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3

What framework or approach to use for an IT services company strategy?

Hi. Let's suppose you are in Spain, and you are an IT services consultancy that offers services related to digital transformation, Java/Python/PHP/etc application development, web development, ecommerce, DevOps, implementation of tools, big data, artificial intelligence .... etc. The characteristics of the market are as follows:

Buyers

  • Potential buyers are companies, as the IT services firm is aimed at the business-to-business customer.
  • The characteristics of the buyer market is that in Spain there are many companies, it is a country dominated by SMEs, whose purchasing power in IT is small, except for large companies.
  • The ratio of IT budget to total revenue of large companies is between 2% and 10%, depending on the sector.
  • The market is growing in adoption. For example, sectors that had an IT budget of 4% have a 4.5% IT budget the following year, and it continues to grow.
  • The volume of potential large enterprise buyers is not growing every year, it is simply growing in the economy as a whole at the rate of GDP.

Competitors

  • The industry has a potential market of 30.000 millions euros in the whole of Spain. The market share of the company to be analysed is small, only 100 million€ per year.
  • There are many competing companies, the market is highly fragmented. The first 20 companies have a turnover of 6000 million euros.
  • The portfolio of services is very broad, it is not a niche company, its focus is to cover a wide range of services.

The company's objective is to grow in turnover.

In order to clarify the objectives, the questions to response with that framework are:

  • What framework or strategic approach can I use to guide a possible strategy for the company?
  • What drivers should I use to define the strategy?
  • What is in the best interest of a company of this size, a narrow and focused portfolio of services or a broader portfolio?
  • Is it interesting to establish offices outside Spain?
  • As it is a very dynamic market with many new companies being created every year, how to analyse the risks in the competitive environment?
  • What is the most suitable business model for growth?

I propose the following response to this hypothetical case.

Key points

  • Given that the IT services market is highly fragmented and has no characteristics that can be associated with a mature market (it has high growth, low or no entry barriers, huge fragmentation...), the competitive dynamics are very large. This means that companies will continuously be created that will take a piece of the market share, and with which we can compete for the same project in a potential customer.
  • The main customers are large companies, which usually have significant entry barriers to working with new suppliers. This is because there is a knowledge that regular suppliers have of the customer's IT systems, and of the internal organisation of the company, which gives them an advantage over other new competitors. Therefore, for a company with an annual turnover of €100M in such a fragmented market, the main strategy would be to grow within the customers in which it is already positioned, prioritising this strategy over the alternative of looking for new customers. This does not mean that new customers should not be sought, but rather that the investment of time and the objectives of the sales team should be oriented towards prioritising the growth of existing customers.
  • The competitive dynamics and the fragmentation of the market in terms of competitors paint a long tail picture, where there are many competitors with the capacity to absorb a small piece of the market. Such small competitors will maximise their probability of growth only if they focus on specific services, i.e. if they specialise. Small competitors with a very broad portfolio of services will not grow as fast because they will not have a large track record, as the lack of focus will give them less traction, and their credibility with large buyers will be very small, which will give our company an advantage over them. Therefore, the bulk of the competitors that can really be a problem are companies of a similar size to ours, which are in a similar annual turnover bracket to ours. These companies will have a broader portfolio of services than we do. Therefore the strategy of maintaining a broad portfolio of services has a higher probability of success for our company.
  • As the IT market is a knowledge-based market, and the demand for services is growing faster than the number of people with the knowledge to carry out the projects, the company should have four key personnel policies. On the one hand, internal training, to fill the GAP between what it can hire and what the market demands. Secondly, a talent loyalty policy, which is based on employee care, a career plan and a strong brand that makes them see the company as an important asset in their professional career. Thirdly, a competitive salary, so that the incentive to change company is less than the incentive to stay with the current one. These three policies require a significant investment both in an internal area that manages all three and in salaries that are competitive with the competition. The fourth policy is knowledge management, which is achieved by establishing internal dynamics that allow lessons learned in one service to be used to advantage in the next.

