Or: What does the successful future of system houses really look like?
IT system houses have been accompanying the digitalization of our economy for almost 30 years. They act as a central point of contact for servers, clients, system-related software and networks; they advise, sell and implement the latest IT systems for smaller companies, SMEs and corporations. One important question is: What does the future hold for system house?
Long-Term contact for the technology management
For over 30 years, system houses have been providing the necessary infrastructure that companies need to operate their IT securely and efficiently. This service model and the collaboration are managed by the company’s own IT departments in terms of budget and organization. They assume the cross-sectional function of their specialist departments and thus make IT manageable for the CEO. In addition, system houses are the bridgehead for technology providers. They gain access to their customers via distribution or directly via system houses. An important interface!
Thanks to this interface function, system houses are usually the central point of contact for very different digitalization technologies for many years. Technologies come and go, the system houses supply differentiated and relevant technologies as a “trusted” service provider and organize the lifecycle management consisting of consulting, sales and implementation.
System houses talk to the IT departments
The contacts for system houses are usually IT departments and the CEO of the respective company. Due to their clear technical focus, system houses find it difficult to communicate with company departments in a targeted and efficient manner, to record business processes and to implement the software derived from the company’s requirements for controlling business processes.
Change and constants
The model began 30 years ago with the transactional sale of clients and servers. Then came the data center business and, increasingly, consulting. If consulting services were sold, they could also be billed on a transactional basis per hour for almost two decades.
A constant stream of small technological leaps through to revolutionary new technologies such as the internet, SaaS or, today, AI, also led to constant changes in the customer relationship. New projects, new digitalization goals, modern change – but the core of the transactional business model has not changed in any rudimentary way.
Even in the cloud world, the business model between customers and system houses has not fundamentally changed, as Amazon and Microsoft are also happy to sell their consumption models via system house partners with a corresponding incentive logic.
Parallel to the technical development, the large system houses already professionalized their logistics 15 years ago and were thus able to significantly reduce transaction costs through their own warehouses and service centers. Over the years, however, almost no system house has managed to sell services directly to specialist departments rather than to central IT.
The holy system house grail: managed services
How cool wouldit be if you didn’t have to spend a lot of time and effort convincing customers to take on new projects? If you could write an invoice with a constant volume month after month and simply make sure that everything was running smoothly.
The utilization of the consultants as newborn “ticket pushers” would no longer be a problem. And best of all: The company value would automatically increase considerably because investors would pay significantly higher multiples on EBIT/EBITDA for genuine recurring managed service business.
The fact is, however, that over the last ten years, no system house has managed to successfully and convincingly transform its entire business model in this direction.
There seem to be many reasons for this, some of which are
- The salesperson who has been able to offer the customer many products and alternatives from a very broad portfolio for decades mutates into a success manager with managed services. He has to explain to the customer again and again why the service he booked a long time ago is still the right one.
- This creates de facto competition with the buying center, the IT department. This is because they have built the service for the specialist departments from the system house’s projects and products over many years.
- Managed services usually have a clear link to the customer’s business. Deep down, the techies want nothing to do with this.
Can there be a happy ending?
So, can there be an organic further development of the “system house” business model into the models preferred by investors today? In terms of a transformation from system house to managed services provider: probably not. This is because the managed services business cannibalizes the traditional system house business. This makes it extremely difficult for large organizations in particular to implement such a transformation.
An aggravating factor in this process is that you are likely to lose a large part of the transactional business. Is it desirable to lose 40 or perhaps even 60 percent of sales with the aim of generating 30 percent net margin on the remaining sales instead of the previous 10 percent?
Another shortcoming is that as a managed services provider, you can only remain without assets in the pure cloud business, i.e. you can manage without CapEx. In the on-premise managed services business, servers and network components – perhaps even software licenses – are carried on the company’s own balance sheet. This leads to negative aspects in the stock exchange business and discussions with the banks.
Any system house that has tried to venture into new fields with customers via the software implementation route has not had an easy time of it, either. Decisions in the area of business software usually depend on the specialist departments, the customer’s internal friction partner, the customer’s IT department. A lot of problems become apparent.
A possible solution for investors and consulting companies
For pure consulting companies without a transactional approach, further development into a managed services provider is much easier:
- There are already ideas there for automating similar tasks across customer boundaries. This is a vital DNA building block for every managed services provider.
- As a consultant, the distance to the discussion about on-premise, hybrid and cloud-only is greater; a more neutral position is possible. This is where a lot of system houses burn their credibility with customers, because they are usually still attached to on-premise scenarios and therefore sing the “hybrid song”. However, hybrid should never be the goal, only the necessary result!
- Consultants have a better chance of connecting with the business (CEO, specialist department) while still maintaining a bridging position with the IT department. They therefore burn less energy on customer-internal power struggles.
- Understanding the customer business is so important today because customers currently have an insatiable need for data management specialists. Most transactional technicians can’t do this because they haven’t had to know exactly what the customer’s actual business solution involves for the past 20 years. Consultants with business process and data management experience are ideally placed to transform a pure day-rate consulting business into a managed services provider.
I think that this will be the realistic path towards managed services, which we will see more and more on the market.
The process of change for the system houses themselves
The transactional IT system house model will probably live longer than we all think. But, one thing is clear: size matters!
For the many smaller and medium-sized system houses, there is really only one way to adapt their business processes. That means getting involved and specializing in industry solutions and complete industry packages. This goes hand in hand with a comprehensive understanding of the business – something that even “thoroughbred techies” definitely have. This is the only way to achieve the urgently needed standardization and automation of IT processes at system house level. And this is precisely what ultimately leads to managed services being offered by system houses from within.
And when we (finally) see some of these smaller and medium-sized de facto industry-oriented managed services providers on the market, we will see waves of consolidation!
Incidentally, this is exactly how today’s larger and larger listed system houses came into being: via consolidation of technology distributors or the aggregation of many local providers.
I think that this is exactly what will happen again. In the near future, managed services providers will have to emerge in a large number and variety of new and small companies and can then be built up into larger players again.
Private equity investors with industry experience can go into the fast lane and try to make a shortcut by rebuilding consulting companies.
