By guest author Tony Scott
On Course for a Collision? The Future of Product and Services Companies
Tony: In that environment [where it’s more about solving business problems than technology problems], much of the technology becomes totally contextual and therefore less important and of much less value. Outsourcing services companies that are only focusing on providing an alternative to context without helping on the core still have the issue of “what is the solution you are providing”? Because if you aren’t helping on the core, then ultimately you can be commoditized out.
Peter: Now we’re seeing larger companies starting to go “fabless.” Much of the semiconductor industry and, in fact, much of the hardware side has gone fabless, but now it’s starting to go fabless on the software side as well. Companies are saying, “We’ll do product management, but someone else could actually write the product.”
Tony: Do you see more services companies moving to become product companies or at least productizing part of their services? Or is everything moving to solutions, but solutions that are specialized subsets of an overall final product – like Tier 1 suppliers in the auto industry that provide big subsets of solutions – such as an entire interior – to the auto “manufacturers” that assemble, brand, and sell the cars?
Peter: A couple of different thoughts immediately spring to mind. First, I do think that the future of our industry is that eventually we will all gravitate toward becoming solution companies. I don’t think there will be product companies, I don’t think there will be services companies; I think we all have to sooner or later become solutions companies, and that all that don’t will perish. I don’t see bright prospects for companies that cling to one side of that equation or the other, honestly. I’m stunned by companies that are still clinging rigidly to their product pedigree, and I’m equally stunned by companies that are service companies and resist climbing up the IT ladder.
Tony: Many services companies are talking about moving to become more product oriented, but that isn’t an easy transition. The same thing happened – but in inverse – two decades ago as product companies began moving toward providing services so they could deliver broader solutions to their customers. As an example, one of the companies I helped build out the entire services executive team for in the mid to late 1990s was Cadence. They were a pure electronic design automation (EDA) software tools company and moved into doing design services for companies that had been buying their software. Part of the reason they got into design services was because their tools became so complex they had to not only teach their customers how to use them, they ended up working with them on design issues because they were the experts. They ended up having more expertise and capability around some of the cutting-edge issues in electronic design than many of their own customers did, so they said, “Maybe we should start charging for this.”
Peter: Yes, that’s the way many companies have backed into services if they are a product compan and why some outsourcing companies are thinking about productizing of their services.
Tony: But then you have to build a completely different kind of team to deliver on that – and that’s not easy to do, particularly in a global environment. Through my executive search work I’ve helped a number of companies build global teams in the technology space and in the professional services environment. From my perspective, no industry is as “global” as the technology and technology-enabled services industry because tech companies have to be able to operate on a global basis almost from day one. You have to build an operation that can breach the walls of different cultures.
Tony: Exactly. When you’re talking about doing it for a services-oriented business, you are actually at the edge of Thomas Friedman’s concept of the world being “flat.” The assets you have come in go out your doors every day, and the work can be moved very readily from one place to another. That has enabled technology-enabled services businesses and outsourcing companies to grow rapidly. But it’s a double-edged sword for companies that are playing in that field because the work can always be moved to a lower-cost producer relatively easily if the service isn’t differentiated on anything other than price. The $64,000 question is, how do you create something that is of value beyond just being the low-cost producer?
Peter: I think that we all have a responsibility to solve problems for our clients and think about ways we can do that holistically, be it through IP or through service or through a combination of the two. Again, I think the future of our industry is inevitably headed there; I think in some respects the industry is heading for a head-on collision between product companies coming from one corner and service companies coming from the other. Ultimately, we all end up meeting in the middle.
That being said, it’s going to be a long process. I think people in the technology sector often underestimate how long it takes for change to happen. We all think it’s going to happen overnight, and it takes much, much longer than we expect.