23 Jul A Portfolio-of-Initiatives approach to building your IT services firm.
McKinsey published an article a number of years ago titled, “Just-in-time strategy for a turbulent world”, which always intrigued me. While most of what the firm publishes is geared to large, global companies their insights can often be tailored to smaller firms. Such I think is the case here, particularly for aggressive IT services firms with a hearty appetite for growth.
The premise of the article is that for industries buffeted by the enormous pace of change, as in IT, the classic approach to corporate strategy defined by the authors as “that with sufficient analytical rigor and an adequate assessment of the probabilities, strategists can pave a predictable path to the future from the matter of the past” — may no longer be adequate.
The author goes on to posit, “Suppose we no longer believe that the future is foreseeable”. “Most companies”, he says, “put too little energy into adapting core businesses to changing markets. Indeed, they often unintentionally harvest their core businesses by pushing for short-term performance while neglecting the investments needed to stay ahead of the game”.
To remedy this short-sightedness, he suggests that CEOs, “think about corporate strategy not as a portfolio-of-businesses, but as a portfolio-of-initiatives aimed at achieving favorable outcomes for the enterprise. Usually these initiatives will be organized around themes focused on achieving particular aspirations”.
Without getting too deep in the weeds of how this strategy applies to big companies (a little more complicated than need be for our clients), we wanted to isolate the key principles as they might apply to the universe in which we work – small to midsize IT services firms. Key among them is creating a portfolio-of-initiatives that come to fruition over a period of time, such as:
- Initiatives that contribute to current earnings
- Initiatives that mature in 2-3 years
- Initiatives that mature in 3+ years
We see this portfolio approach playing out with three basic growth strategies, or if you will, three basic themes, focused on particular aspirations, and which can be managed appropriate to the task.
- Current earnings growth strategy: This is organic growth, building upon your current source of revenue, your current core competency. The key to keeping your organic growth engine on fire is to specialize, to own a segment of the market positioned at the intersection of a technical and vertical market and drive your company to be the number 1 or 2 player in this market. Then sell into this market with a full set of service offerings that includes a) Advisory Service, b) Technology Services and, C) Maintenance and Support.
- Initiatives that mature in 2-3 years: Only when you have a solid base of organic growth contributing to current earnings should you begin to think about an acquisitive growth strategy. Our most successful clients will tell you that without an ongoing M&A initiative, you’re forfeiting over 50% of your growth potential. Thinking 2-3 years out is an appropriate timeframe to consider M&A initiatives that will help you enter new geographies, new verticals, complimentary service lines, etc.
- Initiatives that mature in 3+ years: In a previous article, IP Development: Beware of these potential pitfalls, we wrote about how we are beginning to see (and, in fact, we’re working with) a number of IT services firms that have set their sight on creating and selling intellectual property as a way to grow, and differentiate their business. Having seen the partner community evolve from hardware and software implementers, to service providers we foresee the next platform for growth in IP development. The key to making this work is having both internal and external critical mass. Internal critical mass is having an experience base of successful implementations, which we define as having half your current customers buying into your IP. Externally, it’s leveraging this experience base to attract and recruit new sales channels. This growth strategy requires a great deal of forethought, planning and groundwork; hence it is the initiative that should have a maturation timetable further out.
What is intriguing about this approach is its building block logic. From a base of hardware and software implementation, on top of which came managed services and support, now comes the third leg of a growth stool, new IP. Companies can project out a portfolio-of-initiatives strategy 3-5 years out, that provides clear direction, allocates appropriate resources to the task, gives ample opportunity for analysis, risk/benefit assessment, rigorous monitoring, all without straining the capabilities of the team.