Why Traditional System Integrator’s (SI’s) need to rethink of their business model & transform from project based to a more product & solution focused organization.
What is a System Integrator ?
SI’s as they call them are technologically specialized organizations which bring in various technology and practices and stitch them up together. Most of the SI’s don’t have their own solutions or products but they partner with leading global vendors such as Microsoft, Oracle, Cisco, IBM etc to resell their products / solutions and undertake the implementation, configuration and support services. Each country would have a specialized authorized reseller or preferred partner for a specific vendor. The business model is such that the SI’s sell the vendors product license (if it’s a software) or hardware components to the customer and undertake the implementation. The SI is connected and strong in the local market and has all the relationships with the C level at an organization hence the business is highly dependent on relationships. This can both be an advantage and a disadvantage.
The margin Game
The SI makes most of its money by doing the implementations and the vendor is happy with the amount of licenses or hardware components that the SI sells, that’s your happy day scenario right there. This model worked really well in the past since organizations needed to get their IT setup and it was not a task which the IT department of an organization can undertake on their own. Setting up and managing IT infra was a huge task which includes from networking, databases, Enterprise applications, security, analytics and so on. This was a gold mine for the SI since they could completely undertake the entire project by providing their expertise and support.
The Harvard Business School press explains that;
“At one time, information technology was so expensive and so difficult to manage that companies could make large amounts of money simply by being able to make systems work. In this model SI would up sell, cross sell and keep on selling by milking the cow”
The Game has changed
This model worked well until things started to change during the past 10 years or so according to my personal understanding. Things rapidly started to evolve when cloud computing came to the picture. Many companies did not agree to this new emerging tech which was taking the world by storm. It was then only a buzz word. Even giants like Oracle transformed them from “what the hell is cloud” to “we run everything on cloud”. Cloud became the norm. Every organization jumped into the bandwagon because it actually made a huge impact to an organization. The access to cloud computing gave every organization in the world to transform into a technologically driven company. Every organization whether it would be banking, manufacturing or telco are investing to build their own technology practices and R&D teams within the organizations. Their offering and services are transformed from traditional brick and mortar to technology first approach. And all of these organizations leveraged the power of Cloud computing where most of the solutions and services run on top of either Saas, Paas or Iaas services. So with this transformation where does the role of a SI play? Don’t get me wrong companies still need SI’s to bridge the gap in many IT projects but things seems to be shrinking.
It’s also challenging for a traditional System Integrator to have a global presence since in each country or region there will be a preferred SI who dominates and has a connection with the customers. Trying to collaborate with them will only increase cost for the customer and shrink margins for the SI’s.
While organizations invest on creating their own technology and products, the cloud providers are also making life more easy to deploy them. Almost all the major cloud providers such as Microsoft, AWS, Oracle and Google provide easy to access features where services and applications can be created without a single code. Any business user with a great idea can simply get on board with one of these Paas or Saas services and quickly build an application by drag and drop. The millennials are highly tech savy and they are the future workforce, you don’t need an expert advice to build these solutions. All the back end configurations such as load handling, security are managed by the cloud vendors, This makes it easy for an organization to build a solution with minimal effort and publish it to market places. Again where does the role of an SI sit in the future? According to Forbes “Cloud Solutions Put The System Integrator Industry At Risk”
Reference : https://www.forbes.com/sites/stevebanker/2018/02/07/cloud-solutions-put-the-system-integrator-industry-at-risk/#1a4afc823187
Another states that;
“The massive wave of global digitization affected system integrators as well, posing some major challenges for the traditional project-based business model”
– Frank Strecker, SVP Global Cloud Computing & Partner Eco-Systems, T-Systems International GmbH
Also with software products now offered in a Saas model, 80% of all software sales are done directly from the vendor without a distribution channel. This is because the SI does not have a value to be added.
Although there are still many cables to connect and physical hardware to implement, the overall scope of many of today’s System Integrator projects around the world is changing dramatically,
Where is the sweet spot for a modern day SI ?
As much as the cloud has become a threat it is an opportunity for SI’s. The SI’s might be too late to develop enterprise software application such as ERP’s ,CRM’ or HRM’s but the SI’s can play a major role in technologies such as AI, RPA & IOT.
SI’s have the opportunity of building their own solutions & products by leveraging the power of cloud computing and AI services. SI’s have all the experience and ideas they need to build up solutions and products which runs on the cloud and could be integrated to existing enterprise software. These solutions can then be published to cloud marketplace and leverage consumption / license based revenue.
While the BAU is running a SI needs to invest on new R&D and productizing teams which would research and develop new products and offerings. The new products and offering can be plugins to existing products / solutions or completely new offerings .
For this the SI’s need to have a long term vision, most SI’s are short term sales driven.
Also it is stated that: Collaboration is the new way to work
The road transport industry is a good example. Thanks to the rise of self-driving cars, PwC has projected that by 2030, the number of vehicles on the road in the United States will have fallen by up to 99 percent.
SI’s need to collaborate with various industries and co- build joint solutions on a revenue sharing basis. For an example, a SI can collaborate with a Tire manufacturing company and co-build an industry focused IOT & AI platform. During this process both companies will have a MOU and they will invest their resources and engineers to work on new initiatives.
The operating and business model of the company needs to change as well. As mentioned BAU will need to run to pump the company and separate KPI’s need to be set for the R&D and product development teams (example, new concepts and solutions needs to deliver during 6–12 months)
Like electricity before IT, the nature of IT has changed , companies used to employee chief electricity officers because this was a key differentiator that needed to be created in house, now electricity is a utility and there is no competitive advantage from its generation but rather the applications which is built on top of it. IT was used to be something out of a box but now IT is something that comes out of a pipe as a service. With all these transformations it’s a big question, will the traditional SI business last? or will it be doomed soon? While more and more companies are moving into the cloud and investing heavily on developing their own technology skills and developers, how will the SI be relevant? These are some of the scary questions that any SI should take into serious consideration.
The most important thing for an SI is to hire the correct people, if the SI needs to build its own IP’s, products and services it would need creative out of the box thinkers who are ready to challenge the status quo and think of ideas that others might think they are impossible or crazy. A motivated , dedicated team who is willing to build state of the art products and solutions can change the game.
SI’s should also work closely with vendors so that they could co-sell the products to other regions. This would help the SI to have a global foot print and develop its business globally.
SI’s need to take risks.
SI’s need to look at the startup eco system and acquire state of the art technology startups. This will help them grow more in terms of global foot print and solution offering.
SI’s need to transform from been pure sales driven to purpose driven.
We all know companies need to make money, but if an organization only focuses on that very single objective, we may win the battle but will loose the war. A purpose driven company attracts investments, attracts customers, attracts good employees.
Satya Nadella proved this statement by changing Microsoft to a more purpose driven organization as what we see it today, “To empower every person and every organization on the planet to achieve more.”