BW Communities

Case Study: The Buck Has No Takers

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<div align="justify">Vyaas Varshnei had never felt more alone in his 58 years. Not hopeless, but desolate like Moses atop Mt Sinai. At SysTech he had a wonderful team, raring to go, to achieve — constructively aggressive. Systech was a mid-sized software services company, with a revenue of roughly $1 billion. Not yet the industry's poster boy, it was known for its persevering, steady yet ethical climb up the ladder of growth. Market watchers liked Systech for its image of eager beavers, who had come up the hard way bearing a wholesome Indian approach to business. Last fortnight, Vyaas, Systech's managing director, came head on with what might be his moment of reckoning; the recurrence of this situation in a span of eight months caused him a moment's anxiety. Where did I turn complacent? This is what happened: KenWest, a large multi discipline hospital in the US, had been a client of SysTech for over 18 years. KenWest ran its core applications on mainframe, and it wanted to migrate from mainframe to open systems architecture, because the mainframe was cost ineffective while also operating on legacy systems. KenWest had decided on its new platform as well as the new softwareplatform, system blueprint and preferred design. The consequent migration, transition and settling process was a $30-million deal. The assignment required that the service provider should be conversant with mainframe, all new hardware and know the entire stack well, to migrate smoothly, without derailment of current operations. Now, there were three clear parts to the assignment: a) choosing the hardware and software and advising on compatible parallel applications, b) migration, installation, test runs, validation of all systems and; c) routine maintenance. Having been their resident service provider all these years, Systech assumed the $30-million deal was in the bag. But KenWest's Mark Springer wrote to Systech's Operations head Devdutt Behl saying, "Once we move and install the new software and new hardware, we will give it to you to maintain, as hardware and its ilk is not your core business expertise. Given how risky the migration process can be, the teams here have elected to work with Kessana Inc. We have restricted our bid invitees to only integrated firms with a strong track record in hardware. Hence, SysTech does not qualify to bid." Vyaas was taken aback. This was unusual. Individually, Devdutt, Alex Verghese, vice-president of hospitals vertical, and Kapalesh Desai, the head of business structuring and HR, sat in their respective offices dealing with the shock and strangeness of the message. Soon they were all in the conference room grappling with the pall of gloom. The one thought on every mind was: ‘This probably has to do with the last product design architecture for KenWest and they were not very enamoured with the attention the assignment got.' Eight months ago, SysTech had delivered a design architecture for KenWest's Medic Trend, a small data analysis product, which surgeons and specialists used, to track and study symptoms. The design was trashed by KenWest as lacking contemporary dynamism. At an internal post audit, Samresh Sanyal, the design engineering chief, told Vyaas, "In hindsight, I do feel we should have viewed the complexity of the work and its importance in the context of the changing marketplace. I think we did not factor that in." So now, when it became known that Systech has lost the $30-million deal, especially during recession when everyone was trying to keep at least what they had, not being invited to even bid caused a lot of discomfort. Vyaas did spend time thinking about it, but he had been in this industry long enough to know that business gain and loss had to be taken in a balanced way. Besides, these were difficult times, and reasons for someone else getting a job were not exactly logical. Yet he knew, that at the heart of this crisis lay a lesson to be learnt. Vyaas had wanted the initial raging feelings to dissipate before he sat the team on a soul searching exercise. But even as they stepped out of his room to walk back to theirs, Kapalesh and Devdutt, two strong directors and strong comrades, were already sparring and immensely. Said Kapalesh, "I saw it coming, Dev. We are not matching pace with the industry's evolution, we are not evolving afresh! If we, at the helm of affairs, shy away from calling a spade a spade, how will the business gain direction? This is a professional mishap, and even now it is not late. The MD did not want to enter the hardware business and did not allow me to build competencies. You, as the operations head, are the primary custodian and treasury of our quality... you need to think about this. Everybody is talking integrated business models, except us. Unable to brook attack when he was so vulnerable, DevDutt hit back, "How come, Kapalesh? At Systech, aren't you the architect of structure and systems and a close advisor to the MD on business development direction? How come it is not also your fault? </div> <script type="text/javascript"> var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } </script> <div align="justify">"True", said Kapalesh "but HR cannot force direction. I can point to it, like a compass. But the decision to choose that direction has to be of operations, along with the chief technical officer (CTO) and Strategy. Dev, you are a old hand, you needed to have cast away your blinkers and seen that we needed to get into other businesses too." Ninety percent of SysTech's revenue came from software services; while it did have small initial investments in BPO and hardware, not much attention was paid to grow these businesses. But then again, at the time the software services business was launched, it had relevance and commanded high margin fees and that worked for the state of evolution that the IT industry was in India, especially the offshore model. While other companies