IT Services and ER&D: Convergence or Overlap?
Digital Is Where Both ER&D and IT Service Vendors Compete
The industry loves to talk about convergence, especially between ER&D and IT services. As an industry analyst, I must say that I have never seen such porosity between IT service and ER&D services vendors.
IT services vendors such as Accenture are ramping up their capabilities product engineering, IoT and 5G, and digital manufacturing.
In parallel, ER&D service vendors are now expanding their capabilities towards digital: for instance, Akka Technologies just launched a tender offer for Data Respons, which will bring capabilities in IoT and analytics.
Convergence Is An Ugly Word
I must say that each time I hear the word “convergence”, I think of “disaster”. Twenty years ago, communication service providers (CSPs) expanded into IT infrastructure management and realized that managed services were not telecom services.
Think of how many firms still are active in IT services: NTT in Japan, BT and Deutsche Telekom in Europe. BT and Deutsche Telekom have gone through several restructuring rounds in their “enterprise” divisions. NTT is the only major CSP still active in IT services.
And then, ten years ago, telecom service providers expanded into cloud computing, and then, quite a number of them sold most of their data centers, e.g., AT&T, Verizon. Again, NTT is the only vendor with a global scale in data centers.
It is not just CSPs that have struggled. Think too about hardware vendors building up their services arms in the early 00s. Since then, HPE sold its service arm, and so did Dell.
The other way hasn’t worked either: IT service vendors have struggled going in other areas: software mostly. HCL Tech is investing significantly in its software product business, and so far so good. However, for one success story such as HCL’s, I can think of somewhat smaller IT service vendors that got hit by software product development costs. Indra sistemas comes to mind.
The IT service industry has its own business model, and to a large extent, CSPs and then hardware vendors failed to realize this. The IT service industry is a frugal industry that did not accommodate the Capex-minded telecom industry.
The same goes for the IT service industry’s foray in the ISV world. The IT services industry tends to be project-led when it comes to investing, while ISVs create (little-mature) products and sell it. The IT services industry is obsessed with margins, while the software product industry clearly is not. Think Salesforce here that is barely profitable, despite being a USD 17bn firm.
There are more stories of service expansion: IT services and advertising for instance.
Similar Business Models
ER&D services and IT services have relatively similar business models, with heavy reliance on people, margin obsession, and a focus on portfolios along with HR pyramid management.
The business models are similar but there are differences: the ER&D sector relies on an engineering understanding of client issues (think about an aircraft aerostructure) and craftmanship, while the IT services industry is lighter on domain knowledge and is obsessed with service industrialization and repeatability.
IT Services Vendors Can Be Succesful in ER&D
I think that, fundamentally, there is nothing preventing IT services from becoming successful in ER&D services. Still, IT service vendors will need to go through a learning curve, mostly building up their engineering understanding of client’s culture along with client account mining.
In return, IT service vendors have a lot to bring and especially approaches learned from Indian offshoring: Indian delivery, of course, a focus on IP and accelerators, and their land and expand commercial strategies.
Which IT service firm will be successful then? Capgemini with Alran of course, the Indian vendors that have significant capabilities in product engineering services such as HCL, TCS, Infosys, Wipro, and Tech Mahindra and Accenture. The jury is out for IBM, DXC, Atos, and NTT DATA.