How application development and maintenance has become a loss leader

Agile, cloud, ready-to-buy platforms and other advances have eroded the status—and the margins—of application development.

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Few providers and their customers have noticed it, but Application Development and Maintenance (ADM) has become the loss leader in IT Services.

With everyone scrambling for everything digital, enterprises now are focused on how to buy the next generation of technologies, not how to support the last generation. Maintenance was already low on the totem pole and has become highly automatable, but agile, cloud, ready-to-buy platforms and other advances have eroded the status—and the margins—of development. ADM has to be a loss leader now, not only because it is suffering from low demand, but because it is what allows service providers to walk the right customer halls in search of digital opportunities.

Digital initiatives, while highly valuable, tend to be smaller in scale. ISG’s preliminary research shows that about 85 percent of them are under $5 million. Competition to land these deals has heated up, especially with an exploding ecosystem that offers literally thousands of choices beyond the large service providers. Most of the time, enterprises will choose from their existing providers, so being already “in the building” is an enormous advantage when it comes to capturing digital market share.

If you are an enterprise buyer, congratulations! You have a new source of leverage. You should expect that your service providers will automate your ADM portfolio aggressively to lower your costs and free up funding for digital programs. You also should expect those same providers to showcase and demonstrate their digital innovations and investments so you are aware of what they have to offer. But you also must follow through on the promise. If they meet your expectations at streamlining the old portfolio, you should reward them with helping you build the new.

If you are a service provider, your situation is trickier, but the path is still clear, because if you don’t reduce the unit costs of ADM services with disruptive technologies, someone else will—and you will lose that all-important ability to walk the halls. But cannibalizing your own ADM revenue isn’t enough. You must be willing to invest in digital showcases, and be assertive in bringing innovation to your client.

Even more difficult, you must be willing to collaborate with many other technology companies that have built point solutions and/or superior technologies; since many of them are small, you also must know how to find them. Then, you have to figure out a way to make money when, at best, you have a primary orchestration role in a complex digital ecosystem.

And finally, you must re-invent account management to speak to business benefits that appeal to different buyers, while drastically reducing the cost of sales—the old model simply won’t work for these smaller deals. If you do, you will not only replace the revenue forgone in traditional ADM, but you will give yourself opportunities to grow for at least the next decade.

All of this only works if enterprises and their providers have honest, transparent conversations about the future. The temptation to try someone new will be enormous for the buyer, but they shouldn’t discount the institutional knowledge of an existing provider as a benefit; remember most of the barriers to digital transformation are human, not technological.

And providers will have to step up their game—speak to business buyers about business benefits, while taking on some risk and showing they have the digital chops to play outside their old sandbox.

The shifts are subtle, and there’s money involved, but get them right, and together the buyer and seller can build a sustainable digital business relationship.

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