Silence in Services…?

June 13, 2010Blog Standard

The IT products business is an action packed volatile business, full of churn. Catagoery leaders are trying to usurp the space in other catagoeries by buying out companies. SAP acquired Sybase to get a foothold in database market. Oracle acquired Sun after it exhausted all possible options in software companies. Google in entering the OS space and browser space after success in email and enterprise search. Cisco launched X86 servers and an alliance with EMC/VMWare. HP acquired 3Com to enter in Networking and sewed up an alliance with Microsoft to counter CISCO-EMC alliance. These are the big ones. Then there are countless numbers of small and mid size mergers and acquisitions. The list goes on. The product business seems to be consolidating and it seems like we are going back to the future..
Comparitively the IT Services spaces seems to be moving at a dull and staid space. Yes, there has been action in terms of some services companies being acquired by product companies. HP acquired EDS, Dell acquired Perot Systems, and Xerox acquired ACS. But those were product companies who were acquiring services companies. One has not heard of any bold moves from any other big services companies. Even in the most talked about space of cloud computing, more talk and action is from ISVs and the product companies…The services companies seem to be taking a cautious approach here too…after the last big thing of offshoring, services space seems to be silent for a while now..

What does this mean, if anything?
One could argue that this is not surprising and that Services business is slow and steady business, not given to much twists and turns or upheavels which is more the norm for product busienss.
One could say that this is the lull before the storm…before the next big thing hits the services space…if so…what is the next big thing…and what is the future like for IT services ?

Any thoughts?

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South Asian in WA

In fact I personally feel that the consolidation of product company will actually be the preamble to the consolidation of Services company. When these mega mergers take place, they eventually settle down,.. to cut the fat…or in Business 101 terms, start looking at core competencies. This is when I think the Services companies will see a churn.
We saw that happen when MSFT and Yahoo partnered on the "product" , a search engine. Having been in the Service industry for a short time, I am no expert, but my hunch is that you will begin to see some favorable fall out for hard core broad spectrum service companies, as early as the last quarter of 2010.

Anirudh Joshi

From an experienced ISV Exec in Seattle (on email)

"Great post – fantastic and timely question to be asking.
As the name implies the traditional role of the SI is to get the
complex IT systems and applications up and running in an enterprise
environment. As cloud computing comes of age within the enterprise,
promising to dramatically reduce cost and complexity why the silence
from the SIs?

Yes the normally loud and dynamic product companies are all responding with cloud product announcements and positioning. Are the SIs formulating a raditionally quiet response? Or are they simply
behaving like a deer in the headlights as they contemplate their future and value add in a cloud computing world?"
From bb – feel free to post online – am currently offline or would have posted.


When you acquire a product company, you get the IP and the opportunity to monetize the same at a different level based on the offerings of the acquirer. when you acquire a service company, what you get and need to retain is the knowledge of the people and customer base. Even if you retain the knowledge resources from the acquired company, it makes sense only when customers continue.

The cost of acquiring a company may be some times hihger due to valuations compared to recruiting knowledge resources. So the considerations are different.


Your observation is right Anirudh, however if you observe the revenue patterns of top SIs, their services business is increasing walletshare in their overall business. Though product businss grows at thin double digits or flat growth, services business has been soaring even in troubled times (say last 6-8 qtrs). You do need a solid portfolio of products and solutions to wrap services around – this is the only way one can innovate and survive, before the service gets commoditised. Also buying out a services organisation is not a straight forward thing, you are buying talent, resources and human capital which is very sensitive to M&A and can be lost overnight if not handled with care. Today if you ask me the biggest chunk of services play will now lie in cloud based services. We see large SIs already building private clouds to offer infrastructure as a service, many managed services models like managed connectivity ( VPN services) have evolved well which will now lead to UCaaS, DCaaS and TPaaS.


Conslidation is the only way in future and IT Service industry is no exception. In IT Industry also only No.1 & No.2 make money and all others bleed in trying to compete with the top 2.

Till yesterday service companies had approached customers in different geographies and had developed their niche in each vertical when they were on growth path and were satisfied and didn't felt the need to eat into each others market share.

Last 8 quarters have been tough for the service industry. Business is down, margins under pressure and subequently large teams to support. Till date they have been sustaining on the cash accurals they had of last 6-8 years.

Once the kitty starts bottoming out , then the fierce competition will start to kill each other and slowly it will translate into M&A.

It is bound to happen and it has happened in FMCG,Retail,BPO, Telecom , Banking, Consulting, Advertising , Airline or any other vertical we can think of.

Market is limited and too many players who follow the rat race and enter the business late are the preys for the early starters.

There is no Silence in Services . The pressure are felt across all top service companies . Soon you will hear some big names announcing the acquistion of one service company by another.

