Creating a sustainable long term competitive advantage overcoming the short term compulsions

A lot of companies all over the world show a typical tendency of putting a lot of focus on cost cutting and improving the operational efficiencies during the times of economic crisis. These companies would have shown accelerating growth during the times of good economy and the growth would have come to a screeching halt at the onset of recession. The top line comes under heat due to lower demand in the market and increased price wars.

At this juncture the firms would want to atleast sustain the earnings for their share holders. The only way of doing this is to sustain or improve the profitability of the firm. For doing this the firm has only one lever and that is to reduce the costs by squeezing the low priority expenses (as deemed by the firm) and improving productivity and operational efficiencies.

This method works in the short run and results in increased operational efficiencies but in the long run there is only so much that the engine can be tuned and optimized. Beyond a certain point any attempts to improve the profitability by resorting to methods as mentioned above will result in overheating the engine. Also typically the firms resort to cutting down expenses in the areas of R&D and sales as these are seen as expenses that can be done away with.

Cutting down these expenses will have severe implications in the long term as R&D and Sales are the areas where the firm should continue making investments in the downturn as well as this is an area which will create competitive advantage and act as a clear differentiator for the firm in the long run. The firms that continue making investments in the downturn in strategic areas like R&D and Sales are the ones that will emerge victorious once the economy picks up.

Another related problem which hinders the firm from making strategic investments which will create a sustainable differentiation for the firm is the “Short term Vs Long term” conundrum. All the listed firms are driven by the pressure to show quarter on quarter growth and profits and the firm’s management is so engrossed in showing results in the short term that they ignore the bigger picture and do not have the long term canvas laid out in front of them. This is yet another challenge that could cripple the firm’s ability to create a sustainable competitive advantage in the long run.

However some executives argue that the ‘Short term-Long Term’ conundrum is akin to the mid-term exams and final exams in school. They say that students who show consistently high performance in the mid-term exams have a better chance of faring well in the final exams. Similarly the companies which perform consistently well quarter after quarter have a much better chance of succeeding in the long term. Long term is nothing but a series of short terms put back to back.

I believe that the firms should focus on the net earnings to the shareholders over a reasonable period of time (say 5 years) and not compromise this by resorting to short term ‘symptomatic’ responses to the problems ailing the firm. They should have the bigger picture and a long term canvas laid out in front of them and should take tough calls and make long term investments even though it means facing a beating at the bourses in the short run. Some firms focus on only ‘top-line’ or only ‘bottom-line’. A combination of the two is needed and the net earnings to the share holders over a reasonable period of time should be parameter that needs to be kept in mind while deciding on the firm’s strategy at any point in time.

Ramifications of Scale in the 'High Growth' IT services industry -- Part Two

In my previous blog I talked about the impact high growth rates have on various critical success factors in the IT services industry such as Customer Satisfaction, Delivery Excellence, Operational Effectiveness and Talent Management. To alleviate the challenges posed by high growth on these parameters I am suggesting a few simple steps that need to be taken by the management of the IT Services companies.

1.   Alleviating the Impact of  High Growth On Customer Satisfaction

• Having a ‘Strategic Account Manager/Client Partner’ who will be the single point of contact/Customer Owner from the company for all the major customers for addressing their issues and concerns
• Adequate enablement and empowerment of the client facing team so as to enable them to address customer concerns effectively and continuously provide substantial value adds to the customers
• Identifying a second layer of ‘Relationship Managers’ who can serve the purpose of supporting the ‘Strategic Account Manager/Client Partner’ whenever and wherever necessary

2.   Alleviating the Impact of High Growth on Delivery Excellence

• Develop and harness ‘Large Program Management Framework’ at company level that will incubate, grow and manage large accounts
• Build an  optimized and scalable organization structure which leads to better employee connect and governance
• Institute a proper KM framework and have a core team that constantly updates the KM database and provides a good portal accessible to all employees
• Unique organization structures  will be needed to meet the needs of the larger portfolios and accounts

3.   Alleviating the Impact of High Growth on Operations effectiveness

• Six Sigma projects and Lean Initiatives need be run to facilitate incremental improvements at project/program/account level which will roll up to substantial savings at the company level
• Frequent Audits and Assessments can be conducted to ensure that the process adherence and compliance issues are addressed
• Benchmarking exercises can be conducted with competitor firms to ensure that the operational excellence parameters achieved by the company surpass the norms of the industry
• Non linear measures like IPs and Solutions and innovative pricing models may need to be adopted to bring exponential increases in productivity metrics

4.   Impact of High Growth on Talent Management

• Explore non conventional areas for recruitment such as:
•  Non Engineers to be recruited and enabled in Software development
• Hiring program managers and project managers from Non IT industries who have the experience of handling large projects and adapting them to IT services company
• Plan and set up infrastructure for training and certifying people in large numbers. To meet the inadequacy of training staff , the company must encourage the senior technical/domain experts to participate in mentoring and training activities.
• Empower the managers at second and third level from the SBU Head to take decisions and execute plans that normally would be executed by the SBU head ( More delegation of responsibilities is needed as the organization grows rapidly)
• Providing a clear career road map and instituting a good reward and C&B system that encourages the star performers and promotes meritocracy based system

Ramifications of Scale in the 'High Growth' IT services industry

Certain high growth industries such as ‘IT Services industry’ have much higher growth rates than other mature industries and hence are faced with unique problems of rapidly scaling up the ‘delivery machinery’ to meet the growing demand in the market. This includes scaling up the factors of production applicable to IT services industry such as skilled people, infrastructure, Sales network, Alliances with partners, Logistics etc) in a shorter period of time compared with other industries.