Key drivers

  1. Branding: brand strength and reputation are key factors that facilitate commercial activity and differentiate the company in a competitive market. Investment in marketing is something that the company must do to stand out from its competitors (organising events, webinars, content marketing, etc). This will allow the company to be seen in the market as a reference in knowledge. As an objective, it would seek to achieve two things: attract talent, by being an attractive company to work for, and position itself at the top of mind of potential clients. In turn, this allows it to enter new clients, and helps to build loyalty among current ones, allowing it to charge higher rates for its projects as it perceives a higher value in the market compared to its competitors.
  2. Productivity: being a business whose main cost is wages, an important part of the profits are obtained from the company's ability to ensure that its workforce is producing at high productivity rates, eliminating dead gaps between projects. This implies an important focus on productivity KPIs.
  3. Attrition: given that the main asset is people, it is important to monitor attrition as it is extremely difficult to attract talent, candidates have many alternatives to work with, and therefore personnel policies must pay attention to the factors that determine the growth of turnover, establishing effective action plans to mitigate them.

Summary of the strategy:

  1. Focus on large customers, prioritising growth within the customer rather than new customers.
  2. Watch competitors of similar size with a broad portfolio of services, and smaller competitors that are specialists in services that the company has in its portfolio, have a track record and good growth.
  3. Maintain a broad and diverse portfolio of services, to offer customers a range of services that allows for internal growth through cross-selling.
  4. The company can try to open offices outside Spain, but without great urgency as the Spanish IT market is still large and growing.
  5. The M&A strategy would be reserved for acquiring smaller companies that are specialists in a particular service and that complement the service portfolio in those services for which there is not a high return internally. In other words, to reinforce low-profitability services through the acquisition of niche companies.
  6. Monitoring of brand, productivity and turnover as key mechanisms to maintain profitability.

Hi. Let's suppose you are in Spain, and you are an IT services consultancy that offers services related to digital transformation, Java/Python/PHP/etc application development, web development, ecommerce, DevOps, implementation of tools, big data, artificial intelligence .... etc. The characteristics of the market are as follows:

Buyers

  • Potential buyers are companies, as the IT services firm is aimed at the business-to-business customer.
  • The characteristics of the buyer market is that in Spain there are many companies, it is a country dominated by SMEs, whose purchasing power in IT is small, except for large companies.
  • The ratio of IT budget to total revenue of large companies is between 2% and 10%, depending on the sector.
  • The market is growing in adoption. For example, sectors that had an IT budget of 4% have a 4.5% IT budget the following year, and it continues to grow.
  • The volume of potential large enterprise buyers is not growing every year, it is simply growing in the economy as a whole at the rate of GDP.

Competitors

  • The industry has a potential market of 30.000 millions euros in the whole of Spain. The market share of the company to be analysed is small, only 100 million€ per year.
  • There are many competing companies, the market is highly fragmented. The first 20 companies have a turnover of 6000 million euros.
  • The portfolio of services is very broad, it is not a niche company, its focus is to cover a wide range of services.

The company's objective is to grow in turnover.

In order to clarify the objectives, the questions to response with that framework are:

  • What framework or strategic approach can I use to guide a possible strategy for the company?
  • What drivers should I use to define the strategy?
  • What is in the best interest of a company of this size, a narrow and focused portfolio of services or a broader portfolio?
  • Is it interesting to establish offices outside Spain?
  • As it is a very dynamic market with many new companies being created every year, how to analyse the risks in the competitive environment?
  • What is the most suitable business model for growth?

I propose the following response to this hypothetical case.

