GROW FROM CORE OR OFFER MORE (part 1)

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Should IT service providers look at ‘growing from core’ or ‘offer more’ in the consulting space?

More and more traditional IT solutions and service providers are now moving into the more traditional business/management/strategy consulting space. For instance IBM, Infosys Technologies, TCS, Cognizant are among the largest traditional IT players dishing this up as a business cross offering (structured as a business practice or Center of Excellence). This article looks at the viability of success for such a decision in a rudimentary ‘back-of-envelope’ analysis. A more comprehensive analysis will follow in another article

Natural evolution

Taking inspiration from Bruce Henderson’s short essay entitled ‘Strategic and Natural Competition’, in my opinion, the business environment operates very much like the natural ecological environment and industries like species evolve over a period of time to adapt best for survival and growth. The fact that organizations like organisms within these species would move towards this trend is no surprise.

Strategy consulting and IT solutions are close candidates for natural evolution. Clients want to pay for solutions not strategy consulting or IT systems, so it becomes imperative or both to bring value to the table: Consulting in providing more implementation specifics rather than just strategic direction (Accenture started out in consulting, but has now also become a global technology major) and IT solutions in having more business logic and strategic rationale in its solutions rather than push packaged solutions.

IT solutions are the next step towards implementing strategy in process transformation or reengineering or change management or new market development programs. These strategic moves being envisioned in vacuum and in isolation of implementation (at least IT implementation) are not in the best interests of the clients and are the main source of dissatisfactory comments like ‘….consultants who take my watch to tell me the time’ or ‘….the IT system created more problems than it solved’

Both Strategy Consulting and IT services are now in the Solutions market and must adapt as such. IT service providers seem to have started the move. It remains to be seen whether Consulting biggies make their move (I think they won’t…)

Differences between organizational structures

Pure-play strategy firms have a radically different structure as compared to traditional IT solutions providers. 

Strategy firms are structured around industry practice areas like Consumer Goods, Banking, Social services, Manufacturing etc. which allows pools of domain specific knowledge banks in the form of cumulative experience of its principals or more experienced consultants. Using the synergy of these few (and very expensive) and the combined intellectual horsepower of some very smart junior analysts, strategy giants like McKinsey, BCG and Bain create quick and effective solutions for their clients. This triangle with a guiding principal or client engagement director and a team of analysts uses the concept of ‘labor arbitrage’ to rationalize its high fees for client engagements.

Traditional IT solutions providers also have similar domain divisions (BFSI, Healthcare, Manufacturing and Logistics etc.). However, this is more for grouping the same type of clients or companies or accounts under a single manageable umbrella and less on the basis of knowledge or experience. The ‘labor arbitrage’ triangle in this case gets distorted into the ‘blue collar labor arbitrage’ as the better informed Project Manager is unable to communicate business implications of poorly developed code to the immensely bottom heavy portion of the triangle i.e. Software developers or Techies. This inevitably leads to value destruction and poor client retention. The software industry’s Quality Management Systems like CMMI 5 although fairly robust and mature will not handle non alignment with business strategies.

Core competencies or diversification

This is a non sequitur because it assumes that this is an ‘either – or’ decision. In my opinion, it isn’t. Mature industries do consolidate into 2 or 3 large players. The same will happen to the Solutions Industry. However, the large majority of clients still believe that only consulting firms specialized expertise can help them (Client demands fall in 3 categories: Specialist, Strategic advice, Integrated solutions). So, the consulting industry is still fragmented although along lines of specialized knowledge areas and its necessary to understand the topography of the solutions industry. The following table is a representative example to understand the consulting industry

BASIS OF CATEGORIZATION	DETAIL	COMPANY EXAMPLES
Specialized knowledge areas	Financial, M&A & Audits advisory	KPMG, PWC, Deloitte & Touche, Oliver Wymann
	Strategy	BCG, Bain, Booz, McKinsey, Monitor, Marakon	Roland Berger, Deloitte S&O
	Operations	AT Kearney, PRTM
Work type	Strategy development	BCG, Bain, Booz, McKinsey, ADL
	Systems Integration	IBM, Accenture, Infosys, TCS
	Operations/Efficiency	AT Kearney
Position in the value chain	Hardware/Software Vendors	HP, SAP, Microsoft	IBM
	Consulting Firms and solutions	Deloitte, BearingPoint
	Outsourcers	EDS, CSC

If a traditional IT provider wants to occupy a higher and more profitable position in the value chain it will have to position itself accordingly since clients seem to not trust the ‘pigs in the middle’. IBM seems to be the only one able to do it under a single brand umbrella but is still not as well known in the ‘strategy’ market. Deloitte’s capabilities in this sense are worth emulating since each company within the Deloitte umbrella seems to operate and possess its own brand equity.

The next part of this article will cover some of the potential problems that IT service firms could expect to encounter in their journey towards pure-play consulting assignments.