Are you a smaller company pigeonholed in a particular market, looking to grow? The DC-area firm Igenicomm started out much the same way, until it took a different approach.
“My own background was firmly in the product development arena, and when we were first building the company, our mindset focused on trying to build a unique product that we could take into the aerospace market,” says Amit Puri, president and CEO of Ingenicomm, Inc.
“Fortunately,” adds Puri, “the long development time of this product pushed us into the services business – which we found, to our surprise, to be just as rewarding as building products.”
Recently, WashingtonExec sat down with Amit Puri to discuss how to successfully run a government-focused products and services business – all under one company umbrella.
WashingtonExec: How do the product and services worlds differ?
Amit Puri: There are a few obvious differences between the operation of a services business and the operation of a product business. These differences ultimately drive differences in the financial performance of the two business types.
Services work is essentially a backlog business; a company builds a pool of long-term contracts, and then collects a steady stream of revenue over an extended period of time. When dealing with products, on the other hand, having a significant backlog isn’t a good thing – it means that you’re unable to fill the orders that you’re receiving. Instead, running an efficient products business boils down to minimizing the time it takes to build and deliver a product once you’ve received an order. This essentially results in services companies, on the whole, having much less variability in month-to-month financial performance as compared to a product business, as well as much clearer visibility into future financial performance.
The nature of products and services themselves – what a company is actually selling, in other words – differs greatly between product and services businesses. When it comes to products, a successful business needs to build and retain intellectual property, in the form of proprietary designs, software, manufacturing know-how, and so forth. A product company with substantial intellectual property creates significant barriers to entry, resulting in reduced competition and the ability to achieve premium operating margins.
In the services world, on the other hand, everything is ultimately about the people. While every business aims to attract and retain truly great people for their team – people who have real expertise, and who are well-liked by the customers – a company in the service sector can quickly and effectively build a talent pool based on awarded contracts, whether by taking over incumbency or organically attracting talent to a newly-won contract.
Ingenicomm has positioned itself very strategically in both these regards – generating and retaining significant IP as well as attracting top talent to support our services offerings.
WashingtonExec: How has working in both arenas helped you grow the company? Are there synergies between the two businesses that you’ve been able to leverage?
Amit Puri: The classic synergy between the product and services businesses is the financial one. In our industry, product sales can take a long time to mature relative to the actual time it takes to produce and deliver the product. For example, even though it might only take us a month to build a system, we might have been pursuing the opportunity for six months or a year. This can make revenue recognition very uneven, with a significant portion of the revenue coming in the form of large spikes around major product deliveries. Obviously, that can make managing cash flow a challenge, which is something with which so many small product companies struggle. Unless you have cash reserves or a credit line to dip into, introducing the steady revenue from a services business is one of the best methods for mitigating this issue. Adding a services side to the business also allows G&A recovery across a larger direct labor pool, improving the overall financial efficiency of the company.
Another great benefit of having both businesses is being able to build a larger pool of expertise within the company. In addition, recruiting and retention can both be improved by offering a more diverse set of job opportunities. This is especially critical to retaining millennials, who tend to be more interested in a variety of work experiences. We’ve had numerous cases where a person we hire to do product development winds up having just the right experience and expertise that a services customer needs, or where someone from a services background moves over to our product side and provides unique insights that someone with experience only in product development simply can’t offer. Ingenicomm has been extremely successful in managing this in a conflict-free manner.
Having both a services business and a product business enables us to get the best of both worlds from a financial performance standpoint. By maintaining our base level of services and augmenting that business with highly profitable product sales, Ingenicomm is able to achieve both financial stability as well as premium margins.
WashingtonExec: Why don’t more companies go down this path?
Amit Puri: A lot of companies – particularly smaller businesses – tend to pigeonhole themselves into a particular market based on what they’re familiar and comfortable with. Ingenicomm started in much the same way. My own background was firmly in the product development arena, and when we were first building the company, our mindset focused on trying to build a unique product that we could take into the aerospace market. Fortunately, the long development time of this product pushed us into the services business – which we found, to our surprise, to be just as rewarding as building products.
Many larger companies have successfully integrated product offerings into service companies and vice versa. For predominately product-focused companies, offering warranty or other support services is a natural extension to the product sale. Additionally, many products are in fact not widgets, but rather solutions, where implementation services are a logical pull-through sale. For predominately services-oriented companies, having a proprietary product solution provides an opportunity to offer differentiation even when bidding on commoditized services contracts.
At the same time, some companies may want to move in this direction, but don’t have a good understanding of the elements needed to successfully build a hybrid company. These unknowns include the financial and procedural elements, of course, but also conflict of interest avoidance, which is an area that many people misunderstand and for good reasons have a lot of fear about. Building robust OCI procedures, including up-front OCI avoidance, is absolutely critical to successfully making this model work.
WashingtonExec: So how does a company avoid potential conflicts of interests?
Amit Puri: There are two sides to avoiding conflicts of interest: an internal one and an external one.
Internally, a company has to make sure that the product and services sides of the business are thoroughly segregated. This can be a lot of work – you need separate IT infrastructures, physical locations, separate reporting and management structures, and so forth – but is necessary to make sure that there’s no bleed-over between the two business, and that you don’t find yourself in a situation where someone has seen something they shouldn’t have.
The harder piece to really master is the external one. Some customers are very sensitive about the perception of OCI – regardless of whether there is a conflict or not, even the idea that a company might find someday itself on both sides of the table will make them very uncomfortable. If a company wants to provide services for these customers, it needs to be able to make a very clear commitment to stay away from anything that might lead to an OCI. What this means, in practice, is that certain customers – and these might be individual missions, branches, directorates, or even entire agencies – must be treated as “services-only” markets, in which a company commits to only providing services, and having no product business at all.
On the topic of OCI commitments, it’s important to keep in mind that different agencies can have a variety of OCI policies and practices, and variations in implementation within each agency can be quite nuanced. For example, services associated with IT operations might have different OCI sensitivity than services associated with acquisition support in a SETA role.
Overall, an OCI commitment needs to be a corporate strategic decision based on thorough market analysis. There is an opportunity cost to doing something like this, of course. We’ve certainly had cases where we knew we could potentially provide products to the agencies for which we provide services, but deliberately gave up those opportunities because of the commitments we’ve made to those customers. It takes a clear vision to be able to do that, and companies that don’t have that clarity can obviously find themselves in a situation where they’ve set themselves up for a conflict of interest, and can ultimately lose both their existing services business and their potential product sales as a result.
WashingtonExec: Are there any unique considerations for companies with both services and product business who may want to transact at some point in the future?
Amit Puri: The key to driving premium value in a transaction for a hybrid business is to clearly demonstrate how the two sides of the business are related. By having an integrated product and services business under one umbrella, buyers are more inclined to look at the business as a whole, rather than a sum of its parts.
WashingtonExec: You mentioned earlier coming from a product background. Has anything about the services world surprised you?
Amit Puri: When I worked as an engineer doing product development, everyone I worked with had a tremendous sense of pride in our work and the product we were building. I really didn’t know what to think about this with regards to the services business, so it came as a big surprise when I discovered that the folks working on services programs have exactly the same sense of pride, and exactly the same passion for their work. It really drove home the fact that we were ultimately all there to support our customer’s mission.
