NASSCOM EMERGE Community Catalyst for Growth of Emerging & Start-Up companies

In my view,  the top most challenge of SME IT Services companies is lack of differentiation. This leads to many challenges you have elaborated about. 1000's of web design companies, 1000' of .Net Shops, 1000's of Java Shops and the list goes on. Also this is the reason there is NO Consolidation happening in the Indian Services Space!

All,

The differentiation issue applies to even bigger companies and not to SMEs alone.. as a person with experience and mentoring SMEs, what I believe is that smaller and medium companies act on a herd instinct and are averse to ideas/mentoring from outside on the issue of differentiation

Also the nicheness of being small or medium is not clearly defined resulting in "too many of the same type"..Differentiation involves creating/investing in a core competence and an ability to acquire inbound customers  through that core competence.. Good example would be what Persistent Systems (Pune) tried to do and was reasonably successful at..

My 2 cents and my apologies if the tone of the response is off track..

Seems there's an  implication here, that SME services companies are undifferentiated because they want to be. And I don't agree with that. I ran a Services company for many years and we tried hard to "differentiate" ourselves. But there was so much demand for generic services that pigeon-holing ourselves into any one niche seemed a stupid thing to do. And then there is always this "elasticity of talent" - the belief that our people are smart enough to figure out anything, so we might as well sell everything. After my Product stint of late, I've come to believe that the issue really was our inability to SELL a specific niche offering. Sidetracked by all the market stats and sizes that analysts threw at us, we never got around to seeing that we could have been as successful - more so, probably - if we'd stuck to a specific offering, whatever that offering may be. With a Product business, the company's ability do "generic" sales is limited - no matter what I say, our CRM solution will rarely fit an ERP need. That's a blessing in disguise - we're less tempted by opportunities outside our "core value proposition".

For a large Services player, unlike a small one, the breadth of services offered is an advantage, not a disadvantage. Talking to the CIO instead of a Project Manager, their value proposition is their ability to bring costs down across a wide range of areas, so having that breadth of skills is important. Further, in our quest to be "different" from the big guys (and, I suspect, in a attempt to assuage our own egos), we shied away from the cheaper-than-them argument. That left us untargeted, undifferentiated and not necessarily cheaper - not a good place to be.

I don't know if other SME Services companies go through similar thought processes, but the Product business has taught me to believe in a niche and then stick to it. All else will follow (I hope!).

So why is all this important in this context? Just this: I think the differences between a Product and a Services business are fairly well documented already. What we need here is a way for the two types of businesses to learn from each other - both about what one can do like the other and what one probably should not. Maybe we can spend some bytes discussing that, too!

I had posted some of my thoughts on this topic in a blog post few weeks back - so pasting the URL here.

http://manishrathi.com/2009/10/24/software-services-organizations-calling-mother-earth-houston-we-have-a-problem/

I agree to a large extent to the thoughts of many who have posted here - the challenge is lot about market positioning. In addition, I also think SME Services companies have to decide whom they want to sell (CIO vs. Project Managers Vs. CEOs Vs. Someone Else). Inability to decide that is also leading to confusing messages about their value proposition to the outside world.

Thanks

Manish Rathi

Interesting thoughts and here are my Rupee's worth....

   While I respect Kishore's views (incidentally, I know both your old services and new product area), of having to "fill" a requirement / demand gap rather than using a stovepipe approach, am not sure if the issue is simply that of Sales capability.

   Having started and run 2 small AND focused services companies (taking each to a large enough level for acquisitions), I have a different opinion.

   Most new services startup seems to be an outcome of several people with varying abilities and skills coming together to run the business and hence the divergence starts at that level. I still believe and have seen several cases where a single-minded approach to services works very well. The trick is to understand where the depth needs to be (either industry or technical depth) and sell the differentiation effectively.

   The other problem is that, in most cases, the differentiation is built into the "resumes" of the individual and hence all services becomes is "resume selling"

   Again, I've seen several cases where USP has be brought in either with accelerators or toolkits and they have seen a fair level of success !

Bottom line - the key is in the DNA makeup of the startup team.

Rgds

Ravi.

