The key players in Indian IT industry are shaken up; and there is significant noise about their competitive agenda. The other day, in its article on Verticalization, ET showed that TCS is accelerating its lead over Infosys; while Congnizant is rapidly bridging the gap with WIPRO. Infosys and WIPRO are reacting to the situation by verticalizing their structure around industry practices. Thus, far the authorities within the organization have been segmented across geography, service lines and industries; leading to an extremely complex 3-D matrix structure. Managing a 2-D matrix organization structure, itself has been quite difficult for Indian organizations that are ill equipped to invent grounds up organizational designs.
Surprisingly, it took long time for Infosys and WIPRO to realize that they need to align along industry verticals. Thus far they had their resources sharply divided across geography, service lines and industry practice. It seems no brainer that they should have changed their structure much earlier. But the question is not if the verticalization is the right structure rather it is ‘why verticalization is the right structure? Are Infosys and WIPRO just copy pasting a success formula of Congnizant and TCS, and force fitting to their business? And most importantly, what is the basis of defining a new structure?’
It seems that organizations are reacting to organizational as well as leadership changes, because organizations have grown too fast to be managed efficiently, because no body had time to look at organization architecture and make ongoing innovation, because there has been economic difficulties the world over, because the clients have become too demanding, because the margins have come down, because the competitive pressure of smaller companies is pinching, etc.
Similarly, there is shakeup in the mid tier companies. Take the case of MindTree, touted as an iconic entrepreneurial organization, now is on the verge of major restructuring, primarily to correct its past decisions. It entered into wrong service and product lines; and now seeks to hive off (sell off) part of the businesses that are difficult to manage naturally.
What has been the undesirable effect of these organizational restructuring? Value erosion, confusion along rank and file, uncertain work environment, increased manpower attrition, bad publicity… and it goes on.
In these organizations, as well as in several other organizations, we see a pattern of reaction, although the circumstances under which they are reacting, is not common to business environment. These organizations are perhaps, missing the point. The changes in the environment and within the organization, are natural and happen these days too often and too fast. Reacting to changes by restructuring is not the answer. At best it is a local optimization for a real large problem. It is well known and well established that during ever changing situations Business Model Innovation offers the right approach to dealing with situations.
Here is the case of an organization that applied Business Model Innovation successfully, to deal with rampant changes that put its management to compromising dilemma. InfoSolve is over a decade old software service organization, just like several other leading IT service companies. It leveraged the problem of Y2K to startup its operations. Then, it got into developing and maintaining small applications for its clients in the US. With time, its business grew and its organization became significantly big. The size of engagement became bigger and longer. In order to keep its margins higher, the only way for it was to bid for and build competencies for larger and larger projects. While this happened, it became clear that the business is not able to get enough margins from its smaller clients. These are the clients who actually helped InfoSolve to build its business from scratch. Its small clients have been its long standing clients. They were good on relationship and InfoSolve was their preferred developer. But the market had changed and margins were really low for these clients. Since InfoSolve’s cost structure had changed significantly; it had been thinking great deal about its engagement with smaller clients. And day today issues were creating a lot of conflict for its operating staff. The dilemma was where to focus, on large clients where they offer better value and where their future is, and where they get higher margins and leave smaller clients who are less profitable; or limit taking larger clients and do not leave smaller ones with whom it has deep relationship and great stability in business. There were great pressures from the stakeholders and a section of top management to go in one direction at the cost of others. The executive council (supported by seasoned strategic consultants) were constantly pressurizing to restructure the organization, saying that the current structure has outlived its utility and InfoSolve needs to learn from its competitors and restructure the organization from top to bottom. The discussion on the 3-D matrix , 2-Matrix and Verticalization around industry practices also popped up.
But the management of InfoSolve had strong intuition and was hinged to its purpose. It did not take knee jerk actions. It adopted the business model innovation approach. It clearly spelt the dilemma that it was facing. For them, yes the situation and environment had changed, gradually in the beginning and more rapidly recently; the margins had reduce but only in part of the business. They realized that they were into the dilemma of focusing on larger clients versus smaller because they are continuing to do their business in the same way, as it was 10 years back. But since things have evolved and changed, they needed to look into the logic of doing their business; and not just its structure. (Structure is just one element of the business system).
In order to resolve the dilemma; the executive team along with the Business Model Innovation expert, entered into a day long workshop. Block by Block they built the current business model, describing the logic of creating, delivering, capturing and investing value. They superimposed the current internal and external reality onto the Business Model Visual Canvas. They found the dilemma staring at them. They held brainstorming sessions and came out with alternatives to innovate their business model. At the end, they found that it is possible for them to simultaneously address growth and stability to their business. Their earlier assumption was that they would need to make an unsatisfactory compromise between large and small clients. And in the best cases, they had felt that it might be possible to come out with a solution, where large clients would give them growth and smaller clients would give them stability. However, it was beyond their belief, when the ultimate business model allowed them to have growth with stability from both smaller and larger clients. They had innovated and redefined their business model. And to their surprise, the new business model allowed them to simultaneously ensure growth with stability, by both of their client segments. When, InfoSolve sought validation for the new business model; it became evident that such business models actually exist in other industries that provide complex solutions (Check Mark Johnson’s Seizing the White Space, to know how Dow Corning innovated its business model for two contrasting client segments, without causing Organizational Tsunami).
And of course, the new business model did explore into aligning activities and service lines; but it was not like a shake up and raising too much smoke. There was no ripple, like the exit of top management from Infosys (Pai & Dinesh) and Mindtree (Soota). The new business model brought out the seamless causes for alignment of the organization, without shaking up the organization. The whole exercise of Business Model Innovation when implemented, led to an exhilarating experience for its employees, as it was a concerted positive approach of innovating business, without compromising or creating too many management jargons (crowd sourcing for improving people productivity). It was an exercise in a spirit to innovate business. And it improved its business results dramatically, without taking real risk and without exhausting critical resource… and without ruffling any feather.
On a passing note; why organizations are calling it ‘restructuring’ and not ‘transformation’? That is why, it looks like they are missing the real point; which is ‘business model innovation’ and ‘transformation’.
31 March 2014