Organizational refocus as the survival tool
Our last look at the local IT services market in Australia (in December 2008) portrayed only doom and gloom. With revenues dropping sharply, profits on the slide (Oakton suffered a 48% net profit fall), redundancies, and high debt levels, the future appeared less than rosy for the local SIs.
With their backs to the wall, they undertook comprehensive operational, financial, structural, and customer reviews to find the levers that could be pulled to keep their heads above water. And to their credit, not many took the easy option of immediately culling waves of staff and watching years of experience and IP walk out of the door. SMS Management and Technology did drop 20% of its staff, but it quickly rehired when demand picked up again.
A key step was the tough discussion with the CIO/customer, which could have been tempted to utilize the crisis as a perfect opportunity to drive a bargain. Credit is also due to the strong relationships that many of the local service providers had developed with their client CIOs during the "golden" years, as many projects were retained at reduced burn rates, rather than simply canned.
However, the liabilities associated with the excesses of the good times had to be addressed. This did not follow the traditional cost-cutting across the board, but led to "all for one" policies such as convincing non-chargeable staff to take holidays, short-term pay cuts, and one day a fortnight shutdowns, which in combination improved cash flows, but with far less structural and reputational impact.
Before the global financial crisis, these "local heroes" flourished on provisioning the high-margin variable project work. But they very quickly realized that these needed to be counter-balanced with the lower margin, more dependable guaranteed revenue stream of multi-year contracts, and this led to a rapid readjustment of a number of service offerings.
This also drove a shift away from their historical opportunity-oriented go-to-market approaches to engagement models based on far more value, longer-term outcomes, and core capabilities, but without losing their differentiators of local awareness and intimacy.
Results speak for themselves
The turnaround is astounding. Oakton, for example, had a 50% drop in profits in mid-2009 and lost about 5% of its headcount - six months later, its profits had rebounded by 32% and it was rehiring; SMS has just paid out $6.7 million to acquire Oracle specialist Bright Blue Solutions, has increased profits, and has restarted its 457 skilled employment visa program after a 50% drop in profits in mid-2009.
So what can be learned from these transformations Admittedly, the economic situation in Australia has helped, but that is not the whole story. These proactive approaches have highlighted that the "softer" skills are fundamental within the IT services space when the going gets tough. Proactively engaging with their various industry partnerships and alliances played an important role for these junior partners, creating a greater awareness of the various stakeholder requirements and developing a more co-operative and less confrontational/competitive environment.
But the most important step, and possibly the most difficult, was talking frankly to the clients, many of whom were often in the same situation, or worse. This candid and flexible approach has also realized many innovative solutions (staggered payments, increased scopes, guaranteed partial revenue streams) and deepened the levels of engagement between many of the parties. With local buying preferences coming to the fore in a number of regions, it may be an opportunity for some of the larger integrators to consider addressing that local engagement and autonomy conundrum in more detail, as Australia may well be a test case for other countries to consider and possibly emulate as they too emerge from recession.
