There was a time when enterprises looked at IT service providers primarily as a source of inexpensive, trained engineers to manage their “mess for less.” Provider revenues were directly proportional to head count. There were sporadic discussions in provider boardrooms about the need for nonlinear growth, which led to an initial investment in in-house tools. Consequently, providers developed tools to accelerate their own backend operations, reduce delivery costs and timelines, and achieve annual cost reduction goals in their contracts.
Our discussions with business leaders, as well as our analysis of outsourcing contracts over the last couple of years, show that this tide against provider-developed products might be turning. Increasingly, companies are being exposed to these in-house tools and products. In fact, in several recent deals, the feature set and enterprise-grade architecture of the products have been a deciding factor in awarding outsourcing contracts.
With heightened enterprise acceptance and greater provider investment, the time is ripe for product-led services to become the dominant outsourcing standard. However, the next big mindset shift required will be in pricing models for such outsourcing contracts. We expect to see enterprises paying an explicit product license fee instead of expecting it to be included in the services fee.
Our discussions with product leaders at provider organizations show that they are aggressively incorporating this new paradigm in their sales and account management strategies. We expect that the next 24 to 36 months will see providers identifying a set of their own marquee products, which will be sold in a stand-alone manner.
This paper showcases the HCL case study, one major provider that has been part of the trend to product-led services. Along with its Q3FY21 results, HCL announced it had reached USD 10B in annualized revenue for the calendar year 2020—a significant milestone. Interestingly, its Products & Platforms segment accounted for 16% of its calendar year revenue with nearly 30% YOY growth. Thus, reflecting how important those products are in its growth strategy.
Because of its historical engineering services roots, HCL has always had a unique revenue mix compared to other service providers. However, the increase in its product business is not a consequence of historical roots or legacy. Instead, it is the result of an explicit strategy, which it calls Mode 1-2-3.
By Swapnil Bhatnagar, Senior Research Director, Gaurav Dewan, Associate Research Director and Amrita Keswani, Lead Analyst, Avasant.