobility in logistics & distribution, demand / supply analytics et al.)
10. Content mgmt.
11. Cloud transformation & services

With these, service providers are looking more at high margin business of helping client’s digital transformation (strategy, tech implementation) but continue to deliver the lower volume / margin business of app / infra mgmt. work.

Organizational Change to deliver Digital strategy

TCS in its Q1 results reported 12.5% of its revenue coming from Digital work; that’s roughly $2 bil annual (though a breakup was unavailable, the fact that this stat was provided itself is a big deal); also stating 38 clients to its cloud platform & 11 digital clients have been added. Cognizant & Infosys don’t reveal the Digital split of their revenues but atleast the former is said to earn $500 mil from its SMAC businesses.

Further, TCS results show a slowing revenue growth at 3.5%. I believe this declining trend over the past 4-5 Qs across the major IPPs would be primarily due to a dramatic change in the tech spending habits of clients.  Clients now want providers to not just implement or manage tech but be transformation partners in meeting their vision. The shortcomings faced by providers are in the breadth & depth of services offered – leaving clients to think of their offerings as piecemeal & not fully integrated. I also see difficulties in aligning existing tech capabilities with a client’s vision & ability to deliver transformation services.

Providers are looking at the following aspects to counter the above issues –

Training – TCS will train 100,000 of its people in Digital tech this fiscal. Other firms are following suit. Wipro plans to retrain 15-20,000 people on multiple Digital aligned tech over a course of time. This is going to be a big area of investment & focus in the coming year.

Workforce re-alignment – Several Tier-1 providers have realigned their staff into Digital BUs.

For e.g. – staff skilled in Java & middleware tech that were hitherto part of Custom dev, enterprise integration or content mgmt. groups have all now being consolidated into new Digital units (from my talk with friends in top IPPs this has so far been a cosmetic realignment than any meaningful career shift for most).

The biggest changes have been in the Infra outsourcing space, where storage & capacity mgmt. engineers, data center ops folks (onsite or remote) have to be re-trained & moved to say Hybrid cloud based platforms & cloud offerings. This is true for staff working on Tier2 / Tier 3 apps support where SAAS based apps have rendered large-scale support teams meaningless.

E.g. – Wipro, on the other hand setup a 250 member group called ‘Team Unicorn’ to further its Digital push.

Internal re-structuring – Interestingly, I’ve observed Digital becoming an independent BU lying outside traditional industry based verticals rather than as a cross team horizontal. Maybe this is because of the focus needed here as well as for good client spiel, but I also believe workforce aligned to this independent Digital BU would be expected to develop into a strong collaborative community & staff would be ‘loaned’ to the industry based verticals for specific projects.

Cognizant for instance, collapsed several units delivering SMAC work into a single BU called Digital Works

Lower margins, utilization & higher client engagement – Planning to deal with the fact that Digital work are more projects than traditional multi-year outsourcing arrangements. Since the business development (BD) costs on sales tend to be higher & the engagements are shorter, there is pressure on revenue productivity & staff utilization. The best way, I can think of to offset is to build world class offerings & strong customer credentials to increase footprint across clients & solution re-use.

Wipro aims to extract $1 bil from Digital sales in next 3 years – the way these monies will be earned will be very different from the past.

Acquisitions

It’s no secret that Tier-1 IT firms have money in the bank & are targeting specialized Digital firms for acquisitions – $20mil to $100mil range.

Noteworthy events include –

• Wipro bought a 20+ year old Danish design firm DesignIT. This will probably form the core of its new Wipro Digital arm
• Cognizant bought Trizetto (healthcare), Odecce (mainly mobility solutions) & Cadient (digital marketing)
• Infosys acquired Kallidus (e-Commerce tech) & a $500mil outlay for more buying
• TCS acquired Digilenta

Branding

I couldn’t hide my surprise Wipro Digital sponsoring the precursor to Wimbledon, the Queen’s club tourney.  Marketing exercises to show Digital competencies existing is a big ongoing initiative. Cognizant’s Digital Labs is a case.

Alliance Partnerships

In traditional outsourcing, provider alliances with large vendors such as Oracle, SAP, EMC, MS was literally worth it’s weight in gold.  Strong alliances meant sustainability, credentials & ability to be on their band-wagon (albeit this was a symbiotic relation).

In the Digital business, these have become more complex & obscure. Large vendors themselves are threatened / on unsure footing; providers now have to deal with a lot more smaller partners with murky business plans. Hedging the right bets on these new co.’s is a big challenge. This dynamic is putting more stress incl. costs on the ops, vendor relations /procurement, finance & leadership teams within the service provider organizations.

Now onto ACN – I deliberately desisted using any Accenture citations so far. But it is pleasing that our firm has executed very well in most of the above considerations. Making a head-start in Digital investments incl. targeted acquisitions, its consulting strength & driving internal changes to meet the client demands. I am not privy to internal details of other top co’s beyond what’s available in public forums nor I am at liberty to discuss our firm’s strategy / work, but I feel very confident. Our stock price is at a lifetime high & reports of a revenue jump from monies earn delivering Digital work – @ 20% of our $7.7 bil revenue in the latest quarter. I plan to write a full piece on our performance in FY16 results post the Q4 results. It requires analysis & cautious writing to comply with our social media policy 🙂

Revenue per Employee – An interesting study would be the digital revenue per digital employee across top service providers. Here is an illustration from Mint

Digital Revenue per Digital Employee

Source – http://www.livemint.com/Industry/3gZ9I7orGbi4ttgx4FrhiP/How-digital-are-Indian-IT-companies.html

In summary, over the past 20 years, tech & outsourcing providers have become hugely successful delivering everything from staff aug services to dev / projects to large scale app / infra mgmt. support. A veteran IT executive told me last month that once you established a ‘beach-head at a US client’ in the 90s & early 00s, it wasn’t difficult to grow your headcount to 500-1000 FTE & that this isn’t easy now (in traditional IT). In the future, such expansion of headcount will be even harder as a combination of new age tech & tech-savvy business leaders are forcing service providers to innovate, differentiate & transform themselves.

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Note – I know I am doing a disservice to the reader not discussing anything about IBM’s work, but this is due to lack of awareness!

Image courtesy – Pixabay & Mint

Disclaimer – All info sourced are available in the public domain.