As the current crisis has unfolded, almost all the countries that have been severely affected saw their governments announce multi-billion dollar relief packages. However, most of these funds are directed toward the small and midsize business sector, leaving some large conglomerates and business houses still struggling 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, there are a few questions that most large companies will be pondering.
Every CEO and CFO will be looking to their full leadership team to find ways to conserve cash. One such constituent I engage with often is the CIO, and they are expected to find ways to conserve cash and reduce overall cost. Every advisory business has taken up the opportunity to teach CIOs about how to reduce their overall cost structure and free up cash for their businesses. For example, Gartner ran multiple webinars on this topic, like one titled 10 Rules For Rapid IT Spend Reduction.
Some of CIOs’ biggest cash outflows are for large IT and IT-enabled services (ITES) vendors around software and services costs. So they naturally want to find ways to both reduce their costs on these items and either conserve cash (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 canceling 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 make their decisions considering their own financial viability while also figuring out a way to help their customers in their hour of need. The requests that customers make to their IT and ITES companies might be based on emotion, not a logical or legal argument. The way customers are treated in their distress stays etched in their minds for a long time.
Within this situation lies the potential to make customers either loyal or not going forward, depending on how they are treated.
Smaller, founder-driven partners will have the final say, but they still may not have much leeway to work with. What happens if they are large global organizations that are usually also publicly traded? They need to find a way to keep their customers happy and to keep their shareholders and analysts happy.
If you’ve worked for a large, public, global organization, you know how they work. Typically, they will create a budget to address such requests as a part of doing business. This budget is distributed to the different regions, the regions then further distribute it to the different market units, and the market units then offer it to their customers.
This approach has two drawbacks
- In the short term, the relief is never enough to make a significant impact for the customer, hence they are not happy.
- In the mid to long term, the business outlook may lead customers to want to work with smaller vendors that they may have better control over, just in case this phase lasts a bit longer than expected. This means that global IT and ITES service providers will face the risk of reduced revenue, which means that the analysts and shareholders are not happy.
This could lead all the constituents to end up unhappy and, in the process, force the vendor to cut its internal costs, which most likely means they will let go of people – their biggest cost and strength – making them weaker and their recovery slower when the economy turns around.
There is another way
Most IT and ITES organizations look at this situation and see it as a risk that must be contained. While that is a good approach to ensure financial stability in the short-to-mid term, I believe that such an approach eliminates a much bigger opportunity in the mid to long term.
I think this provides a great opportunity for someone in the IT and ITES industry to make some big, bold moves that can create long-term competitive advantage.
There isn’t 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 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 and services to selling outcomes (reduced inventory levels, reduced out-of-stock levels, reduced operating capital, etc.).
In normal circumstances, few 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 in their productivity, some customers might be open to this offer.
When such an offer is made to customers, one of three outcomes will result:
- Customers reject the offer: This is the status quo, and the IT and ITES player doesn’t lose anything but can always claim they offered a way to bring significant cash flow and productivity gains for their customers by willing to take on the CAPEX and OPEX and the risk associated with adopting the products off their balance sheet.
- Customers accept the offer and the outcomes are delivered: Assuming that the organization that made the offer delivers the committed outcomes, this is a win-win scenario for all parties involved, and this relationship can start to blossom. The organization can show this as a success story and start moving up the value chain, offering the outcome-based service model, which has the potential to be much more profitable than existing contracts.
- Customers accept the offer, but the organization can’t deliver the outcomes: In this case, the organization will know where they stand with respect to their ability and industry expertise. They can then look at different partners, reconfigure the talent they hire, retrain their existing employees, and learn from their early lessons. They will either learn how to deliver the outcome in the near term, or they will learn things 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.
If they can succeed in delivering the outcomes promised, the organization can then continue to expand its 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.
As they are mostly publicly traded entities, they may not 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 in 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 and ITES space to make such a decision.
Times of grave crisis have seeds of greater opportunity hidden within them. Growing them requires a leader with a bold vision and a belief that their teams 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!
Get an overview of the S/4HANA Value Discovery Workshop and its benefits by joining this webinar.