Small services organizations have only two routes - specialize or get big. CIO's either want a provider who can provide an array of services done together so that the business problem altogether, or they want a vendor to solve a particular problem quickly. The former goes to the big guy and the latter goes to the specialized guy. Message to the small guy - either become a broad based  outsourcing guy, or become the best BI or ERP or Database expert (as examples) globally.

We 'Made in product companies' are looking for small services companies who say - we can give you a good solution on 'big brand' or we can also give you a great solution on 'small but proven' small brand. The 'small but proven made in India small brand can do an equally good job in some situations.

I loved it when Kiran Karnik said that the role of Nasscom was to bridge the gap between service providers and Indian products, proudly presenting them as good alternatives.

So, is differentiation the only challenge? Most folks I have met talk about the selling challenge, the marketing challenge, the lack of capitalization to attract/retain good talent, the lack of having a senior management team to scale beyond a point.

If there are folks out there running a 50-100 man team, I would like to hear their veiws on some of these issues.

Arvind

Arvind,

  Not sure if I can answer for all the "challenges" raised by the folks you've met.....

  I can certainly put myself back in time where I've run multiple 50-100 person (being politically correct now :-)) teams to larger ones and give you some of my own experiences.

  - Marketing challenge : This IMHO is a lesser issue when you are in the 50-100 member team - esp, when you are starting up / lower in number. The reason being, you / team should be out SELLING and your back end is more Business Development

  - Selling challenge : Yes, this is a hugh challenge - esp when you DO NOT have an USP

  - Lack of capitalization : Red Herring IMHO - if you are a services based company, your worry is "cash flow" and NOT capitalization. This goes back to the previous point - if you can sell a concept / USP externally, you should be able to sell internally ?

Yes, there are a set of people who'd not want to join a startup / would like to have the comfort of a big company, but, do you want these folks with no fire in the belly ?

Expect to pay higher than the big guys, but, be more demanding.

My 2 Rs. worth.....table stakes that you can either take or leave ;-)

Rgds

Ravindra

Ravindra, thanks for your comments. Based on your past experiences what seliing strategies do you recommend when you dont have a USP - which seems to be generally agreed is the case with small emerging providers?

How much of your revenue / cash-flow do you allocate for sales?

Arvind

Dear Arvind,

    Is this a trick question ;-) ?

    If you do not have the USP / service differential, my first recommendation would be to CREATE one using either existing funding streams or my revenue stream. How much is kind of irrelevant as I believe small USPs can be created / enhanced with little investment.

    Once you have this in place, ie. you have the "pin point" to prick into your market, you could do with a lowball 10% of revenue as cost of sale if your entry USP is very "sharp". If you have a "blunt" USP, you'd probably go as high as 30% on your cost of sale.

Not sure if I answered what you were looking for....

Rgds

Ravi.

Hi Ravindra,

No tricks. The bottomline is that most service companies dont seem to be having a "differentiated" offering. It may be true for small, medium and even large service companies. I was in a NASSCOM meeting with a German delegation and company after company used the magic words "full service, 360-degree all you can want shop". Maybe it is the nature of the services - that sharp differentiation is hard to achieve though managers try to. Would a service business refuse a customer if the project fell outside of the core competency? I guess all service companies are tyring to acquire as many customers as they can.

Given that service offerings are not differentiated or not differentiated enough what can emerging companies do to grow their businesses? Your 10-30% estimate of sales is good feedback. Are companies really budgeting this or are they squeezing their long-term growth and sacrificing investments in sales in their rush to be "competitive".

Another question in my mind is the exit strategy for a small services company. One VC I met said that we have seen the last of the big IT service IPOs. If you cant grow the business to get to IPO, should the small service companies look at M&A opportunities to extract value for the founders?

Or is there an alternate model where a bunch of small companies can collectively act like a bigger player? What is needed to get to this federated model?

Arvind

Arvind,

   That (trick bit) was a bit of tongue in cheek on my part....

   Seriously, IMHO the fact that so many service companies talk about "undifferentiated" offerings is probably the reason we hear about so many failures. To use a restaurant analogy - if you are small, would you focus on a particular cuisine with a menu card (and a premium image attached to it) or carry a menu book ? This is all the more important in the nature of business that you (as a small player) may actually have to pay a premium on your input / inventory costs (human resources) and are carrying a lot of other SG&A overheads......

