For the last decade, IT services has been a synonym of boring. Having started and ran an IT services company I am very bias against that line of thought but I don’t ignore the fact that the majority of the industry feels that way. Arguably, the clearest example of this fact is that shockingly low number of VC-backed IT services companies in the current market. Whether you love or hate the venture capital (VC) model, following the VC money will always point to the exciting areas in an industry.
Seriously, can you name any VC-backed IT services companies that started 5-10 years ago?
There are very good reasons why VCs have stayed away from the IT services market in the last decade. Long sale cycles, lack of recurring revenue, scalability challenges, increasing commoditization, lack of innovation and excitement are just some of the factors that never made IT services companies a good candidate for VC funding.
Well, things are changing and IT services are hot again!
As I mentioned many many times in this blog, these are the most exciting times that the enterprise software industry has witnessed since the internet boom. The emergence of technology revolutions such as big data, enterprise mobility, gamification, natural user interfaces, cloud computing, network virtualization, enterprise social computing is redefining the enterprise software landscape. New and exciting software packages are making inroads into enterprise customers and, a lot of times, those software required a complementary services delivery mechanism to facilitate their adoption in the enterprise.
Suddenly, IT services companies are reinventing themselves to play in all these new spaces and incumbents are challenging the well established players with new and innovative delivery models that result very appealing to enterprise customers. Like any other disruptive movement, VCs are actively watching and we are already seeing an increasing interest on IT services companies. In that sense, we can see firms like Sigma Partners backing Boston-based enterprise mobility startup Mobiquity (http://www.masshightech.com/stories/2011/03/28/daily16-Mobiquity-launches-with-5M-VC-financing.html ) and Intel Capital and Canaan Partners putting $45M behind IT services company Happiest Minds(http://articles.economictimes.indiatimes.com/2011-11-16/news/30405749_1_happiest-minds-technologies-chairman-ashok-soota-mindtree).
Without trying to give a complete explanation to this renewed interest of VCs in IT services companies, there are a few factors that can quickly help to explain the phenomenon:
In the IT services world, new technologies is often a synonym of high rates. These days, enterprises are willing to spend large sums in IT projects related to technologies such as big data, enterprise mobility, cloud computing, etc which sometimes translates into large revenue sources for IT services companies.
SaaS models have not only redefined the software delivery model but they have opened for IT services companies to offer IT solutions in a subscription based model. With more and more enterprise solutions moving to public cloud infrastructures, enterprises are very receptive to the model of paying for those solutions in a subscription based model which can rerate sources of recurrent revenue for IT services players.
The new generation of enterprise software technologies is redefining vertical solutions across different industries. Given the constant exposure to customers, IT services companies have traditional been in an enviable position to craft and deliver vertical solutions. A lot of these solutions can evolve into very lucrative revenue sources from an IT services perspective.
Vibrant Enterprise Software Ecosystem
The enterprise software ecosystem is more vibrant than ever and every year new players are challenging the traditional enterprise software vendors in different industry. This vibrant ecosystem offers a very unique opportunity for IT services companies to provide efficient mechanisms for enterprises to adopt these new software packages.
What do you think? Is the IT services industry back?