Why are IT services firm so confused and mess up when they sell their home-grown products and IT service?

IT services companies agents do miserably in pricing, selling and delivering their home-grown IT products and associated services. Why does this happen?

1. The sales and marketing team often sell IT software product like services instead of selling the products and then add-on services
2. The solution architects simply dont get how to solution and postion the services and IT Software product separately
3. The marketing folks are confused on how to price the licenses and support for the IT software products effectively and competetively in the market.
4. The delivery team often dont get the fact that you need to run the IT software products business like a product company and not like services. For example they need a Engineering team, development team, dedicated resources who can work on products, processes and methodologies for product development in line with what is used in the industry, professional services arm which focuses on services, which is seperate from the core products team, incentives and motivation for the team in line with industry standards, nurturing and influencing the ecosystem of the IT products through investments and participation, having a support team which focusses on providing ongoing support, a release and program management and product management team that works with cross-functional team and vendors out there to drive features,/functionalities/releasesetc.

The above are only a few, but the biggest challenge often is how do IT services companies solution and price these products?


So what is the right model to sell Home grown IT software products and associated service. To answer this lets look at what SAP and Oracles of the world do and learn from them:

SAP and Oracle charge a Software update and Product support yearly fee of ~25% of their license fee. Ofcourse, this can be negotiated. The software Update and Product support comes with free maintenance packs/patches, ongoing vendor support for product issues. If you keep applying the regular patches and maintenance packs and have done no bespoke RICEF customizations it is as good as upgrades. But this is seldom the case as any enterprise application will require you to build RICEF to work with other IT systems in organization that’s where IT service providers like us fit in.



Given the above background, if you are selling home-grown Software product, client is expecting you to provide this software update and product support. But this doesn’t come free; you have to charge client with a yearly fee a.k.a. 25% of software license fees. I don’t know what is the standard that is charged for the home-grown software product update and software support . You should provide ongoing Software updates/fixes to the product as this is home-grown software and you would have roadmap of future releases that enhances the product based on some charge. Over and above this you need to also clearly separate AM work for client like the way IT services firms do for SAP/Oracle and estimate this work and provide this as a separate service.



So your overall pricing = Home-grown software product license fees + Implementation Fees + Ongoing product and Software support fees + Application maintenance fees.



The first 2 components will be SI and does not concern your ongoing IT services. The last 2 is where you need to separate this our clearly and charge client as you are both the software vendor and application maintenance/management vendor. IT services companies often muddle up the last two components as they don’t have an existing shared services based support team which people like Oracle and SAP does so they often get confused and muddle up the scope of ongoing product and software support with application maintenance. My submission would be to scope and separate this out clearly and position this to client team so they can pitch it to client.

Why IT service providers are not successfull in selling home-grown software products?

Have you ever wondered why pure play IT services companies are a utter failure in selling a home-grown software product to clients? They are good at providing services and sometimes service large product vendors like Oracle and SAPs of the world to create world-class products, but they fail miserably in either creating industry leading IT software products. Even if they have one they are unsuccessful or rather pathetic in making their products successful in the market. Some of the reasons I believe are:

1. They often dont have the R&D budgets to create and sustain the products in the market over long term.
2. They lack the pricing and delivery acumen to run the Product Update and Software support leaving the clients high and dry with poor future release road maps and upgrades
3. They fail to understand that product support is critical as no IT software product can work independently without configuration, but rather a part of the larger ecosystem requiring ongoing support and maintenance.
4. Since Software product licensing and selling is not their core competence it often takes lesser priority both in budgeting and resource allocations in the firm.
5. They look at every new client opportunistically and when they sell their products they also end up selling part of their critical resources (manpower) into services work leading to lack of competent people to providing ongoing support to product development.
6. The incentives and motivations for for sales and delivery of software products are not commensurate with the risks and efforts of the team. Often they see their services counterparts have better incentives and well motivated.
7. It requires commitment, patience and diligence on part of management to make the software product successful, which they often lack. They take the easier and quicker route of generating the same by selling services.

What can a IT services player do to make their software product successful:
1. Hive-off a separate software product Legal entity rather than subordinating it to the larger services organization. With this you also end up having dedicated management that reports independently to board, separate books of finance, separate HR policies, separate budgets and commitments to make it a successful business.
2. Operate the IT software product business as per the norms of the industry rather than that of a services firm. Eg: Professional services arm instead of full fledged services focus, engineering team for product, R&D budgets for future product releases, participation in Software standard bodies to influence the standards, etc.
3. Have the software licensing and support model in line with the IT products industry norms.
4. Have an arms length transaction in sales, delivery and services around the Software product.