   Coming to sales focus - I think the industry has been a bit of a spoiled child... historically there was so much demand that anyone who was doing a halfway decent job in delivery was getting the projects. This cannot be sustained in a mature market. There is already considerable pressure on the hundreds of companies out in the market whose ONLY claim to fame is that they have a "good technical team" !

   Your other 2 points - federated model and the VC / exit options are in a way related. Today, even with all the cash-flow pressures, there is a tendency with the core (startup) team to expect MULTIPLES of revenue as valuation. Infact, I keep getting people trying to put a valuation based on number of employees !

   Bottom line, I believe that IT services is going to go the way of other traditional services (eg. hospitality industry), where either you have the large hotel chains with multi-branding on price points or the smaller boutiques with differentiated offering. The real small / individuals will end up being "home-stays" .......

May sound quite a drastic depiction.....but, someone has to call it......

Rgds

Ravindra.

Hi

I have been small emerging company that has grown to mid-size over last few years, a lot of the points made here are very relevant. For emerging companies the approach has to be through specialization, as generic service as low cost will not viable on the long run.

The challenge with specialization is that it requires framework and accelerator to demonstrate real value and this  needs time and expertise, however a lot of time the focus gets lost in day to day cash flow management.

One of the aspect that forum can look is at synergizing the efforts and providing guidance and channel the focus.

regards

ram

Hi Ram,

Can you share some details on the framework and accelerator comment? It may help other folks with their current challenges. Also, can you share how you have used this to grow to mid-size? Are there some best practices that will help smaller companies?

Arvind

Guys, I think we all recognize what George put so succinctly: "specialize or get big". The question is: How? Ravindra has his model (from what I've heard): pick a large product player and specialize on value-added services on their platforms. Ram has his model:Framework + Accelerator (I'd love to know more, since that seems to be along the lines of what we tried). Are there other approaches? Is there a pattern to what's worked and what's not? Is there also a "play" for Services companies to migrate or expand into Products? Can Product companies help in any way? Will that lead to the Product space having a number of undifferentiated offerings, like we decry the Services space of being? Questions, questions!

Commenting on your quote Kishore - "Is there also a "play" for Services companies to migrate or expand into Products"

If you meant that Service companies leverage proven product companies to provide better services on the product - yes its a proven model. A big chunk of the biggies revenue comes from implementing big product brands. Inviting more small service companies to leverage products from small product companies is a great idea.

If however you meant that Service companies migrating to  become product companies - some big danger signs went off when you said it. We transitioned succesfully from a service company (www.KallosSystems.com) to a pure product company over the past 3 years. (www.KServe.net). I also worked before this in a larger company which also tried to transition from a product company to a service company.

The culture of the two are completely different. Never run both of them with the same management team. In services you do what the customer wants, the way he/wants it, in the time frame he/she wants. Its skills, people availability, project management. In fact you dialog with the customer to stay there as long as you want to bill the maximum

In products its architecture (tech and functional), marketing, brand, partners, pricing. You install, train and come out as fast as possible to get the next customer. You can have a separate consulting business on your product if it becomes a winner.

Frameworks + plus accelerators makes you ask the question - is it product or a service. Even if you have the greatest framework (say achieves 90% code automation) you still have to decide if you want to be a product company or a service company. Its an engagement model that the customer defines and you cannot change.

If you have a great framework + accelerators and take the service route it may be better not to tell the world about it!. That way you can bill the customer and keep the gains of the service. Customers value time, cost and quality - never technology.

If you have a great framework + accelerators and want to be a product company again dont tell the world about the technology. Just build more products or make your current product the best. Again keep the great framework under the hood - we have taken this route. We are a small company that has ERP, CRM, HR and retail products - how? because we have a great underlying platform. SAP lasted so long in the Enterprise world since its underling platform outlasted all technology leaps - mainframe, Unix, LAN, Internet...

The product vs. service debate is huge but the classification is clear - the twain shall never meet under the same organization. May be an extreme view, but this is my experience.

Focus, specialize, win and expand your focus area

Good discussion...I have been running an I.T Company for two years and what i have realized so far is that we all start of a service based companies and eventually shift to product based marketing. The shift is all dependent on the services we are giving to our customers and  once the products are ready, the better approch is to have two divisions where on caters to selling ready to use products and the other concentrates on taking company to newer verticals which will further add to the product line in future.