Last week I had two interesting discussions with owners of web/software development firms that we’ve partnered with in the past. While the two discussions were completely unrelated, the implications of both seem awfully similar. The questions they raised were related to the focus and positioning of a small or mid-sized tech consulting firm.
“There Will Always Be a Need for Development”
Early in the week, I was talking with one of the partners of an 18-20 person firm. I was sharing with him some of my thinking about the growing commoditization of services — in many industry segments the supply of professional services firms exceeds (or will soon exceed) the demand for services. For technology, I see this tipping point occurring in about 8-10 years. The principal looked at me like I was slightly crazy, and said, “there will always be a need for development.” Let me be clear in saying I completely agree with that comment. That said, I’m not convinced that the current model of technology consulting firm will always be viable to fill that demand. After a few further minutes of discussion, he acknowledged that one of the biggest pressures they face is staying in front of technology trends and the commoditization of technologies. After all, straightforward HTML development is well past the point of commodity, but good PHP development is still very much in demand. So, the challenge his firm faces, as he sees it, is staying in front of the next trend of technology. The last few years it’s been mobile development and mobile apps, the next few years it will largely be virtual reality. So, in essence, his firm’s positioning really relies on it’s ability to stay in front of its clients’ knowledge of and ability to execute on new technology trends. I call this the, “we just need to stay an ounce smarter than our clients” positioning.
But, is that sustainable? Does a small firm really have the resources or ability to consistently predict what technology is next, hire or train the people needed to deliver the work, and market its ability to do so for any meaningful period of time? So far, this particular firm has done it for about 15 years – a great run from anyone’s perspective. But, I fear that one wrong technology choice could tear the entire firm asunder.
Talent Costs are Skyrocketing
How could there possibly be too much supply when talent costs are skyrocketing out of control? Later in the week I was talking with the owner of another 18-20 person web/software development firm. I asked him, “What regulations are holding back your business?” he responded by talking about the relative lack of H1 visas for talented developers. Large companies scoop them all up as soon as they’re issued and pull all the international talent into their companies that they can. Unfortunately, that’s still not enough so they hire teams of recruiters to poach talent from small firms all over the place. He’s seeing salaries nearly double for an “average” PHP or .NET developer – let alone his best ones.
So, we don’t have enough domestic talent. And, immigration rules leave plenty of international talent, that might otherwise come here, on the outside looking in. What happens to that excess talent that can’t get into the States? It seems to me they start businesses in Bangalore and look for opportunities to commoditize the existing technologies that form the bread-and-butter of a consulting firm’s practice. We receive at least 2-3 calls each month from India-based development resources offering to provide all forms of web development at exceedingly low rates. I know what firm owners will say, and I agree with them — at least for now. We’ve had a few experiences with these firms (not necessarily of our own choosing, mind you) and projects haven’t gone too well. But, more and more firms are figuring it out. They’re doing a better job of discerning client needs and delivering on expectations. And, those that are doing it well are using their successes to simultaneously explore the new technologies that form tomorrow’s core revenue streams with more people resources than the small US-based firm can hope to muster.
So, will there always be a need for development firms?
Which brings me to the logical question of this post. I agree with the sentiment that there will always be a need for development. But, the real question is, “Will there always be a need for development firms?” Large corporations have already awoken to the fact that they can hire talented engineers and developers in emerging markets to provide many of the technology services they relied on US-based small businesses to provide over the last 10-15 years. In fact, we’ve even done business with a Fortune 500 Company that has hired over 600 engineers in India and built two marketing support operations filled with designers, technical writers, web developers, software developers, and IT support personnel in the Philippines and in Costa Rica. For now, those operations centers, when built in-house, are successful in providing comparable service at a fraction of the cost. How long before middle market firms learn how to do the same? At the moment, only 23% of middle market firms are sourcing globally (see last year’s annual summit report from the National Center for the Middle Market), but that number is sure to grow significantly in the next ten years as firms seek out new opportunities for growth and profit.
So, what do you think?
Do you agree? Are development and technology firms being commoditized? Can a small or midsize firm differentiate by staying in front of the next “hot” technology? Do tech consulting firms face increased commoditization, especially in the form of increasingly capable and less expensive overseas competitors?