Previously, business and technology are now interdependent. Five years ago, it was possible to build growth strategies for a railway company or retail conglomerate without focusing on technology. This is impossible today without integrating data engineering, data analytics, customer experience, front-end design and back-end cloud mechanics. IT CEOs now lead integrated business solutions companies, not just IT services companies.
Second, the IT budget is being distributed to the business CXO. Previously, both “run” and “change” budgets resided with chief information officers (CIOs). Now, “change” budgeting is increasingly going to chief digital officers and business CXOs such as chief revenue officers and chief supply chain officers. These CXOs are focused on business results, not the underlying technologies. IT CEOs must be able to re-position and sell to business leaders beyond the CIO to capture this high-value business.
Third, companies that directly affect the customer’s business results are given more importance. Analytics companies like Fractal and Trendense can charge $40 or more per hour in India, while the same rate for IT firms is in the low twenties. This results in valuation multiples of 30X forward Ebitda or higher for analytics firms, while for IT firms, it is around 10X. As a result, IT CEOs must re-establish their firms’ “centers of gravity” higher up the value chain and closer to their clients’ business results.
These trends have become apparent over the years and have resulted in increased M&A activities: management consulting firms such as McKinsey are acquiring analytics, design and engineering firms to capture the downstream value. IT companies are acquiring niche consulting, design and analytics companies to propel themselves up the value chain.
Basically, both top management consulting firms and large IT firms are trying to reorganize themselves as an amalgamation of four separate businesses: consulting, design, analysis and engineering. In a way, it is an attempt to recreate the Accenture model.
Even though most of Accenture’s offerings and talents are similar to those of Indian IT firms, it is in a consulting-led position and can command higher billing rates and value.
But as most CEOs learn the hard way, successful acquisitions don’t necessarily mean successful integrations and successful integrations don’t lead to expected value gains.
The likes of McKinsey are struggling with the relatively low rates that analytics, design and engineering companies can charge. IT companies are struggling to integrate the high-cost talent and ambitious culture of consulting firms within their current cost-focused framework.
Therefore, IT CEOs who master integration will be disproportionately successful in the coming decade. This would require two capabilities:
First, master integrators must have a clear understanding of the cultures of the constituent businesses. Management consulting firms include unsuspecting over-achievers who solve small, but high-impact problems for boards and CEOs. They are highly paid, have large expense accounts and want to grow fast.
Design firms are often led by moody mavericks who believe in the transformative power of design. They see what others do not and therefore often get frustrated. Analytics firms usually struggle with their position, as they compete with consultants on the data analytics side and IT firms on the data engineering end.
As a result, each requires a different type of leadership, organization design and incentive structure.
Attempts to integrate these diverse cultures within the prevailing Indian IT culture (large, relatively simple projects delivered cheaply) are unlikely to succeed.
Second, master integrators understand how each of the four different components contributes to revenue, margin, value and impact. Consulting revenue may be relatively low, but it yields high margins and has a disproportionate impact on the overall company’s position. The design may have a very specific utility, but its effect on consumer behavior can make or break a strategy.
Master integrators are able to deploy the right team for the right problem, with the right incentive structure, to add end-to-end value to customers. They are able to drive cooperation without structural integration.
Mastery in integration is no longer a must-have, but an essential ability for the next generation of IT CEOs.
Abhishek Mukherjee is the co-founder and director of Octus Advisors
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