The golden rules in business are same what it was 500 years ago. If you cant beat the competition buy it out.


Services have always been around. There's just more press about it this century than the last. Why? Because, more constituencies are trying to milk a relationship. Why should a product company require a services story in the first place? There could be many reasons, but primarily (to me) it appears to be the case of innovation starts to wane off. The magic is on the decline. But financial commitments are divorceable. So, you take business decisions and play the percentage game. The vision/mission things are "adjustable" and so long as the numbers are coming through, the company is successful. Nothing wrong there.

And then there are companies that continue to innovate and stay honest to their raison d' etre. Bose, Apple, Dolby. They are willing to put their energies around innovation as opposed to just giving up and playing the M&A game for financial reasons.

Most companies that have a business plan driven by the Street, are no more than just a morphed financial services company. Bunch of investors, put money, dictate what to do, collaborate to generate numbers, share dividends, play M&A games, sell/buy/merge/other. More powerless team members in these companies play the original role of "doing something/anything" to keep the neon lights on.

IMHO, there need be no mystery or clairvoyance required to understand that services will only grow. More and more companies will diffuse their offerings so much that it will be hard to distinguish the laundry services of one from another. It's all business. Being ok is more secure than being brilliant. Innovation is best left for the fanboys. Excellence and new ideas are left to the startups. Ah, the ironies in life 🙂


There are many reasons for typical service sector companies to be silent:
1. growth of IT "product" companies.
mChek – provides secure playment platform via mobs.
Oracle – Flexcube
TCS – BaNcs
Infy – Finacle
3i infotech – Kastle
OrangeScape – Dimension
iViz – with "SaaS based" web security
Subex – Nikira
etc etc..
2. Infact, 52% of the all new IT entrants are "product" companies.
3. reasons:
1. availablity of talen pool – expat managers who can now work on "product" offerings.
2. acceptability of SaaS model
3. availablity of funding via – VCs, PE, Angel Investors
4. mobile phone growth – penetration as well as technology base
5. internet penetration.
4. So, focus is on bundling services around a product.

There r other reasons too..
Many tech firms ventured into service sector. Now post 'R era' the companies are entering into shared offshoring model. So, the scope in service sector is slightly less.

R. 🙂

Anirudh Joshi

A comment I received on mail from an experienced exec who has rich experience in both ISVs and serviecs side….

"Good blog post, thought provoking..

Couple of comments:

– services companies typically prefer stable, steady cash generation and growth and are bulky, slow to change, slow to react, and less likley to take undue risks, especially when economic climate is uncertain, and landscape is slippery. product companies have lesser time to react before their PE gets wiped out, more prone to make aggressive and defensive mergers, acquisitions and forced to make bold moves in order to survive or dominate.

– everyone is trying to figure out how this cloud thing will change the landscape, i guess first product, platform giants have to decide which seat will be taken by whom, who marks which territory and defines their space at the table, and figure out who gets to eat what. the music for the musical chairs for this game still seems to be on, once the landscape at that level is clear and the music stops, everyone takes the seat and losers are out of the game, services companies will have to quickly take the their seats which help them milk the services revenues using this new world order or ecosystem.

Aggressive folks will think music has stopped and start making their moves at the risk of faltering a bit and the lazy folks will keep waiting for the dust to settle, hope they dont wait too long and become dust.

every few years this drama will happen, cloud seems to be the latest show.

till then, services companies will keep nibbling into their existing accounts and hope that they can keep getting their steady revenues and hope that there are no major earhquakes on ground while they wait for the clear white clouds in a blue sky.


Reena Dayal Yadav

I would say that the context of the acquisitions and the consolidation in the Product Industry is not new…it's following the usual cycle….any new leap in Business Models/Technology creates a rush to have early supremacy in the area. Look at the History of Server, Dektop consolidation scenario in the past. Even currently I think that whatever we are observing now was "cooking in the background " so to day for some time. How? – Let me elaborate-The 4 essential elements in the Data Centre/ Enterprise Architecture are – Server/Compute / Networking/Computing /Applications . Off course we have Power, DC setup and so on…but three main INfrastructure Technology components are these. For the last few years the boundry lines between these technical stacks have been fast blurring . CISCO foraying into Storage switches and then into Application oriented networking. EMC moving way beyond traditional storage into Information Management, with ecer expanding definition of that area. HP moving beyond Server and Desktops into Networking ( Like u mentioned) .
Service companies do not follow a similiar cycle…..that is probably because most of the leaders in this segment are already providing a wide diverse range of services….. Acquisitions even when they do happen are less remarkable…
In fact it is product companies making more remarkable forays/consolidation into/of Services as well. HP acquisition of EDS ?, EMC acquisition of Infra Corporation ? and others. Not to mention more of Cloud "Services" Providers in the horizon.

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