Are IT sourcing Third-party advisors losing steam?

IT Third-party Advisors for sourcing were viewed as trusted advisors and facilitators of IT decions by several large client. We have seen several TPA both global and niche players in the last decade 2000-2010 offering services such as soucring/legal advisory, facilitating bids for clients through their standardized templates/process, information reports, etc. They had played a crucial role in helping clients in making the righ sourcing decisions on the buy side and providing a good marketing/information service for the sell side clients. Hence their role as information intermediaries for the IT industries had worked extremely well.

With the IT industry maturing and their outsourcing services getting commodotized the large question comes to mind if their sourcing services are helping discover value for the outsourcing clients?

The clients on the buy side have the following percpetion about these intermediaries:
1. Makes the bid process expensive due to the long buy cycle
2. Generalist mentality pushing procurement process, legal diligence, etc. while losing the larger focus on bringing value to the businesses that sponsor the outsourcing decision in long run


On the sell side the Being in the IT industry have the following perception:

1. Paper pushers whose primary drive is in filling templates and lack of transparent rating process leaving the IT vendor confused on client buyer values
2. Make the entire sourcing process driven from legal standpoint rather than really driving value-buy decisions for client.


We have been seeing sever TPA in the market either closing shops or getting acquired by larger TPAs (a.k.a consolidation drive). As most of the IT outsourcing services are getting commoditized leaving us with few questions:
1. Are the TPA really adding value to Client buyers and IT vendors?
2. Should client be paying TPA for sourcing advisory services considering most of the information are in public domain?
3. Can this be a free service offered to clients rather than a paid service?

What next? - IT outsourcing industry.

We have seen some interesting differentiators used in winning outsourcing deals in the last decade:

Technology based
1. Communication/Connectivity technologies
2. Internet technologies
3. Emerging technologies????

Event based
1. Y2K
2. Dot.Com

People-based
1. # of graduates (engineers)
2. Talent pool

Business/Economic based
1. Manufacturing -> Services

Quality based
1. Quality certifications leading to claims on Industrialized/factory model for delivery

Cost based
1. Labor arbitrages
2. Factor costs based on countries

Risk based
1. Shift and degree of accountability and ownership changes

What is the next dominating set of factors that could (re)shape the IT outsourcing industry?
- Politics (Regulation, taxation of outsourcing industry, and other trade impediments)
- Economics (Inflation, Exchange rates,....)
- Social structures (Free agents as opposed to employees of organization, ???)
-????

Setting-up and Running a successfull business in India - A Pardocixal market for the mystics

India is a market filled with Paradoxes...every MNC that come here get carried away by the GDP growth (6-7%) even during recession, the middle-class size (remember the 200 million middle class episode painted by Chidambaram in late 90s and the market flooded with MNC searching opportunities), the growing affluent class (also remember the Percapita income of ~USD 3000) demanding new products and services, deregulation and progressive structural changes in economy leading to open policies for investments (remeber the 1991 deregulation and the gradual expiry of license raj), strong regulatory & legal system (IRDA, RBI, TRAI, NASSCOM, you name it all strong) etc. Among all these positives juxtapose the abject poverty with more than 25% of population living below poverty line (BPL) with a Gini Index of 36.8 (not really bad is it..but then this was in 2004 and it had a rising trend...also this is a sample and knowing fully well we have no basis to anchor on this number!), 86th rank as the most corrupt country, the infrastructure (social/Physical/Infrastructure) in shambles, pending cases that comes for hearing after the petitioner dies (remember Lakhubhai Pathak and NRI who has the famous Masala, pappad business who died before his corruption suit against the Govt. of India was filed), largest stock market in Asia with ~ 5000 companies listed and actively traded in the market, etc. You bet this is country of paradoxes....


Now why is this country so mystical. Look at it this way there are great academicians (remember the number of Indian Profs have taught you in your PG courses in US/AUS/UK/etc.), Nobel laureates (Chadrashekahr, Raman, Venkatraman Ramakrishnan), CEOs (Vikram Pandit, Indra Nooyi), relegious leaders (Buddha, Mahaveer, Dalai Lama, Vivekanand), environmentalisits (Pachuri), Sociologist (Amartya Sen), poets (tagore), activist (Gandhi) endless names...all eminent people who have played on the World platform and recognized for their endeavors that shaped and changed the world, but how much impact did they have on India? Have you ever considered why? sometimes it make me believe they are all mystics of India!