Key points

  • Given that the IT services market is highly fragmented and has no characteristics that can be associated with a mature market (it has high growth, low or no entry barriers, huge fragmentation...), the competitive dynamics are very large. This means that companies will continuously be created that will take a piece of the market share, and with which we can compete for the same project in a potential customer.
  • The main customers are large companies, which usually have significant entry barriers to working with new suppliers. This is because there is a knowledge that regular suppliers have of the customer's IT systems, and of the internal organisation of the company, which gives them an advantage over other new competitors. Therefore, for a company with an annual turnover of €100M in such a fragmented market, the main strategy would be to grow within the customers in which it is already positioned, prioritising this strategy over the alternative of looking for new customers. This does not mean that new customers should not be sought, but rather that the investment of time and the objectives of the sales team should be oriented towards prioritising the growth of existing customers.
  • The competitive dynamics and the fragmentation of the market in terms of competitors paint a long tail picture, where there are many competitors with the capacity to absorb a small piece of the market. Such small competitors will maximise their probability of growth only if they focus on specific services, i.e. if they specialise. Small competitors with a very broad portfolio of services will not grow as fast because they will not have a large track record, as the lack of focus will give them less traction, and their credibility with large buyers will be very small, which will give our company an advantage over them. Therefore, the bulk of the competitors that can really be a problem are companies of a similar size to ours, which are in a similar annual turnover bracket to ours. These companies will have a broader portfolio of services than we do. Therefore the strategy of maintaining a broad portfolio of services has a higher probability of success for our company.
  • As the IT market is a knowledge-based market, and the demand for services is growing faster than the number of people with the knowledge to carry out the projects, the company should have four key personnel policies. On the one hand, internal training, to fill the GAP between what it can hire and what the market demands. Secondly, a talent loyalty policy, which is based on employee care, a career plan and a strong brand that makes them see the company as an important asset in their professional career. Thirdly, a competitive salary, so that the incentive to change company is less than the incentive to stay with the current one. These three policies require a significant investment both in an internal area that manages all three and in salaries that are competitive with the competition. The fourth policy is knowledge management, which is achieved by establishing internal dynamics that allow lessons learned in one service to be used to advantage in the next.

Key drivers

  1. Branding: brand strength and reputation are key factors that facilitate commercial activity and differentiate the company in a competitive market. Investment in marketing is something that the company must do to stand out from its competitors (organising events, webinars, content marketing, etc). This will allow the company to be seen in the market as a reference in knowledge. As an objective, it would seek to achieve two things: attract talent, by being an attractive company to work for, and position itself at the top of mind of potential clients. In turn, this allows it to enter new clients, and helps to build loyalty among current ones, allowing it to charge higher rates for its projects as it perceives a higher value in the market compared to its competitors.
  2. Productivity: being a business whose main cost is wages, an important part of the profits are obtained from the company's ability to ensure that its workforce is producing at high productivity rates, eliminating dead gaps between projects. This implies an important focus on productivity KPIs.
  3. Attrition: given that the main asset is people, it is important to monitor attrition as it is extremely difficult to attract talent, candidates have many alternatives to work with, and therefore personnel policies must pay attention to the factors that determine the growth of turnover, establishing effective action plans to mitigate them.

Summary of the strategy:

  1. Focus on large customers, prioritising growth within the customer rather than new customers.
  2. Watch competitors of similar size with a broad portfolio of services, and smaller competitors that are specialists in services that the company has in its portfolio, have a track record and good growth.
  3. Maintain a broad and diverse portfolio of services, to offer customers a range of services that allows for internal growth through cross-selling.
  4. The company can try to open offices outside Spain, but without great urgency as the Spanish IT market is still large and growing.
  5. The M&A strategy would be reserved for acquiring smaller companies that are specialists in a particular service and that complement the service portfolio in those services for which there is not a high return internally. In other words, to reinforce low-profitability services through the acquisition of niche companies.
  6. Monitoring of brand, productivity and turnover as key mechanisms to maintain profitability.

(edited)

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Hello, I have edited the case to add my possible solution. — Roberto on Apr 09, 2021

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Hello!

I don´t fully understand the target of the exercise and the part that you want the community´s help and feedback, can your clarify?

Is it a case, or for your own startup, etc?

Cheers,

Clara

Hello!

I don´t fully understand the target of the exercise and the part that you want the community´s help and feedback, can your clarify?

Is it a case, or for your own startup, etc?

Cheers,

Clara

I have set up an exercise as realistic as possible in order to find a first approach, an approximation, a framework, which will allow me to build a mental map to focus the analysis. The question is, what framework could I use/build to help me decide on a growth strategy? — Roberto on Apr 09, 2021

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Hi there,

I'm sorry but this goes beyond the abilities of the Q&A community....you're asking for a review on a thesis! Any answer here would take a good 30 minutes to process + craft properly.

This is where coaching is needed!

Hi there,

I'm sorry but this goes beyond the abilities of the Q&A community....you're asking for a review on a thesis! Any answer here would take a good 30 minutes to process + craft properly.

This is where coaching is needed!

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