The Evolution of System Integrators

When IT departments were overwhelmed with work, systems integrators, with their diverse skills and abundant resources, rushed in to help. However, with the rapid transformation of the IT market, the role of the system integrator is becoming obsolete. What challenges will systems integrators face in this environment, and what steps can they take to reinvent themselves as value-added new-generation IT service providers? 

In today’s ever-evolving world, the role and importance of IT have grown significantly due to digital transformation and evolving business models. Organizations face external pressures, such as the need to accelerate product development to remain competitive and meet evolving customer demand. There are also internal challenges, including adapting to the agile business models, cultural change, and optimizing resources to support these models.

IT managers are tasked with juggling competing priorities to ensure the continued viability of critical systems while also reducing costs, increasing productivity, managing cybersecurity, and keeping up with the demands of digital transformation and evolving business models.

The rapid pace of change requires IT leaders to act quickly. They must balance a multitude of initiatives and priorities, each moving at its own pace, while also managing the ongoing innovation and the day-to-day operation and maintenance of systems. However, many IT organizations lack the necessary resources, skills, and agility to effectively respond to these demands. This is where system integrators can provide valuable support.

SYSTEM INTEGRATORS WHO ARE JACK OF ALL TRADES ARE DISAPPEARING

Advances in technology have greatly expanded the range of services offered by system integrators. As a result, it is no longer necessary (or even possible) to be a one-stop-shop system integrator. In fact, it is already too difficult to recruit a skilled workforce capable of providing the required variety and quality of services, while at the same time remaining competitive against highly specialized niche players in the market.

To pursue new opportunities and innovation without compromising current operations, many IT departments have adopted a two-speed delivery model  This model involves developing customer-facing digital applications on a more agile and independent track while implementing iterative solutions on legacy systems to ensure stability and reliability. However, this approach is no longer sufficient in today’s rapidly evolving IT market. It is seen as the lesser of two evils and is applied only when the organization units cannot move forward in tandem. Consequently, many IT organizations and system integrators are facing new challenges and opportunities.

Spot: Many IT departments have adopted a two-speed delivery model as the best option to pursue new opportunities and innovation without compromising current operations. However, this approach is no longer sufficient.

ADAPTATION TO THE CHANGING TECHNOLOGIES

Many system integrators in the market today are spin-offs from the IT departments of larger organizations that have since branched out to serve external clients. These service providers are often heavily dependent on their parent companies and face challenges in providing even the most fundamental services.

Other system integrators, who see the differentiation in providing proprietary products and services or introducing solutions that are well integrated with next-generation technologies, are often challenged by the rapidly changing IT services market. Meanwhile, global system integrators face the challenge of understanding and adapting to the changing local market conditions.

Here is a short list of some of the challenges these companies need to address:

• Digital transformation is the most significant business trend of our time, and system integrators need to partner with niche players specialized in new skills to provide consulting services in this area. Failing to add these skills to their portfolio swiftly can trap them in traditional IT application maintenance, development, and operations activities with diminishing returns.
• There is a significant difference between the traditional service delivery model and the one required to develop proprietary products and services. Agile organizations require a different culture, governance structure, and mindset that can regularly engage in iterative cycles of hypothesis generation, experimentation, feedback, and refinement.
• Large-scale transformation projects require deep industry expertise and skills in sufficient scale and diversity that are not possible in shallow markets like Turkey, dominated by spin-offs from IT departments.
• The post-pandemic “Great Attrition” is making it more difficult to retain much-needed new-generation skills, posing a major challenge to system integrators who need to ensure efficiency and continuity. As it takes longer to fill the talent pools that need to be nurtured for the future, the cost of retaining expertise is increasing.
• Next-generation system integration services require a sizable market to realize a profitable return on investment (ROI). Traditional and shallow markets like Turkey do not provide the right environment to mature this type of service.
• One of the hygiene factors for the global competition is the ability to quickly scale and expand the workforce. However, most system integrators rely solely on their internal resources to staff their projects. Many lack the rapid sourcing methods and business methodologies necessary to take on truly massive projects.
• The services provided by most system integrators in Turkey will become a low-cost, low-profit commodity in the next few years. Companies that do not enhance their offerings with value-added next-generation IT services, risk becoming unprofitable with limited returns and large sunk costs.

What is the best course of action for the system integrators? Should they withdraw from highly competitive markets or shift their focus to untapped markets? Should they instead concentrate on developing their own proprietary products and services,? Unfortunately, there is no one-size-fits-all solution, and attempting to pursue all options simultaneously will likely lead to failure.

