The Lost Mojo (Monopoly) of IT Services

Peter Theile in his book “Zero to One” argued that the foundation of any successful business starts with the ability to create a business proposition that is a monopoly for at least for few years.

Economists have generally argued that perfect competition is ideal. It achieves equilibrium where supply meets demand. There is no differentiation and it eliminates profit margins for business. Hence, there is little or no value to consumers. An equilibrium state of competition kills business.

By no means am I promoting illegal ways of doing business. However, consider another definition of monopoly that means that a company is so good at doing certain things that there is no substitute.

Google and Facebook are currently the best example of businesses that have little or no alternatives – hence a sort of monopoly. IBM had a monopoly in the hardware business in the 1960s-1980s. Microsoft monopolized the software market and continued for several years before competition crept in. But that was the key to success and business growth.

The lesson is clear: If enterprises want to create value, they cannot do it by offering undifferentiated services/products.

If we draw parallels to IT services – and especially Indian IT services – their model of offshoring and cost arbitration was differentiating – similar to a monopoly. This approach thrived for two decades or more, as long as there was demand and supply was short.

Now we are fast approaching a state of competitive equilibrium and not much has changed in the offerings and engagement model. Launching new portfolio services that hardly represent differentian in a competitive IT services market will not provide long term success.

The result is growth stagnation, lower guidance and decreasing profit margins (except for few quarters when client spending goes up). NASSCOM, for the first time, has skipped the guidance for FY20. And consider that for the past three consecutive years it missed its guidance negatively.

Most analysts report that the outlook for IT services companies is cautious. Traditional outsourcing deal value is stagnating while “X as a services” has been growing in excess of 30% on an annual basis.

Sid Pai in his latest column in mint made an interesting point: Software firms like Microsoft, AWS and Google have very fast expanded their delivery model from just product to services like cloud services and software as a service.

They are continuously trying to differentiate (hence create more value) and now are well positioned to provide system integration services – traditional the strong hold of Indian and MNC’s IT services.

Whereas, IT services firms are still not able to offer differentiated services – at least to the extent that it is perceived to be so differentiating that it can generate high value.

So: Can IT services firm rediscover their mojo (monopoly)?

Only time will tell but I will be eagerly looking for indications and signs.