As the current crisis unfolds, almost all the countries that have been severely affected would see their governments announce multi-billion relief packages. However, most of these would be for the SME or the MSME sector. Some of the large conglomerates and business houses might still struggle in the short term with cash flow issues, continuing supply chain disruptions, reduced demand for their products, a stagnating top-line and a falling bottom-line. As the economy opens up, there are a few questions that most business houses will be pondering over.
Every CEO & CFO will be looking to their entire leadership team to look at and find ways to conserve cash. One such constituent that I engage with often is the CIO and obviously, the CIO’s are expected to find ways to conserve cash & reduce overall cost as well. Every advisory business has taken up this opportunity to try and teach the CIO about how to go about reducing their overall cost structure and free up cash for their businesses. For example, Gartner ran multiple webinars around this like the one titled “10 Rules For Rapid IT Spend Reduction“.
Some of the biggest spends that CIO’s have on their cash outflow is large IT & ITES vendors around software and services costs. So, it is quite natural that they would want to figure out a way to not only reduce their costs on these items but also either conserve (re-negotiate payment terms) or free up cash (postpone or cancel new projects).
When they reach out to their biggest vendors or partners and ask to re-negotiate their payment terms or talk about cancelling or rescheduling their new projects, they are putting their partners in a bit of a fix and at the same time giving them an opportunity.
These partners or vendors need to do make a decision to ensure that they make this decision considering their own financial viability and at the same time figure out a way to help their customers, in their hour of need. These requests that the IT and ITES companies receive from their customers might not be a logical or legal argument, but is an emotional appeal. How these customers are treated in their distress stays etched in their minds for a long time.
Within this situation, lies the potential to either make customers “unreasonably loyal” or make them “unreasonable” going forward depending on how they are treated.
Smaller, founder driven partners can take these calls one way or the other as they anyway have the final say, and usually, might not have too much leeway for them to work with. What happens if these are large global organisations who are usually also publicly traded. They need to not only figure out a way to keep their customers happy, but at the same time also keep their shareholders and analysts happy.
If you’ve worked for such a large, publicly global organisations, you know how they work. Typical behaviour of such a global organisations is that they would create a budget to address such requests that they will receive as part of doing business. This budget will be distributed to the different regions, the regions would then further distribute it to the different market units, which the market units can then offer to their customers.
This approach has two drawbacks:
- In the short term, the relief thus offered to their customers is never enough for it to make a significant impact for the customer and hence they are not happy about this.
- In the mid-to-long term, with the business outlook, their customers might want to work with smaller vendors, over whom they might have a better control, just in case this phase lasts a bit longer than expected. This means that the global IT & ITES service providers will face the risk of reduced revenue, which means that the analysts and their shareholders will not be happy.
So, this choice could lead to all the constituents ending up unhappy and in the process forcing the vendor themselves to take measures to cut their internal costs (which would most likely mean that they will let go of people – their biggest cost and strength, when the economy turns around), making them weaker and their recovery slower.
There is another way.
Most IT and ITES organisations usually look at this entire situation and see it as a challenge that is a risk that needs to be contained. While that is a good approach to ensure financial stability in the short to mid-term, I believe that such an approach leaves a much bigger opportunity in the mid-to-long term.
I think this provides a great opportunity for someone in the IT & ITES industry to make some big bold moves, which can create long term competitive advantage for them.
There can’t be a better time for someone in the industry to experiment with an outcome based model instead of selling products or services. The overall profitability of an outcome based model can be potentially a lot higher than the cost of license, maintenance or subscription fees.
Just like some businesses have pivoted from selling steam instead of selling boilers, there is an opportunity for someone in the industry to pivot from selling software/services to selling outcomes (reduced inventory levels, reduced out-of-stock levels, reduced operating capital, etc).
In normal circumstances, not many of their customers would have been open to such an offer. However, with the current situation, if the contract can be designed in such a way to help them with their short term cash flow and mid-to-long term improvements of their productivity, at least some of these customers might be open to this offer.
When such an offer is made to their customers, one of three outcomes will result:
- Customers reject the offer: This is still status quo and the IT & ITES player doesn’t lose anything but can always honestly claim with them they did offer a way to bring in significant cash flow & productivity gains for their customers by willing to take on the (capex, opex) and the risk associated with the adoption of the products off their balance sheet.
- Customers accept the offer & the outcomes get delivered: Assuming that the organisation that did make the offer is able to deliver the outcomes committed to, this becomes a win-win scenario for all parties involved and this relationship can start to blossom. The organisation can now show this as a success story and start moving up the value chain and start offering this outcome based service model, which has the potential to be much more profitable than their existing contracts.
- Customers accept the offer & but the organisation is unable to deliver the outcomes: In this case, they would exactly know where they stand with respect to their ability and industry expertise. They can then look at different partners, reconfigure the kind of talent that they hire, retrain their existing employees and learn from their early lessons. They will either learn and deliver the outcome or learn significantly from the experience, that will benefit them in the next iteration. In either case, they have the potential to build a competitive advantage unlike any of their competitors.
Competitive advantage unlike any other:
If they can succeed in delivering the outcomes promised, they can then continue to expand their offerings. The beauty of this approach is that the more they do this, the better they will get at it. The flywheel effect kicks in and once that happens, the combined effect can be similar to what Google still enjoys with its search business or Amazon with its e-commerce store.
To contain the risks (as they are mostly publicly traded entities, they don’t necessarily have to advertise or announce these initiatives to the public but can negotiate them as special contracts with their customers who are willing to participate on these terms, as part of their regular business conduct.
Satya Nadella took an enormous risk with Microsoft. Shantanu did that with Adobe. WE now have such an incredible opportunity for someone else in the IT & ITES space to make such a decision.
Times of grave crisis, have the seed of greater opportunity hidden within them. It requires a leader with a bold vision and belief in their teams that they can pull off such a transformation – of not just their business but of the entire industry.
For everyone’s sake, I truly hope that some leader steps up!