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1Mby1M Deal Radar: Systems In Motion, Fremont, California/Ann Arbor, Michigan

Posted on Monday, Feb 28th 2011

Joining the blog’s ongoing conversation about outsourcing, nearshoring, and IT services is Systems In Motion, a U.S.-based technology services company that was founded to create a competitive and complementary alternative to the trend of offshore outsourcing of IT work.

Systems In Motion’s CEO, Neeraj Gupta, along with CMO Debashish Sinha and delivery head Mike Parks, launched the company because, from their decades of experience in offshore outsourcing, they believed there was a large and underserved part of U.S. enterprises’ technology services needs not being adequately fulfilled by any current sourcing option, whether that was offshore outsourcing, domestic staffing, or boutique consulting firms. Gupta was previously the chief commercial officer at Patni, Sinha previously VP of marketing at HCL, and Parks previously CIO at Virgin Mobile.

“You’re thinking, ‘Does the world really need another IT services company?’ says Sinha. “Unfortunately, it does. None of the existing technology service providers will make a significant investment in developing a local U.S. workforce because, ostensibly, it’s cheaper and more profitable to be in India, the Philippines, China, and Egypt.”

Systems In Motion’s approach is to use the best practices of remote delivery management in combination with investments in centralized service delivery infrastructure in the Midwest (specifically, Ann Arbor, Michigan) in order to create an IT service model that out-competes those of players such as Cognizant, Wipro, Syntel, and Intelligroup at large and fast-growing U.S. enterprises. “In the inshore model, dedicated delivery centers can be created with resource pyramids of as few as 20 full-time equivalents (FTE) since the cost of infrastructure, security, knowledge transfer and governance are substantially lower than is typical for offshore operations,” says the company. “Once established, the delivery center can grow rapidly, without any further significant investment, and on average generate 30% savings over in-house or independent contractor staff.”

The total addressable market (TAM), which Systems In Motion defines as the market for external service providers supporting U.S. enterprises’ technology needs, is approximately $200 billion. Systems in Motion focuses primarily on application development and management and business intelligence – approximately 50% of the TAM. However, the business model at this point is built more on targeting a set of 50 fast-growing U.S. enterprises that have:

1. Significant new technology application development needs – typically retail, healthcare, and e-commerce companies;

2. a relationship network within these organizations that the company can tap into, and;

3. experience with offshore outsourcing but an expressed desire to change strategy because of quality and attrition problems, or a large pool of individual on-site consultants from staffing companies that could be consolidated into a more efficient centralized operations.

This market segment is approximately $1 billion in external services spending. Systems In Motion aims to penetrate and grow these accounts and capture a 10% market share over the next three years.

When the company was founded in 2009, there were thousands of service providers, many operating as “me-too’s” and addressing a $500 billion global technology services industry. Since then, there has been considerable consolidation in the supplier base, which is likely to continue. Systems In Motion’s competition ranges from large to mid-sized companies, including Tata Consultancy Services, Infosys, Cognizant, Wipro, HCL, Syntel, Patni, IBM Global Services, Accenture, CSC, and Keane. Many of these companies do have delivery centers in the United States, but Systems In Motion does not think that they have invested in any net new technology workforce in the country.

There are also more U.S.-grown onshore companies, one of which has been covered on Deal Radar: Rural America OnShore Sourcing, which has ITO, BPO, KPO, staff augmentation, and design outsourcing with a focus on clients with revenues of less than $50 million. Others are Rural Sourcing, which focuses on the healthcare industry; and CrossUSA, which offers IT services for the healthcare, insurance, banking, manufacturing, and government sectors.

Systems In Motion has two types of engagements:

  1. Team augmentation – In this case, Systems In Motion builds a team of technologists across levels at the Ann Arbor delivery center that is tightly integrated with its clients’ internal teams. Pricing is based on an average per day, per resource rate.
  2. Managed services and projects – In these programs, Systems In Motion scopes specific deliverable and service levels and fixes a specific price (either by deliverable or by month, based on the scope of the engagement)

Since pricing is dependent on a large number of variables and determined for each individual engagement, it’s difficult to provide numbers with specificity, however, on aggregate pricing works out to the equivalent of $50–$60/resource hour for most engagements.

Initial funding was provided by Cervin Ventures, an early stage VC firm, in 2009. The company did not need additional rounds of funding before becoming cash flow positive. At some point, if needed, management may consider growth funding from a strategic investment partner. Systems In Motion is cash flow positive with an annualized revenue run rate of ~$16 million, at a growth trajectory that indicates a revenue run rate of ~$35 million by the end of 2011.

The company does not have an exit strategy at this point and is focused on building and growing a strong business. However, the founders know that there will be several exit opportunities over the next three to five years – from larger offshore outsourcing companies looking to acquire a U.S.-based service business to enlarge their domestic delivery footprint, to private equity firms providing strategic investment capital (roll-ups). A public offering is another possibility.

Recommended Readings
1M/1M: Rural America’s Outsourcing Potential
Top 10 Outsourcing Trends For The Decade

This segment is a part in the series : 1Mby1M Deal Radar

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The 1M/1M Deal Radar: Systems In Motion, Fremont, California/Ann Arbor, Michigan » Systems in Motion Wednesday, May 28, 2014 at 10:53 AM PT