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The promise of pivoting from IT services to products is great. In fact, in my blog: How IT service industry can spring back to life, I opined that product strategy would be one of the most discussed topics in the boardroom of top IT services players in the future as it creates higher entry barriers for competitors, increases annuity revenue, and has higher revenue and net dollar after tax added per person.
That said, the biggest challenge is making IT services and product business coexist and succeed–a proposition made difficult by the fact that a few fundamental business model aspects in the two lines of business differ drastically.
Top five differences are:
1. What goes in the bank? In IT services, revenue is earned either on an hourly or project basis. Subtracting operational costs such as salary, infrastructure, general and admin expenses, sales and marketing expenses, interest, and taxes from the revenue gives the profit which is deposited in the bank. In the product business, however, there is an additional cost line item–R&D. R&D is spent on features, technology upgrades and innovation. R&D adds to the value of the product and so is an asset and depreciated over time. Most IT companies do not capitalise on their R&D investments and therefore, the money that goes to the bank after deducting R&D investments turns out to be lower than profits from the service business. Treating R&D costs as an expense may keep the product business out of favor, until it is too late!
2. Pyramid or diamond
The IT services model is pyramid shaped and typically, arranged in five layers. The largest layer at the bottom of the pyramid–‘freshers’ (less than 3 years of experience), helps keep costs low. On top of it sits junior management, middle management, senior management and executive leadership. While major hiring is in the fresher layer, attrition across all layers ensures the cost structure is managed. A rigorous technology training of 12-16 weeks makes freshers delivery-ready and they further learn on the job. Conversely, in the product model, there are three dimensions to the skills required to be productive–technology, domain and the product. It takes 12-18 months for a fresher to be productive. Knowledge is not easily replaceable in the product model. Therefore, the talent model is diamond shaped with less freshers flow and a larger junior and middle management layer. Knowledgeable resources are an asset in this model and it enables companies to charge a higher price for those skills.
3. Automation, a necessity
Automation is not on ‘top of the mind’ while executing an IT services project as they are usually small to medium in size, timeframe and context. Product development, on the other hand, is of a longer timeframe with little tolerance for errors due to multiple customer impact. Capturing knowledge is absolutely critical here. Therefore, tools and automation for project management, configuration management, release management, testing, knowledge management, production support, and application performance management are investments that pay back multifold, increase speed-to-market, and keep a check on quality.
4. Architecture, a key differentiator
Products are multidimensional–they impact multiple customers, integrate with multiple third-party systems, and are compatible across multiple versions. Some of these aspects do not surface until many years after the product launch. An architecture that is flexible enough to accommodate not just current technology and business needs but also future evolution of technologies and customer needs is a critical differentiating factor for product teams. A well thought-out, future-proof architecture can save resources, lower risks, and increase time-to-market. IT services projects also take these into account, however, the impact (on cost, risk, timeline) of decisions is significantly higher for products.
5. Win some, loose some
Investments are made upfront to develop product features and like any other investment, there are wins and misses with product investments too. Some features and functionalities are multi-baggers while others are duds. Although this is unavoidable, duds can be minimised through a robust product management process. It helps to qualify and prioritise functionalities, build in checks and balances to cut losses sooner, and drive consensus across sales, product and implementation teams.
Most IT services companies are now taking the product route and investing in developing products. But to house IT services and products in the same organisation, caution is essential since the financial, HR, development and infrastructure model of these businesses widely differ. IT services, as a proven and bigger part of the business, could kill products very quickly. That’s why a deep understanding of the product business, leadership commitment, different perspective of performance measurement, financial and HR flexibility is essential for the two business lines to coexist. And this challenge is surmountable only when we appreciate the differences between the two models.
- By Rishi Kumar Jain, COO, Infosys McCamish
The thoughts and opinions shared here are of the author.
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