Analysis of software services industry
Q1 – Which industry is being analyzed?
The industry that will be a part of my analysis is the software services & consulting industry. I would simplify and constrict it further to consulting services based on a global development model – provide r procure services from anywhere in the world to any part of the world. I have been associated with this industry or business model for over a decade. As a business consultant I provide my services to my client & manage their IT operations, including large programs that align with their strategic needs. Software services industry started gaining a lot of attention since the mid-80s. The reason was personal computing capabilities that democratized the digitized world from large companies to households. Since then advances in networking & technologies have catapulted the world we live in into different dimensions. Since the 90s, as the Eastern Europe & Asian countries opened post-communism, with decrease in network cost & high availability, software services made a paradigm shift.
Q2 – Barriers to Entry
Economies of scale
The software industry is highly competitive. First we will analyze the economies to scale. Usually with all industries the overhead costs are spread with the scale of operations. However, the fixed cost in the software outsourcing industry is low. The only real fixed costs are those of buildings where industry workers sit and perform their work and sales. In comparison with the revenues, the required assets to perform the work being very low, software industry faces very low advantage related to economy of scale. Everything else, management costs, cost of administration, cost of equipment like computers etc are somewhat proportional to the number of resources employed. However, an entrant into this industry may need to pay higher salary to their employees being new in the industry, since the risk involved in joining a new company from the perspective of a potential employee, is higher compared to established names and large companies whose operations may be diversified geographically or across industries. Similarly, larger companies are able to market the services to potential customers while the cost of the sales team gets proportionately divided across delivery units. Thus a larger company is able to enjoy economies of scale over smaller, new entrants.
Distribution is a critical function in the software industry. Ability to market potential products or services for a particular company depends on the ability of the sales team to grow a relationship with customers. For some companies the relationship is managed by delivery teams who can interact more closely with the customer’s management group. Usually the customers have their operations unit as well as a separate vendor management unit. Usually the larger companies have their sales teams interact with the vendor management group, while the relationship with operations and domain capability groups are maintained by the core delivery group who are more oriented towards the day to day operations of the clients. Essentially, distribution channels towards the customer is maintained both by delivery as well as vendor management units. And building up the relationship with clients is usually a time-taking process and does include costs when a new customer is approached by the sales team with the capabilities of the service or product providers in the software industry.
The capital requirement in the industry is usually low. Small companies can operate by just renting small buildings or some even from home offices. Networking facilities can also be hired with low cost in this age. As such with low capital requirements, the industry offers as ease of entrance.
Switching suppliers is not easy in this industry. The primary purpose of every service provider is to build a repository of...
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