The Dragon is among us.

A few words of introduction

Hi!

Arkadiusz Terpi?owski here - co-founder of Primetric.

It's great to see you in the very first issue of our monthly bulletin. This will be an excellent place for us to exchange knowledge to help your IT company achieve operational excellence and get a strong grip on profitability.

What will you find in today's bulletin?

1. The evolution of management indicators over the last 30 years of IT service industry development - based on an example of the Polish market.
2. The most important European study focusing on profitability and utilization in IT services companies - something every executive should have on their desk.
3. A small gift from the Primetric team - some say you can scroll to the bottom for it, but I think it's best to wait for it a bit ;)

Ready, steady, go!

And we do run - but where and why? To make the most of the demand for IT services that appeared over the last 30 years.

For many countries in Eastern Europe, which owe their rapid economic growth to the opening of borders to the so-called "West," this change has allowed fresh capital to flow into the bloodstream of their economies. The opening of branches of corporations, globalization, and rapid development of technology with a relatively low entry threshold enabled small local businesses to spread their wings.

So let's ask ourselves, what did the West need that it was so eager to enter Poland and other Eastern European markets? The answer is a receptive market offering:

• a cheap but highly skilled labor force - done,
• demand for its services and products - done,

The economy was slowly gaining momentum, enabling the arrival of new generations increasingly willing to take risks and interested in the latest technologies.

Groups of students and enthusiasts fascinated by Steve Jobs wanted to create software, and new digital products got together. They had enthusiasm, knew the language, and.... were cheap or, more diplomatically speaking, competitively priced.

So why not start creating software for Western companies, especially in times of the rapid growth of the Internet?

The entry threshold was low - all you needed was a computer and some knowledge, preferably with a lot of code involved. And if someone had connections in Silicon Valley, their door to success was wide open.

That's how many IT service companies were established in Poland and Europe. They had competitive prices and excellent quality, so Uncle Sam's treasury opened its doors for them, pouring the cash into many micro, small, and, after time, large entities.

Acquiring a project from the market was a relatively easy challenge. In some cases, clients even appeared independently - as long as the previous ones were satisfied. Many companies acquired projects from referrals - without marketing or sales teams - or focused on a few large clients, accounting for 80% of revenues.

Therefore, in-depth indicator monitoring was not a high priority, as 20-30% margin was easily achievable.

The industry flourished and became competitive in the global market, as can be seen from the recent FT1000 or Clutch 100 rankings, as well as the number of IT service companies established in the region - Poland has more than 1,400, Ukraine more than 1,000, Romania 600, etc.

Pandemic, war, ChatGPT, and negative sentiment on the NY Stock exchange

What happened in 2020, however, set off a veritable wave of global change. From a pandemic that accelerated market trends (both positive and negative), to the war in Ukraine and the collapse of several banks causing negative sentiment in the U.S. stock market, to the introduction of another technological revolution by OpenAI, the global economy began to change.

All these changes have resulted in:

• rampant inflation,
• the suspension or reduction of investment by many U.S. entities,
• a paradigm shift in programming, which became simpler, and the real value began to lie no longer in providing qualified personnel but in building the client's business,
• an even greater professionalization of the industry, and thus the ability to build real competitive advantages and understand one's business.

The effects are already visible:

• sizable layoffs at many IT service companies in Europe,
• prolonged negotiations with Western companies, and fewer projects,
• more specialists available on the market, and a consequent decline in salaries (a shift toward the employer market),
• the continued growth of companies that have found their niche or have built strong relationships with their clients.

Right now, while talking to managers of many IT companies, I hear that the project pipeline has shrunk, customers are postponing their decisions, and they are preparing Plans A, B, and C depending on different scenarios.

During the last webinar organized in cooperation with Croatian Independent Software Exporters (CISEx), Krzysztof Wojewodzic from ESCOLA S.A. (one of the fastest-growing IT services companies in Europe, according to the Financial Times) said something that made me think even harder:

"The current situation is simply the new normal for me. The IT outsourcing industry is beginning to function in a manner other industries were used to for many years."

