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Home >Opinion >Columns >Key steps for IT firms to transform biz models from staffing to solutions

Key steps for IT firms to transform biz models from staffing to solutions

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Staffing cos are like recruitment agencies, while solutions firms resemble consulting cos

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Cognizant was founded in 1994. Its current revenue and valuation are approximately $17 billion and $40 billion, respectively. Driven by Y2K (the software bug scare in the year 2000), hundreds of Indian IT services firms were started in the 1990s. Unlike Cognizant, many of the survivors have revenues below half a billion dollars.

Cognizant was founded in 1994. Its current revenue and valuation are approximately $17 billion and $40 billion, respectively. Driven by Y2K (the software bug scare in the year 2000), hundreds of Indian IT services firms were started in the 1990s. Unlike Cognizant, many of the survivors have revenues below half a billion dollars.

One reason for this disparity is that many firms failed to transform their business models from staffing to solutions. In staffing, IT firms place engineers directly under the supervision of client managers, who scope and control their deliverables. Solutions firms sell specific technology offerings and not engineers.

One reason for this disparity is that many firms failed to transform their business models from staffing to solutions. In staffing, IT firms place engineers directly under the supervision of client managers, who scope and control their deliverables. Solutions firms sell specific technology offerings and not engineers.

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Staffing companies are like recruitment agencies, while solutions companies resemble consulting firms. Most Indian IT firms sell both models, but the prominent brands have strong solutions capabilities.

The staffing model is facing three existential threats. One, commoditization of traditional application development, maintenance and enterprise platforms are putting margins under pressure. Staffing margins are often in the high teens, leading to single-digit Ebitda (earnings before interest, tax, depreciation and amortization.) Two, low-end work that provide volumes are being replaced by automation or software-as-a-service products. Three, in the premium market focusing on niche digital skills, the talent is limited, expensive and prefer established brands. Consequently, while solutions firms may command revenue multiples of 2+, staffing firms are often valued at or below revenue.

Having directly observed multiple efforts to evolve from staffing to solutions, we have identified three philosophical imperatives underpinning a successful transformation.

First, leaders must acknowledge that staffing and solutions, though related to technology, are fundamentally different businesses. Staffing relationships are typically with procurement and human resources, whereas solutions require business and CIO-level relationships. Staffing relationships with clients do not easily translate to solutions opportunities. Offering development and delivery capabilities are necessary for solutions, but not staffing. Transforming to solutions requires a new leadership, necessitating the old leadership (that ironically desires to transform) to create space. Second, transformation requires investments: To create new offerings, build pilots, attract new leadership and talent. Shareholders (often past staffing leaders) must forgo short-term cash for potential long-term value. Third, transformation requires time. In our experience, transformation that creates meaningful shareholder value takes three to five years. Shareholders must invest and trust the new leadership over this protracted period.

Sadly, many transformation initiatives fail because shareholders do not internalize these principles. Even if they bring in new leadership, they do not invest enough time and money. However, once these philosophical underpinnings are in place, the focus can shift to building a transformation strategy and its execution.

While a transformation strategy has multiple elements, the key is identifying the right combination of solutions and associated clients. Themes drive valuation: Identifying a manageable set of solutions that will be in demand in the medium term is important, as is identifying trusted client relationships that will provide the platform to build track records. These clients are typically existing relationships, though exceptions exist. Also, existing relationships determine the focus industries. Transformation starts with the effective identification of these intersections between what the clients need and what the firm can effectively offer.

Execution involves building the trinity of practice, sales and delivery. Practice builds the solutions and associated capabilities; sales take these offerings to market and delivery ensures client satisfaction, leading to repeat work. This is an iterative process that is fine-tuned over multiple cycles. A big portion of the investments, both time and money, is spent in this cyclical fine-tuning. It starts slow, but if done well, builds momentum over time.

Given these complexities, transforming from staffing to solutions is complex, like rebuilding an aircraft mid-air. One way to do this effectively is to separate the staffing business under the existing leadership and use it as a source of cash to drive the transformation under a new leadership.

While this can be done under the existing brand, our experience is that a new brand helps to position the solutions business independent of the staffing legacy.

Finally, like any effective transformation, having a coach who has been there and done that helps. The staffing model is under threat, and the transformation to solutions is not only a choice for higher value, but also for survival.

Abhisek Mukherjee is co-founder and director of Auctus Advisors.

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