in the industry were investing aggressively in infrastructure and BPO as well as exploring markets other than the US and the UK — APAC/Middle East/Latin America — Systech continued to have faith in the software business and remained in its comfort zone. This was at the heart of Kapalesh's irritation. He felt Systech was snoozing and needed to revisit its business plan. Life had changed, the alarm had gone off long ago for many, only Systech was yet to awaken, he thought. Sure, this may not have been the right time to say all that he did, but then he had been saying all this for long, and each time he only felt vindicated, as he did now. The situation was irresistible. Kapalesh: I think the biggest mistake we are making is in not venturing outside software. But today, if we do not expand in all categories, we are limiting our reach. It is just a perception that software is the high end to be in. Enterprises want the service provider to look at the entire stack — hardware+software+business processes, and the innovation around these. Devdutt: But don't forget — being in software allows me to stay in touch with my customer and have a front seat view of the market evolution. And we need this business to own the entire universe to which it belongs. Kapalesh: But we also need the low margin businesses like infrastructure, even the logistically tedious ones like BPOs; whereas we are caught in our own story of how good we are. We continue to pat ourselves on the back for an era that was about a completely different set of dynamics. Now that is over, we need to move on! Devdutt: Software is even today better placed in terms of average margins, Kapalesh. Look at the operating margins of Wipro and Infosys and TCS — they range from 20-30 per cent! Kapalesh: Yes, but what do we do with this slap in the face from KenWest who have sidelined us? We have been their vendors for 18 years; we saw them through their every growth phase. Today when they have a major assignment, we are not good enough. Why? Don't tell me that is perception. That is not perception my friend... it is reality, the hard truth. Matt Kroner's mail was unmistakeable — "hardware and migration are not your forte..."! Here they were in the lobby outside Alex Verghese's office and the four management committee members stood there, hands in pockets, unable to make sense of what the future with KenWest held. Audarya Guha, the CTO, was already insulted by KenWest's email. Deep within, he rued the fact that they had been informed like any applicant and not been called as would befit such a long-standing relationship. He felt it was a stab in the back. But Kapalesh felt that it was a slap on the face, the kind that you would administer a sleepy groggy person. For Audarya, Kapalesh's verdict was painful and almost an assault, since he had always closely nurtured the KenWest account. And now, as the others listened in silence, Kapalesh said, "You are too involved with the business to be objective, Dev. The tech and strategy teams are too consumed by Systech's success story that makes news now and then, and the loyalty of our US clients. But we, who are support functions, are able to see a bigger picture, for we know that our continued success as functional gods will sustain only if our strategy is sound. If Operations succeeds, then we succeed, but by ourselves we cannot achieve success and that is why I am anxious. We are slowly losing out because the changed environment seeks something different, and we have not changed." Chintan Deo was angry now. The loss of the assignment was not after a pitch, was not after a bid, was not after competing. It was ‘just like that', he asserted. "Not ‘just like that'," said Kapalesh. "How can you forget the mess up on KenWest's Medic Trend architecture?" KenWest had wanted to redesign the architecture for Medic Trend, which had been developed in-house a long time ago and which was far too basic for the modern times. Systech did not realise the importance of this assignment, it was being argued. Architecture in this context meant designing, preparing a blue-print for the product, which meant, high-end resources. It was argued then that Technical and Operations departments, did not pay attention to it, and staffed the project with low-end resources. The resultant job was trashed for its mediocrity by the product value audit team at KenWest. So now, here they stood in the lobby, dissecting and acknowledging that the Medic Trend failure was what led to getting by-passed on KenWest's migration project. "Worse can follow," said Audarya, mellowing down a bit. "We may slowly lose all of KenWest because I think they are hinting at integrated all-rounders, which we are not. or, we may remain maintenance boys, thanks to Operations, with small blessings like KenWest, which will cast our reputation in stone as maintenance people!" </div> <script type="text/javascript"> var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } </script> <div align="justify">Two alleys behind this lobby sat Vyaas thinking about how he could organise an audit of the Medic Trend assignment to establish four sharp points that would point to what went wrong. But Kapalesh's words that morning, soon after the email arrived, had been incisive, "No audit is going to point out the whole truth, Vyaas. And even if it reveals anything, it will mislead us back into a state of false conclusions and verdicts. The business model is not holding up. Start today, revamp, call for a brainstorm…" The KenWest fiasco may have been bearable had other accounts not been shrinking as they were. SysTech clients were enterprise customers with revenues upwards of Rs 500 million, chiefly in banking, finance and hospitality and some insurance too. Shrinking demand, coupled with stubborn cost lines, was beginning to tell on the internal patience and bonhomie at Systech. It had done what most organisations did to cope with the recession: tightened expenses, shrank increments, froze recruitment and put a ban on business