Monthly Archives: April 2011

Never.

That is, according to Mark Suster who has a superb post on TechCrunch

They [a services startup] have created two internal technology “products” and wanted to figure out how they could turn their services business into a product business that could be financed. This team is talented. They wanted advice. And probably some money.

I gave them advice I don’t think they were expecting from a VC,

“Don’t raise venture capital for this business. Ever. And stop effing around trying to create a product company.”

The post covers a lot of ground, much of which will be of interest to services startups. But some of it applies to big services companies as well

I saw this first hand. My first career was at Andersen Consulting (one of the largest services businesses in the world). We built a hugely successful global services business yet we never got over our product envy from watching our tech clients. So we created internal software projects and all of the internal consultants on those projects became blowhards who thought they knew how to create software product businesses.

We stunk at every product we ever created. We had no sense for gathering real customer requirements. We over-spec’d products. We built for our over-intellectual selves. I can’t think of any great software tools ever created internally by Andersen Consulting. We were a great services business. Period.

Most of the bigger offshore services companies have some kind of active strategy to acquire a stream of non-linear services. Some people expect this to comprise of product-like revenues. In our forthcoming book we argue that tech products are a very different business from services. And given their lack of skills and management experience of the products business, services companies are going to find the going tough.

Fortunately, services companies don’t need to be “rescued” by products. They have ample opportunity to differentiate themselves within the ambit of services itself. The role of retained or developed technology IP doesn’t have to be wrapped up into a product to create value. The beauty of a services business is that there are so many ways in which you can extract value from a client, as long as you have something that they can’t get from the next company.

And yes, some of it, might actually be license or subscription fees. But hopefully, you’re not banking your company’s future on it.

Genpact acquired Headstrong for $550 million in cash.

Headstrong revenues for 2010 were $217 million. Genpact’s were $1.26 B. So unlike iGate’s acquisition of Patni, this isn’t remarkable in the minnow-swallowing-whale fashion.

Nevertheless, the acquisition is a sensible one. It is largely complementary in that Headstrong is mostly about IT Services to Capital Markets. Very little overlap with Genpact. Again, unlike iGate-Patni, this was about complementarity, not about achieving scale.

Genpact had to bulk up its IT Services business. IT Services offers both higher margin and higher growth. Both of which Genpact has not been able to deliver, at least to the satisfaction of investors whose expectations are benchmarked to the early days of the IT Services industry.

Genpact’s sophistication in BPO means that most of their growth comes from solutions where IT applications must be implemented or reengineered. Headstrong will bring them a lot more credibility, especially with custom applications.

And finally, even if the IT and BPO work are not joined at the hip in the same solution, having both offers cross-sell opportunities.

A few months back I had written about Cognizant’s rumored interest in Genpact. Eventually, nothing came of it. But I thought that that would have been a very good combination. Sort of a dream team – the fastest growing services company and the best BPO company.

Obviously, I don’t know whether the rumors were true or not, or what transpired if indeed there were serious discussions. But if I were to go out on a limb, I would say that they did have discussions. Maybe they didn’t agree on the price, maybe there were disagreements about the future of the combined company. Whatever the reason, the deal did not go down.

Which left Genpact in the position of being the leader in BPO, an industry that was very promising in the future, but an underachiever in the present. They had to do something to fix that. And so they acquired Headstrong.

This is a good time for bankers in the Offshore services industry. More transactions are to be expected. Watch this space.