On the other hand, Igor Vrdoljak - co-founder at Netgen (one of the leading IT services companies in Croatia), mentioned that the key to survival might be hidden in long-term relationships with current customers.

"Netgen has been on the market for more than 20 years. We have already experienced one crisis in the life of the company. I know that the long-lasting and strong relationships we have built over the years with our customers allow us to sleep soundly."

Therefore, the golden era of the IT industry is slowly coming to an end.

So, how to prepare for "tough times / new normality"?

There are essentially three main paths you can take:

• Focusing even more on sales,
• Upselling and increasing rates for existing customers,
• Insightful analysis of your business to understand its main leverage.

The first two paths are short-term.

On the other hand, the third build your competitive advantage in the long term and allows you to set your "levers" on upselling and raising rates to existing customers accordingly.

But why is insightful analysis so important? Because you can find out from it:?

• How much money am I realistically earning from projects, and which ones have historically been the most profitable (after adding company and bench costs)?

Conclusion: I know where to focus sales and in which direction to develop services.

• How much will my bench costs be if projects X, Y, and Z won't be acquired?

Conclusion: I know whether it is worth maintaining the bench or reducing my workforce after all.

• How much time do my people spend on actual, billable work, and is it too little/too much by any chance? If so, what can I do to change that?

Conclusion: I know how productive my organization is and whether or not projects and non-billable activities generate too much cost.

However, such a focus on financial statistics is not driven solely by a desire to be profitable. As said by David H. Maister - a former Harvard professor who in 1993 created a bible for managers of professional services companies, "Managing the Professional Services Firm. - every company should:

Provide excellent customer service, supporting careers and job satisfaction for employees, and achieve financial success to continue to grow.

You will read about the individual elements in future newsletters. Today let's just focus on the big picture.

It's difficult to talk about balance if you don't understand what the business dynamics are rooted in.

Many IT services companies don't measure, forecast, or see a direct correlation between management indicators, thinking: "Since we have a high overall margin, everything is great".

Ability to count and forecast:

• utilization (billable occupancy) of employees by seniority,
• or 1st, 2nd, or 3rd degree margins,

is an elementary part of this knowledge. With this, you can begin to build leverage for the business, creating a competitive advantage.

So if you want to build your business in a scalable and informed way in the coming years - balance will be key.

And... "Scale the Balance" was created with this in mind as well.

The #1 European Profitability and Utilization Report survey is already available!

Measuring and forecasting are key, but how do I assess whether indicators are at a good enough level? And to what extent is my company advanced compared to the rest, and what do I need to do to prepare for the "new normal"?

We will answer these questions in the #1 European Profitability and Utilization Report, which aims to:

• To show the average values of EBIT margin, 1st-degree profitability, and utilization by type and location of customer and services offered (e/m-commerce, enterprise applications, etc.) - the goal? To find correlations between these variables and high-performing businesses.
• To measure your company's operational maturity and place it on a 5-point scale based on 60 key variables affecting business profitability and develop dedicated recommendations for getting to the next level,?
• Identify industry trends based on statements from industry leaders.

Do you want to get the report?

Take the survey, which is available at the link below, and receive a personalized self-assessment showing your company's situation compared to the rest of the industry.

The anonymous survey takes between 3 and 20 minutes, depending on your answers.

Link to the survey: https://bit.ly/3pJkLp4

The gift we have promised you!

As promised, we have prepared for you a practical guide to profitability during the recession based on interviews with over 220 managers of leading IT service companies in Europe.

Riding the Dragon: How European Leading IT Services Firms Thrive During the Crisis can be found here.

What will you find inside?

• Practical lessons with examples of how to improve a company's profitability and operations,
• A checklist for impatient readers with key actions to take in difficult times,
• A list of the most important books to read for anyone managing an IT services company.

Still unconvinced? So far, more than 80% of managers have found the e-book useful, so you might want to download it (especially since it's free ;) ).

That's it!

Thank you for making it all the way here - please let me know what you think of the first edition and whether you find this form of content interesting.

I'd also love to hear your opinion - whether in a comment or a private message.

Take care!

Arek - co-founder @ Primetric - Profitability and Utilization Management Software