Redux: "Building" a "Buy" Culture

I was all set to go to the Global Services conference last week. Rusty Weston had kindly invited me - but second year in a row, another client commitment precluded me from doing so. I wanted to particularly go for 2 reasons - would have given me a chance to meet execs from many non Indian outsourcing vendors. And many are focused on software engineering and R&D rather than more mainstream IT services.

Two years ago I wrote an article titled "Building" a "Buy" Culture  for Silicon India magazine. The basic question was why tech vendors which preach "buy is better than build" to their own customer bases are so reluctant to buy themselves. It focused on R&D outsourcing efforts of software vendors, and on acquisitions by Indian vendors as they continue to seek greener pastures.

Since I wrote the article, I have been impressed with the steady progress in the first arena. While my firm primarily works with end-user organizations, we are involved with 3-4 software companies a year as they evaluate R&D - captive versus outsouring, location analysis etc.  VCs today almost mandate startups have a global development model. More established ISVs still struggle with the model, but even there support of older releases and other "safer areas" are often outsourced. Specialists like Symphony Services have grown rapidly for a focus on ISV R&D outsourcing. Many Chinese, E. European and Latin firms are finding it easier to compete against  Indian suppliers in the ISV vertical than in more mainstream IT markets. ISVs benefit from the specialization - some of these specialists shepherd more major releases in a year than an average ISV would do in a decade. Their CMM and Six Sigma focus sharpen software testing skills. They allow R&D to move from fixed to variable models, and on and on.

Clearly there are risks. It is almost impossible to find  an attorney  in an ISV who is  not focused on customer (as against vendor) contracts. Few ISV executives  have vendor management disciplines. There are IP concerns etc. But it's good to see at least some progress on building a buy culture.

On the second front - service firms making acquisitions - the progress has been limited. An executive at a large Indian firm told me they had evaluated 15 acquisition targets in the US and Europe in the last year and not executed on one. Many Indian firms have valuations of 10X revenues and they are cautious about small acquisitions at 1.5X? As I wrote in the magazine article, they need to become like GE and Cisco, which have honed the art of smoothly acquiring and integrating several small acquisitions - and even some large ones - each year. May be the Chinese and the Latinos will do better than the Indian firms as they grow their footprint.

Buying expertise is not just relevant for buyers of technology ...

Update: Caritor acquires Keane which is many times it size. I can see many of the larger Indian vendors saying this morning what do they know that we do not. And how could they have moved so quickly after Keane brought in a new CEO 2 weeks ago