This column was written by Auctus Advisors co-founder and director Abhisek Mukherjee, and was initially published by Mint, one of India's most esteemed business news publications. The content may be viewed on livemint.com, and more information about Auctus Advisors (now a part of YCP Group) can be found here.
The next generation of IT CEOs must be master integrators. Only those who can derive synergistic value from amalgamations of consulting, design, analytics, and engineering will succeed. Three trends underpin this assertion:
First, business and technology are now interdependent. Five years ago, it was possible to build growth strategies for a railway company or a retail conglomerate without focusing on the technology. It is impossible today without integrating data engineering, data analytics, customer experience, front-end design, and back-end cloud mechanics. IT CEOs now lead integrated business solution companies, not just IT services companies.
Second, IT budgets are getting distributed to business CXOs. Earlier, both the “run" and “change" budgets resided with the Chief Information Officers (CIOs.) Now, the “change" budget is rapidly moving to Chief Digital Officers and business CXOs such as Chief Revenue Officers and Chief Supply Chain Officers. These CXOs are focused on business outcomes, not the underlying technologies. IT CEOs must be able to re-position and sell to business leaders beyond the CIOs to capture this high-value business.
Third, companies which directly impact the client’s business outcomes are valued higher. Analytics companies like Fractal and Tredence can charge $40 per hour or more in India, whereas the corresponding rate for IT firms is in the low twenties. This results in valuation multiples of 30X forward Ebitda or more for analytics firms, while for IT companies, it is around 10X. Consequently, IT CEOs must re-position the “centre of gravity" of their firms higher up the value chain and closer to the business outcomes of their clients.
These trends have become obvious over the last few years and have resulted in a spate of M&A activities: Management consulting firms such as McKinsey are acquiring analytics, design, and engineering firms to capture downstream value. IT companies are acquiring niche consulting, design, and analytics companies to re-position themselves higher up the value chain.
Basically, both top-end management consulting firms and large IT firms are trying to restructure themselves as amalgamations of four distinct businesses: Consulting, design, analytics, and engineering. In a way, this is an effort to re-create the Accenture model.
Even though most of Accenture’s offerings and talent resemble Indian IT firms, it is positioned as consulting-led and can command higher billing rates and value.
But as most CEOs learn the hard way, successful acquisition does not mean successful integration and successful integration does not lead to expected value realization.
The likes of McKinsey are struggling with the relatively lower rates that analytics, design, and engineering companies can charge. IT companies are struggling to integrate the high-cost talent and ambitious culture of consulting firms within their existing cost-focused structures.
Therefore, IT CEOs who master integration will be disproportionately successful in the coming decade. This will require two capabilities:
First, master integrators must have a visceral understanding of the cultures of the constituent businesses. Management consulting firms comprise of insecure over-achievers who solve smaller, but high-impact problems for Boards and CEOs. They are highly paid, have large expense accounts and want to rise fast.
Design firms are often led by moody mavericks who believe in the transformative power of design. They see what others do not and therefore are often exasperated. Analytics firms typically struggle with their position, as they compete with consultants on the data analytics side and with IT firms on the data engineering end.
Consequently, each requires a different type of leadership, organization design and incentive structure.
Trying to integrate these diverse cultures within the prevailing Indian IT culture (large, relatively simpler projects delivered cheap) is unlikely to succeed.
Second, master integrators understand how each of the four distinct components contribute to revenue, margin, value, and influence. Consulting revenues may be relatively smaller, but it yields high margins and exercise disproportionate influence on the positioning of the overall company. Design may have very specific utility, but its influence on consumer behaviour may make or break strategies.
Master integrators are able to deploy the right team to the right problem, with the right incentive structure, to add end-to-end value to clients. They are able to drive cooperation without structural integration.
Mastery in integration is no longer a good-to-have, but a must-have capability for the next-gen IT CEOs.
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