lunches. Steadily, manpower costs stabilised, but its facilities and IT costs were still going up. Systech had availed many years of STPI tax exemptions like other companies. This had translated to an advantage of 7-10 per cent impact on the net bottom line. The scheme expired in 2009, and had worked beautifully for all the IT companies. But how long could they depend on superficial and temporary benefits? Later, the management committee met Vyaas again, hoping they would now speak more objectively about KenWest. Audarya argued his point, "What we are refusing to face up to is that the going was really good for 10-15 years. Demand was high; there was the currency arbitrage facilitating us also; and the profits too were not taxed by the government. So we had huge margins and thus we paid high salaries. That phase has changed. It is not about recession. It is about many changes and we not adapting to these external changes. Not investing enough! I have been saying all this for sometime; you guys never had faith in other businesses and never invested time in learning these businesses to master it. Now, see where we are. "For one, now the industry is $50 billion and 5 per cent of GDP, so it has no rationale to ask the government for tax exemptions, especially the STPI. Two, the demand has not gone down in itself; the demand is there and will be there, because businesses will be in business. But the competitive argument for outsourcing from India has changed a bit. I was discussing with Kapalesh this morning and he too agrees. You can still go get the business, but you need to bring newer skills or attitudes to the table, which you are not. That is simply the fact of the matter." Alex was hinting at the same counsel, but differently. He said, "The majority of our business has come from application development, maintenance and managing infrastructure. We now need to think beyond this and come up with new business models and develop newer service offerings. In the past 15 years, business came to the industry owing to cost-value advantage, and focused on executing it well. Consequently, our management expertise too is narrow and geared towards demand fulfilment. Truth is, we need to develop skills for developing new markets, new offerings and also build capabilities for selling in hostile markets." And Kapalesh had agreed, "Exactly my point. We keep running back to US and UK because there is familiarity with cultures, costs and levers. These comfort zones have to be dropped because business cannot be about comfort. There is a huge market outside these two, and we need to face the truth that cost advantage and dollar-rupee advantages were simply advantages. We have milked these markets clean, now get on with it, grab early-mover advantage and explore other markets. Our people need to develop the emotional stamina for this. And as a people's officer, I feel helpless that until business takes a stance, people development cannot." <img src="http://www.businessworld.in/bw/image/CaseStudy/Mastek_Campus1_sbd_mdm.jpg" border="1" alt="(BW Pic By Subhabrata Das)" title="(BW Pic By Subhabrata Das)" width="200" height="200" align="right" />Audarya endorsed that, "Our problem is as senior management, we cannot afford to remain mesmerised into a belief in the current state, such that we are unable to take our attention away from the current business. As a result, all effort is channelled into ensuring status quo." "This is the bird-in-the-hand syndrome," said Alex. "Everyone is clutching their hair and killing themselves to survive… when they could have easily thrived by doing different acts." Vyaas wondered as he heard this, "They are saying that earlier business came sheerly because of the curve the industry was in, the cost arbitrages available, and of course the industry — and hence SysTech itself — was lean and hungry, and hence, work patterns and ethics too were far richer. Don't I know what ails us today? Today, we are unable to move from a demand-fulfilment mode to a whip-up-new-business mode, to a create-new-needs mode, examine-user-habits mode, to how-are-industry-needs-changing mode… which is really about innovation… No?" Kapalesh: To be fair, markets have also changed in structure and composition, Alex. India and APAC are emerging markets and demand will boom here, but the customers in this region are toughest customers in the world and most cost-conscious. so they will never give you the margins compared to US and Europe. The other thing is also that this region may not place a premium on looks and bells and whistles as much as the other markets do. They look at the core efficiency of the product, its content. This is a serious difference between the two markets. Chintan: Companies which are focusing on software services only will suffer if they ignore infrastructure services. Take Standard & Poor who compile industry reports; you will find that they have four categories, computer hardware, software products, and IT services. So globally, IT services firms such as CSC, IBM, HP, ACS do everything including hardware/software/BPO. Globally there are no big companies who only do software services. Because service is low margin business, so you have to be doing everything; you cannot restrict yourselves to software. "In India, due to the way IT evolved and the way software was glamourised, we have seen this huge category of software services companies. So, to acquire scale and leadership, we, SysTech, need to focus on all three pieces, infrastructure, BPO and software services." Vyaas said, "We need to get the middle management into this discussion." But like Moses, Vyaas's struggle was about to begin, but not yet... his apostles were about to wage a war. Classroom/Syndicate Discussion Success leads to a sense of invincibility and perpetuity. But the contrary is true. Why do we then promote and preach success? casestudymeera at gmail dot com</div> <script type="text/javascript"> var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } </script>