Elementary, Mr Watson, “Focus”!!

Polaris announced separation of its products and service divisions. Infosys also announced separation of its products and platform division from the rest of services. So why are Indian software companies rushing to redefine SBU? What is the grand strategy in creating separate divisions?  Has this happened in other industries too?

More than a decade ago, World class manufacturing (WCM) companies, realized the value of focus and dedication. Companies like Toyota, Copeland corporation (part of Emerson group) and others have implemented simple 3 link WCM method to ensure their SBU’s are profitable. First, these companies separated the production lines that required high customization and low volume from those that were high volume and highly standardized ones. Second, the management process focused on efficiency and utilization in one group, while the other was aligned to capturing customer requirement and eliminating rework and waste.  Manpower resources with different skills are aligned for different SBU. High customization and low volume require resources with significant experience, often with ability to work independently. On the other hand, younger workforce may be better suited to high volume, standardized production set-ups. Finally, the incentive structures will be aligned differently for these two groups. More individual, piece-oriented incentives for high volume set-ups and group based for low volume customization set-up.

Service businesses, including hospitality, have adopted similar strategy. Hotel properties have been grouped into business, leisure and luxury with separate branding, customer experience and resources. Indian IT industry, which has enjoyed the benevolent market friendly years till now, is at cross roads. Companies understand product business with higher EBITAs, longer sales and implementation cycles and higher investments in terms of people and expertise is much different from service business. Unlike service business, the product business is sticky, monetization and protection of services is much higher and highly scalable. Product business require not just good software engineers, but also people who can bring years of domain experience to help you  build state-of-art products. Partner ecosystem can help in increasing the reach, entry barriers are high and complementary strategies can be effectively deployed to grow business. Service business, are high on “commoditization” axis, suffer from lower EBITA’s, have higher receivable cycles and associated working capital woes. If your company engages with government, additional Bank guarantees (BG) and approval cycles test the nerve of CFO.

Indian software companies have to quickly realize the intrinsic value of each business and see how they could be cut loose to grow independently. Indian companies have to quickly learn to move beyond “Business as usual (BAU)”, and adopt sensible strategies to defend and grow business. Expect more companies to streamline operations, bring dedicated focus in SBU, and align tighter organizational process and measurement systems.

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