Structure versus strategy: The struggle at IT services firms
IT services firms are seeing huge pressures on margins; unless their structure adapts to new strategies, efforts to build new revenue streams may not succeed
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Long back, Alfred Chandler proposed the management theory: “Structure follows Strategy”. Based on his study of American conglomerates that dominated US industry from the 1920s to the 1950s, he postulated that corporate strategy usually determined long-term focus and outlook. Firms use corporate strategy to determine the organizational structure that would help them implement their strategy on the ground. Structure, he felt, was a derivative of strategy. As strategy evolved, structures would change to support it.
This view was countered by David Hall and Maurice Saias in their essay, Strategy follows Structure. They argued that structure, far from being just an enabler of strategy, often was the choke point when strategy changed.
The current scene at many of the information technology (IT) services firms reflects this battle between strategy and structure.
Many Indian IT services firms were founded on high availability of skilled manpower in India at a significant cost differential from the developed countries. In their first phase of growth, this was a huge advantage. The huge workforce, growing to tens of thousands in the larger firms, and a decent billing rate enabled them to grow to billion-dollar behemoths.
However, this was not a sustainable model.
The IT services firms knew that they couldn’t keep adding thousands of employees to get to the next billion; many started tinkering with building products, platforms and business transformation solutions. In the years after this shift in strategy, they are yet to see much success. Much of their income still comes from services projects.
Why did this happen? This is a case of structure impeding a strategy shift. Firstly, existing businesses were deeply structured around client needs. Most, if not all, intellectual property around services was owned by clients. When the IT services firms began their journey to build reusable platforms or products, they ran into the wall of renegotiating contracts with clients that allowed them to use data and knowledge for building products. Clients were loath to share information that might help competitors, and often didn’t sign off on contracts.
Secondly, there was a challenge of building products beyond just one client’s needs. In the services business, clients give exact specifications of what to build. IT services firms had armies of business analysts who translated client needs to deliverables, but hardly worked on skills for identifying broader market needs that would help build products that would serve multiple clients.
Thirdly, since existing businesses were tied so closely to services, there was always a doubt whether the firm aiming to build products would stick to its commitment or wind up the efforts in a few years if they found few clients.
Fourthly, the sales structure at IT firms was designed around the services model. Their sales departments were comfortable looking for multimillion-dollar deals with clients that involved multiple service contracts. When these firms tried setting up product or platform arms, the existing ways of doing things clashed with what was needed to get done. Product or platform sales involves looking for high-volume licensing deals or product sales. This involves dedicated focus from the management and different sales skill sets and incentive structures for sales teams. In many cases, existing salespersons who got licence or product sales targets often gave the licences for free to win services deals. Senior management often didn’t understand the gestation periods involved in product and platform sales, and scaled back efforts before maturity. Well-entrenched sub-organizations would be slow to adapt to new ways of working required, and slow down progress or stymie innovation efforts.
Lastly, a shift in strategy required firms to build new skill sets, often at odds with the existing way of doing things. IT services firms are largely organized around verticals. Most have built up internal skills on elements like financial certification, regulations, testing and more. In the new scenario, clients realized that it was inefficient to give a development contract to one vendor and testing to another. This required new skill sets to manage accounts, which IT services firms are often lacking in.
IT services firms are seeing huge pressures on their margins; unless their structure adapts to new strategies, their efforts to build new revenue streams may not succeed.
Shrinath V. is a Google Developer Expert (Product Strategy) and a partner at Questellar, a consulting firm specializing in innovation and design thinking.