THE MUSCLES THAT SYSTEM INTEGRATORS NEED TO STRENGTHEN

To address the challenges facing system integrators, it is critical to approach the to-do list in a systematic and manageable way. The first step should be to get the house in order. Upon analyzing several system integration firms, it has become apparent that many long-standing service providers share a common issue: they lack a comprehensive method for monitoring costs and revenues at the project or service level. Those that are considered to be doing so are only capable of forecasting on an annual or historical basis.

Spot: Those long-standing service providers all share a common issue: they lack a comprehensive method for monitoring costs and revenues at the project or service level

Most organizations rely on year-end financial statements to monitor their financial health. The minority that does so on a monthly basis are often not fully aware of the outlook at the individual project level and typically look at aggregated numbers. Without activity-based costing, adverse conditions such as fluctuating demand, rising labor costs (which represent the majority of the operating costs), and poor pricing and contracting practices can pose significant challenges for system integrators. If the contract is a turnkey one based on poor assumptions, the already slim profit margins can easily erode. Those that are lucky leave with a loss year. Those who learn the hard way risk their future and lose the slim glimmer of hope. Therefore, the golden rule is to ensure the health of your primary service lines and keep your house clean and tidy.

Let’s summarize what needs to be done in a simple recipe.

• Create a financial management system (aka management P&L) that treats each project as a separate entity, just like a subsidiary of a holding (parent) company
• Perform a regular financial forecast for each project that cascades up to the corporate level, with a frequency of monthly or ideally bi-weekly.
• Create a “new business evaluation” process that systematically evaluates the sales of new services and projects based on specific criteria to reduce risk throughout the entire sales lifecycle.
• Align what the sales team promises with the technical solution that the engineering team creates in terms of cost estimates and timelines. Ensure that the proposal and the final contract align with the solution and financial terms.
• Monitor this alignment throughout the project lifecycle to ensure that the delivery performance is consistent with the original project solution and meets the customer expectations documented in the contract.
• Set continuous improvement targets and metrics to ensure the quality of service delivery, and report on performance on a regular basis

In summary, each project should be managed like a mini-company with the project manager acting as its CEO, responsible for ensuring customer satisfaction and meeting shareholder expectations. This requires establishing a project management system with financial and quality metrics that are tracked at least monthly.

WHAT ABOUT SYSTEM INTEGRATORS THAT SERVE THEIR OWN GROUP COMPANIES?

Let’s pause for a moment to discuss system integrators that primarily serve their own group companies. Although many of these companies were originally established to serve the IT needs of their parent companies, they are now branching out to serve a broader range of customers and to develop new sources of revenue. Some are even exploring the possibility of turning the solutions they once developed for their parent company into marketable assets or products. While this entrepreneurial spirit is admirable, there are a few success factors that these companies must keep in mind as they pursue this path.

As these IT integrators primarily serve their own group companies, they often lack the expertise in sales, contracting, pricing, and delivering projects with targeted profitability in a competitive environment.

After developing a business that serves their parent company, venturing into a wider market without adequate preparation can be a painful process and a terrible experience for the entire organization. While we plan to explore the challenges of product commercialization in a separate article, it is important to note that commercializing a system that was originally designed by a system integrator for a specific custom purpose is a very complex task that is difficult to achieve success with compared to a system that was designed as a commercial product from the beginning. It is inherently more challenging and risky than creating a product with a single, focused function.

Spot: Commercializing a system that was originally designed by a system integrator for a specific custom purpose is a very complex task that is difficult to achieve success with compared to a system that was designed as a commercial product from the beginning.

It has always been disheartening to witness companies attempt this without the proper skills and planning, only to be met with disappointment and failure. All the effort and hope are wasted, and often these attempts become their last.

You could say that you have cleaned your house and made sure everything is as predictable as possible, let us develop our own products and services using next-generation technologies. Exciting times are ahead!

In the next episode of this series, we will delve into the company’s attempts to expand its service offerings into uncharted territory. We will discuss lessons learned, pitfalls to avoid, and the intricacies of running an innovation machine. We will also explore the realities of entrepreneurship games, the challenges of accommodating employees who work at different speeds, and the circumstances under which agile organizations can be effective. Additionally, we will examine the situations in which they end up being nothing more than the trial versions of strategy consulting firms’ recipes. Stay tuned for more insights!