I'm sure we may not have answers to it...these are profound questions not worth bickering...

But lets look at what is required to set-up and run a successfull business in India...what wualifies me to say this...well I'm entitled to my perspectives as I've set-up and run a business for a MNC in this very market...but unsuccessfullat that...Well I've walked the talk (shall I say my inflated overambition busted by the reality of the markets) by set-up a business, accepted a sales target and trying to meet these numbers in a year in this market...

Lets simply see what it takes an MNC to set-up and run a successfull India market:


1. Setup a separate LE with following mandate: RoI focused, Separate brand (avoiding brand dilution of Accenture), engineered cost/price/margin structures to meet market requirements, focused team and differentiated operating model.
2. Define sharp Go-To-Market-Initiatives for key growth areas (Government, Banking, Communications, etc.) in collaboration with partners (Hardware, OEMs, etc.) in the market.
3. Provide Autonomy to India team: Empower the India team to run the business enterprisingly and enable decentralized decision making.
4. Remember three golden rules to foster business in Indian market: Cost, Cost and Cost.
5. Be conscientious of India market paradoxes and don’t set unrealistic growth goals.

I participated in an Idea competetion with my above perspectives before my CEO visited India and lost in the competition...so dont take my perspectives too seriously :-) ....

Are you leading with a mind on your brain?

I read an interesting neuroscience research on how socail nature of humans define the high-performance in workplace....http://www.strategy-business.com/article/09306?gko=5df7f

I tend to agree part of the reasearch in my real-life experience. We often feel utter dispair in working in some environments where SCARF: Scare, Certainity, Autonomy, Relatedness and Fairness was absolutely lacking in one or more of these factors. We feel restless till we get out of the environment and it was quiet pleasing to realize that the author has put a well defined structure to understand why we feel so and why we avoid getting into such work environments....


However, What made me wonder is that if there is tolerance levels for each individuals to handle the lack of SCARF factors?

In my view and insight it is "YES". Some individuals have higher tolerance levels to handle lack of SCARF factors in work environment. I guess they probably do the following to survive longer in the environment:

1. Ignorance is bliss: They are highly people oriented and lack sharp cognitive skills that allows them to carry on longer in such environment purely due to lack of choices.
2. The Ventilator: They find equal minded people and socialize more to share their work woes with similar collegues and jointly vent out the frustration, which eventually allows them to sustain the lack of SCARF factor longer.
3. Fatalist: People accept that as their destiny and continue to work in such environments.

What do you think?

Viewing outsourcing deal through the Contract lens - Transaction cost perspective...

I was reading an interesting article from Olivier E Williamson, who won the 2009 Nobel prize for economics....Just curious if it was due to Obamanomics (the obama factor you see...the guy who won Noble peace prize for 2009 for just being what he will be (did)/should be (do) than what he is)....He has viewed the entire transaction cost economics from the contract lens...there are few powerful insights that he shared and it reverberated with my current thinking and challenges that I'm facing at work on day-day basis...


1. Contract refrative index theory (This term is copyrighted, dont steal or quote this term ;-): Contracts tries to capture ideal transaction cost, but often the real/hidden transaction costs are visible when it is actually implemented.
How is it relevant to IT outsourcing Industry: Simple you may present great solution and contract it with client, but if you do not have the experience/acumen to see through the real/hiddent transcation costs that may emerge during implementation, you will end up losing the game. maybe not in short-term but long-term.
2. Hostage Theory: All contracts are made for mutual gains and at the same time it should also capture/share losses if the other party terminates.
How is it relevant to IT Outsourcing: Simple no matter how you structure a deal, if either party are not willing to share losses as equally as gains it will be an unsustainable deal (meaning we cant execute the deal without heartburns and with degree of fairness that will leave the client and supplier happy).
3. Incomplete contracts: No contract out there is completely complet in the realm of bounded rationality. In reality there are so many factors to be considered, that it is impractical to nail it down on contracts
How does it apply to IT outsourcing contracts: Common guys (I mean lawyers) just wake up, dont think you have protected your client (i mean in terms of lawyer, the cupplier and the client) from every feasible uncertainity. We are all humans and our rationality is bounded in utopian world but predictably irrational in real world.

So what does it make my position on lawyers/contracts and analysis of why Indian Pure play firms are more successfull in some areas that large outsourcing vendors who have presence in India...I still stick to my view that lawyers overcomplicate things and loose focus that business transactions sometimes have to be based on trust and good intentions....An optimist view not a pessimist view....Have an open mind for the predictably irrational!