Wednesday, June 8, 2016

The Fading Allure of Pure Play Services

In the long history of IT outsourcing, there was a prominent strategy among many IT Services companies to position themselves as “pure play” services firms.  This was meant to counter-act the competitive alternative offered by companies that were simultaneously product manufacturers and services companies.  See: IBM, HP, Xerox, Fujitsu, etc.

The paradox here is that product companies tended to think that they need to have a services arm in order to optimize the sales/service channel to the market.  Yet, that services arm tended to command lower profit margins than the product business lines, and risked having the provider being seen as biased with respect to servicing products that are not part of the manufactured portfolio.

Pure Services companies, on the other hand, promote their objectivity.  They promise to serve multiple product families brinigng efficiency through leverage of process and scale.  Some even advocate agnosticism in terms of the products being serviced.

In my experience, the win rate for large IT Outsourcing contracts wasn’t materially different among the pure play contenders versus the product-plus-services providers.  None the less, it was a healthy point of competitive debate in the selection process.

The question I am increasing asked is this: “What does it mean to be ‘pure play’ in the era of ‘As A Service’, and will there be a shift towards favoring a pure play proposition?”

I had the pleasure recently to experience a sales pitch to a banking IT executive in which an IT services provider was touting its objectivity and independence with respect to the cloud infrastructure offerings it was suggesting to serve as the foundation for a rather ambitious transformation.  The central assertion was that the bank should not be beholden to any particular technology suite, but would be better-served by selecting a service provider that was firmly established for services, and not selling products.

The bank executive listened for only a few moments before he interrupted the pitch to say, “You guys don’t get it.  We don’t care what products are under the covers.  Independence doesn’t matter when we are buying outcomes.”

The meeting ended abruptly, as the service provider’s script was now turned on its head.

Based on the interactions I am seeing in the market, enterprises are increasing leaning towards buying/subscribing to turn-key services solutions that unify the various component parts into holistic offerings.  The actual product underpinnings are less relevant than the committed level of features, functionality, and service integration.

The effect of this shift in buying tendency means that there is a third breed of service option.  We have the emergence of service contenders who are removing the complexity relating to underlying components of a technology stack and bringing well-engineered services solutions to the table.  Commonly labeled “Business Process as a Service” or some variant thereof, these are platform-oriented “As A Service” stacks that present a new proposition when considered alongside the traditional product and pure-play service alternatives.

So, the answer to the question of what it means to be pure play in an “As A Service” world is that companies must compete on the basis of built-for-purpose functionality, as opposed to general-purpose run/operate.  Independence has diminishing relevance.

Recent M&A within the industry that is shifting non-differentiated service capabilities among companies is considerably less interesting and less relevant than the development and scaled deployment of BPaaS platforms, regardless of the heritage of the provider.

Call yourself pure play if you like, but the market won’t care unless the play is built “As A Service.”

Peter Allen applies many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, with focus on technology-enabled business services. He is now Chief Evangelist at Peter Allen & Partners and Senior Advisor for Alvarez & Marsal.

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