Why IT services companies suffer from an 'identity crisis'

Ajeet Khurana

Why, oh why, can’t we be happy being who we are? Excuse me for waxing philosophical but I come across this ‘identity crisis’ in the IT services space fairly frequently.
 
What am I talking about? Well, speak to any successful entrepreneur in the IT services business and you will find that they wish they were actually a product company.
 
Many services companies, in the IT space and otherwise, have realised that they have to dig a well every time they get thirsty. Wouldn't it be easier if they could establish a steady stream of highly profitable revenues by selling their own products instead?

Remorse and regret – and while we’re at it, how about some gratitude? – are never good motivators for a business. So why the grass-is-greener attitude? On the face of it, the reasoning appears sound. Markets value a product company at a far greater multiple than they value a services company. Many venture capitalists would not touch a services company with a barge pole but they love a product company.
 
Tut, tut… India is a nation with global success in the services space but we have not done equally well in our product businesses. Yet, why do companies that offer services list products as their future? What are the challenges in migrating one’s business in this direction? And is this migration feasible at all?

Services Are Easier to Sell

One of the main reasons for continuing to offer services while hoping to be a product company is that it is easier to find customers for services. I have met entrepreneurs who have a ready B2B product. When they approach prospective customers, they are often asked to provide services instead!

Losing Money In Services Is Less Likely

It is common for service contracts to entail advance payments. In addition, the client requires installation, customer service and upgradation. Given the customer's sustained vested interest, it is easy to get them to pay. On the other hand, product development costs are front-loaded. Even delays in selling products may prove fatal to businesses.

Product Quality Needs To Be World Class Regardless of Your Location

Thanks to Internet connectivity, you can buy world-class software products even in remote locations. And many of these global products are competitively priced. On the other hand, B2B service contracts usually require face-to-face meetings. So if your services business is located in a small pond, you can hope to be the dominant player there. In the absence of strong competition, client's expectations are usually lower.

So Why Do Services Companies Want to Develop Products?

After tasting initial success in the services business, it becomes obvious that growth will be linear. Service companies are unlikely to experience the much-famed ‘hockey-stick’ growth. As the order book grows, human resources as well as office space has to increase proportionately. And access to new markets requires sales teams in those geographies.

These problems are far less severe for product companies. It is conceivable that a browser extension developed in a remote hamlet in India could be sold worldwide. Additional sales would require little addition to human, or other, resources. Valuations would be higher; profitability could be much higher. This is what makes product businesses the El Dorado of the IT sector.

So What Really Is the Problem?

There are plenty of problems. India has no dearth of coders but I have had little luck meeting world-class user-interface designers, or people who truly get usability. So, we fall short in some areas. In addition, global product companies now have such deep pockets that a start-up is not able to invest the time and money required to come up with a competitive product.

'I Will Provide Services Till I Can Develop a Successful Product Business'

Many companies offer IT services to generate survival money while developing a product in the background. But after years of mentoring software companies that have tried to adopt this strategy, let me tell you that I am very sceptical of its success.

Angel Investors & Venture Capitalists in India Do Not Support Idea-Stage Companies

I have seen great hesitation in backing a product company at the plan stage. Most early-stage Indian investors seek a company that has already developed at least its version 1.0 product – some call this an MVP (Minimum Viable Product). This hesitation to fund product ideas often leaves the entrepreneur with no option but to provide services to survive. And that leads to the vicious circle that prevents them from becoming successful at products.

The author of this article, Ajeet Khurana, mentors start-ups. An angel investor, trainer, author, entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. He sits on the board of Rolocule Games – a gaming product company that successfully avoided getting into the services business. You can reach him on LinkedIn and Twitter.

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