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When IBM announces a 12th consecutive quarterly decline, when practically every other service provider is trying to mask layoffs and austerity plans as strategic moves to delink revenue from headcount, you have to hold your hands up and admit the services industry is going through a secular transition that is going to get considerably more painful, before it eventually reemerges in the As-a-Service Economy.
Service providers need to address the transition years we are currently in to reach the As-a-Service promised land
With consolidation of the current environment clearly very much on the minds of senior leaders in the service providers (e.g. Capgemini and iGATE widely mooted to be close to tying the knot, it’s pretty clear that we’re distracting ourselves from entering the As-a-Service world anywhere as quickly as we should be. See update here. There are simply too many operations and IT careers tied to legacy ERP and business processes, and too many providers making too much money feeding off this legacy, for the change to happen at anything bar a snail’s pace. There simply is no burning platform for change – no Millennium Bug, no Dot.com bust, no Great Recession in the offing (perish the thought…).
It is my belief that we’re at the start of a ten-year cycle of interim change as operational human labor is gradually replaced by automated platforms that are in turn augmented by analytical and creative talent and cognitive computing. The smart service providers are those, which are going to address this ten-year phase of transition head-on and not get distracted by maximizing their position in the old model.
So let’s pick on the biggest service provider of all in the middle of this industry transition, IBM, to assess its options:
The cool stuff is all great, but the dollars are relatively small
While IBM is making many right moves investing for the long-term, it’s this long drawn out medium-term period that’s the real problem. Watson, Apple and Twitter alliances, its new $3bn IoT unit, Softlayer etc. all create As-a-Service mojo, but it’s going to take years to get to the revenue levels that can replace the traditional services dollars that are in gradual decline.
IBM needs to work with clients at the pace they are comfortable with, if it wants to maintain its wallet-share with them. The problem with the current business is that prices are getting squeezed, second tier providers are getting desperate and practically buying deals with the hope of making them profitable down the road and keeping their investors happy.
The solution: Buy TCS and create a dominant giant to crush its competitors
It’s simple – make a move on the largest, most aggressive and dynamic of the Indian-heritage providers: TCS. Together they would crush the market across all areas of delivery, all verticals, all technologies because their individual forays in the As-a-Service world could play off each other and get scale even quicker. They would have skill at massive scale and could undercut the competition on key deals – almost at will – if they needed to. Together, they would have the footprint for global delivery, transformational talent, low-cost transactional labor, proprietary automation and cognitive capability, analytics, BPO, cloud platforms, mobility, digital consultants, unique software solutions and product engineering… the list is endless. An acquisition would also give the incentives to restructure the existing labor base of both providers through a very active program of automation.
The Bottom-line: This industry needs a mega-merger (or three) to change the game
Let’s face facts, we’re in a worrying downward spiral in the services business as enterprises and service providers face unprecedented challenges on this inexorable journey to replace operational and IT labor with products. Rather than price-compete each other out of business, the service providers need to figure out how to blend the best parts of each other especially from the As-a-Service world to get ahead of the change and the pain – and there is nothing like mega mergers to mask the change that is needed for a few quarters to keep the Wall St investors at bay.
Now would IBM really buy TCS? Probably never, as there is simply too much history in both providers, and this is just too bloody big. Plus, it would create a leadership challenge of unprecedented proportions in this industry. But this industry needs change, it needs real disruption like this to shake us to our foundations and force the new thinking and new behaviors the As-a-Service Economy demands. Let’s hope this impending consolidation has this impact and we’re having a very different discussion in a few months… let’s keep the conversation rolling!
(Cross-posted @ Horses for Sources)
Why IBM should acquire TCS is copyrighted by Phil Fersht. If you are reading this outside your feed reader or email, you are likely witnessing illegal content theft.
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