I am listing down the different areas where higher growth rate poses challenges:

1.    Impact of  High Growth On Customer Satisfaction

        Increasing Scale due to growth often results in the reduction in the bandwidth of the top management for each of the individual customers and portfolios. The leadership team needs to be supplemented and the second layer of leadership enabled to interface with customers and empowered to address customer concerns so as to maintain the same levels of customer interfacing, same levels of issue resolution, same levels of customer response time etc as before.

2.    Impact of High Growth on Delivery Excellence

Delivery is the most important aspect of the business as it is the core competency around which the whole organization revolves and this is the main service offering to the customer. The quality of the deliverable is of utmost importance as the reputation and image of the company revolves around the end deliverable/offering to the customer. Increased scale of operations puts intense pressure on the delivery leadership team (both middle as well as senior levels) as the focus is dissipated and distributed among the various delivery programs. The delivery processes and methodologies may not be able to sustain the load of increased scale and may start creaking under pressure.

3.    Impact of High Growth on Operations Effectiveness

Improving operational effectiveness becomes important to scalability because small improvements in operations translate to large dollar amounts when compounded with scale.

4.    Impact of High Growth on Talent Management

Talent is the key to the success of any initiative in the IT industry where talent is the main input/raw material to all the processes. Managing talent in a high growth industry is always a major challenge. Growth is impeded due to unavailability of well trained, experienced and skilled talent on time. Recruiting new talent, enhancing the skills of the in-house talent and equipping and facilitating the talent to take on higher roles at a short notice are some of the key challenges

In my next blog I will talk about how each one of these challenges can be mitigated and successfully attacked.

'Sharpening the Saw' to bridge the gap between what the customers need and what the IT service companies have!

We are going through exciting times in the market and environment around us with global economic recovery on the anvil and plenty of hope and optimism in the offing.

I was reading a study from IBM, giving insights from World’s top CEOs, which says that ‘rapid escalation of complexity’ is the biggest challenge confronting the CEOs the world over and today’s enterprises are not equipped to deal with this complexity. It goes on to say that ‘creativity’, ’dexterity’ and ‘reinventing customer relationships’ are the levers which will help tackle this complexity.

A similar study giving insights from the World’s top CIOs says that key drivers for growth this year will be projects in the areas that add real business value/real competitive advantage to the customers and the projects that show tangible cost benefits and operational efficiencies.

The point in question is as to what needs to be done by the employees in an IT Services organization in the wake of these challenges facing them. I believe that the employees need to be more innovative and also acquire additional competencies which are multi-disciplinary in nature to tackle the complex situations arising in their day to day life. The first thing that they all need to be doing is ‘sharpening the saw’. They need to adopt a multi-pronged approach to learn new competencies, skills, technologies, domains as the case may be. This could comprise of self learning, taking informal coaching from seniors in the projects, attending formal training programs, taking industry and technical certifications, reading blogs and articles from thought leaders and so on.

The employees of all hues need to come out of their respective 'technology shells' and start developing a broader level understanding of the business issues and the business pain points/ challenges being faced by their customers. They must adopt a wholistic approach to solving customer issues driven by understanding of the customer business processes and providing business solutions rather than placing technology at the center of their universe. Technology is a mere enabler/tool for solving business issues and is a means to an end rather than the end in itself.

 

The employees are expected to play a vital role in "realizing" the client's IT strategies and enable these to come to fruition. The alignment of corporate strategies with IT strategies must be ensured and all endeavours must be focussed on making this "one big thing" happen.

Unless the employees invest adequate time and effort in ‘sharpening the saw’ they will become irrelevant in today’s world and will cease adding value to their customers. Customers need to see constant value from the firm and this will be possible only if the employees first add value to themselves in terms of acquiring additional knowledge and competencies and keeping abreast of the happenings in the industry from time to time.

Which of the 'stakeholders' is most important for an Organisation?

Many a time a question arises in a manager's mind as to which of the stakeholders ( viz. employees, customers, shareholders, society) is more important. When it comes to taking a decision on a trade off between differing stakeholders interests there is an ambiguity as to whose interests are to be given the highest importance.

I believe in “People First” philosophy and believe that all the people managers should explore and experiment with this point of view. I genuinely believe that people are the "greatest" assets that every organisation has. If people are well taken care of then they inturn will take good care of customers by delivering high quality and high value output. Satisfied customers give the firm more business and this will create greater growth for the firm. More growth and more profits for the firm would mean more opportunities for growth and better career prospects/remuneration for people within the firm. This inturn will motivate people to further perform better and also create more employment opportunities for the society.

Thus this will become a self reinforcing loop which is beneficial for all stakeholders ( employees, customers, shareholders, society). 

So keeping employee interests ahead of everything else helps achieve all the outcomes that are amicable to all the different stakeholders.